Growth Overseas Signals Device Maker Cuts

By Jennifer Johnson Backer

U.S. markets, including Memphis, may lose employees as global medical device makers look to faster-growing markets, such as India and China, for growth.

Global medical device makers, including those with a large presence in Memphis like Minneapolis-based Medtronic Inc. and London-based Smith & Nephew PLC, face challenges as U.S. hospitals push for lower prices and European austerity plans cut procedures and profits. A new 2.3 percent U.S. medical device tax to help finance the health law also adds to manufacturers’ costs.

Pressure on U.S. and European profits have led CEOs like Smith and Nephew’s Olivier Bohuon to eye platforms that give the company an entrance into difficult-to-enter emerging markets like China and India, the Wall Street Journal recently reported. In 2007, the company acquired Switzerland-based Plus Orthopedics, opening up a Chinese footprint. Medtronic and Stryker Inc. also have purchased Chinese makers of trauma implants in recent months to gain entry into the markets.

As device makers shift resources from slower-growing markets like the U.S. and Europe to emerging markets and trim unprofitable divisions, that’s led to U.S. job layoffs.

Medtronic Spine, the Memphis-based division of Medtronic Inc., told employees earlier this month it will reduce overall costs by 5 percent through a variety of measures, including employee layoffs, said Eric Epperson, senior director of public relations and communications. While the plan was communicated to employees on April 4, the specific details won’t be available until May, he said. The medical device maker’s spinal division employs about 1,500 employees in Memphis.

“We are addressing the near-term cost and pricing challenges facing our business, while also responding to the long-term dynamics of the global health care environment and changing needs of our stakeholders,” Epperson said.

Epperson said near-term challenges for Medtronic Spine include: pricing pressure, more complex customer device purchasing processes, expanded medical device governmental review times and requirements, and the medical device excise tax.

Smith & Nephew’s Orthopedics division also recently eliminated 63 positions in Memphis, 20 in Andover, Mass., and a dozen in Europe. The company employs about 1,800 in the Memphis area. Smith & Nephew CEO Bohuon told the Wall Street Journal in March he’s reducing the company’s exposure to difficult markets, like orthopedics, in Western markets.

The orthopedic divisions of Medtronic and Smith & Nephew employ large workforces in Memphis.

The market for orthopedic and spinal devices is under pressure as economic uncertainty leads patients to delay elective procedures and regulatory and reimbursement pressure mounts. While Medtronic reported a 5.7 percent boost in earnings for the quarter ended Jan. 25, the spinal-products business posted a sales decline of 3 percent, excluding currency impacts.

This isn’t the first time Medtronic has announced U.S. job cuts.

Soft markets for spine and heart markets and overall economic uncertainty led Medtronic to announce it would cut about 1,000 positions worldwide by the end of fiscal year 2013, which ends April 30. According to regulatory filings, about 600 of those positions have been eliminated as of Jan. 25. The device maker estimates the cuts will save $100 million to $125 million.

Epperson said the plan to cut overall costs by 5 percent at Medtronic Spine is not tied to other company-wide efforts to eliminate 1,000 positions and trim costs by $100 million to $125 million.