Medtronic spinal unit's sales climb

But firm losing ground to small competitors

The Commercial Appeal
February 20, 2008
By Daniel Connolly

Worldwide sales at the Memphis-based spinal unit of medical device maker Medtronic surged 35 percent to $808 million in the firm's third fiscal quarter, but analysts pointed out underlying weaknesses.

The company is still trying to convince insurers to pay for its Prestige brand artificial disk for the neck, and analysts said Medtronic is losing ground to small competitors in the U.S. market for the rods and screws used in traditional spinal fusion surgery.

Offsetting these shaky points were good international sales of spinal fusion products and strong sales of biologics, substances that promote tissue growth.

Another big boost to the spinal unit was $147 million in sales from Sunnyvale, Calif.-based Kyphon Inc., which Medtronic recently acquired. Kyphon makes hot-selling products for healing spinal compression fractures.

Total sales for the Minneapolis-based giant, which makes products ranging from cardiovascular stents to pacemakers, rose 12 percent to $3.4 billion.

Sales of implantable cardiac defibrillators rose 2 percent to $726 million, better than expected, given the recall in October of Sprint Fidelis leads, president and CEO Bill Hawkins said in a conference call with investors. Leads are wires used with implantable cardiac defibrillators, devices that shock a malfunctioning heart back to a normal rhythm.

But profits plunged on a $310 million charge related to the Kyphon acquisition and a $366 million charge for legal costs related to the 2005 recall of Marquis brand implanted cardiac defibrillators and a patent infringement lawsuit involving stents.

Net earnings were $77 million, or 7 cents per share, about one ninth what they were in the year-ago quarter.

Analysts surveyed by Thomson Financial had predicted profits of $703 million, or 53 cents per share, on revenue of $3.3 billion.

Sales of traditional spinal fusion products rose 2 percent in the U.S. this quarter, a slow rate that concerned analysts. Medtronic is losing market share, Morgan Stanley analyst Glenn Reicin wrote in a research note.

Dozens of small new companies like Orthofix International of McKinney, Texas, are chipping away at Medtronic's number one worldwide position in the spine sector, Phil Nalbone RBC Capital Markets said.

"The smaller players have proven to be very pesky, very resilient and very tenacious," he said.

On the other hand, the power of small, physician-owned medical device firms may diminish with the introduction of new regulations meant to discourage conflicts of interest in the medical field, said analyst Chris Cooley with FTN Midwest Securities.

Good sales of the Infuse bone graft product, the Kyphon acquisition and future sales of the Bryan and Prestige brand artificial disks should help the spinal unit, he said.

Chief operating officer Michael DeMane acknowledged competitive pressures in the U.S. market for spinal fusion products and said the company will try to improve that area. Efforts to integrate Kyphon into Medtronic's operation may have caused a dip in sales growth, he said in a conference call with analysts. "But I'm confident that that is going to come back and we are going to do quite well going forward," he said.

Medtronic stock rose 3 cents to close at $49.15 Tuesday, an increase of less than 1 percent.

-- Daniel Connolly: 529-5296

Spinal unit sales

A breakdown of Medtronic's worldwide spinal sales in the third fiscal quarter compared with the year-ago quarter.

Traditional spinal instrumentation: $455 million, up 7 percent.

Biologics, including Infuse bone graft product: $206 million, up 20 percent.

Kyphon products: $147 million (acquired in 2007).

Total: $808 million, up 35 percent.