Could Medtronic's once-high flying spine device business be in play?
In the wake of ever-more-embarrassing revelations about the $3.4 billion division, the Fridley-based medical technology giant's board may move to sell it, wrote Wells Fargo Securities analyst Larry Biegelsen, in a July 5 note to investors.
Biegelsen's speculation, circulated widely over the Internet, comes after a major medical journal in the orthopedic field devoted an entire issue last month to Medtronic's controversial bone-growth product, Infuse.
Used to stabilize the spine in back surgery, Infuse has come under a steady drumbeat of negative publicity over the past five years, and has attracted investigations by Congress and the U.S. Department of Justice centered on the way the product is marketed.
The June 28 issue of the Spine Journal found that the 13 original company-sponsored studies of Infuse significantly downplayed potentially serious complications related to the product. Plus, many of the studies' original authors were paid millions in royalties and consulting fees by Medtronic, raising questions about potential conflicts of interest.
The journal's probe will have broader implications for Medtronic, Biegelsen predicted. In addition to a possible spinoff, it could spur an investigation by the Food and Drug Administration and a surge of potentially expensive class-action lawsuits by aggrieved patients. Infuse sales could decline by as much as 50 percent as a result of the articles, he said.
Other analysts disagree
Medtronic said it does not comment on rumors or speculation. And not all of Biegelsen's Wall Street brethren agree that the spine business may be spun off, or that the overall picture for the market is so dire.
Thomas Gunderson, a veteran analyst for Piper Jaffray & Co., doubts Medtronic will attempt to shed what is still a profitable business. Infuse sales are not broken out separately, but analysts estimate they are about $750 million a year.
"I don't see the Spine Journal articles as any sort of tipping point for Medtronic," he said.
Plus, Gunderson points out, Medtronic has a new CEO, Omar Ishrak, a GE alumnus who just took over the company's top spot last month. "He'll need six to nine months just to learn the business," he said.
Either way, the journal articles are a stunning denouement for a business that once was Medtronic's shooting star. When Medtronic announced it was buying Memphis-based Sofamor Danek Group, in 1998, Wall Street analysts hailed its entry into the spine market as transforming and a coup for then-CEO Bill George, now an author and business ethics guru.
"It's a new time in Medtronic's history," gushed one analyst.
The $3.6 billion purchase was at the time the largest deal ever struck by Medtronic, and came as the company was struggling to diversify beyond its staid pacemaker business.
"It was a big, big deal, notable for the size of the deal and for the fact that it wasn't a [cardiology] deal," said Gunderson. "For a long time it was hailed as the best acquisition Medtronic ever made."
Sales gains and whistleblowers
And the former Sofamor Danek didn't disappoint, at least initially. Sales took off when Infuse was approved by the FDA in 2001 for use in the lower back. But several whistleblower lawsuits followed, with allegations that Medtronic showered doctors with trips to chic resorts, lucrative consulting agreements and kickbacks to induce them to use its spine products.
In 2006, Medtronic agreed to a $40 million settlement with the Justice Department to end the suits. The company admitted no wrongdoing.
Following publication of the Spine Journal articles last week, Medtronic issued a two-page response. While the articles "raise questions about researchers' conclusions in their published peer-reviewed literature, the articles do not raise questions about the data Medtronic submitted to the FDA in the approval process for Infuse," it said.
Side effects linked to Infuse are noted on its label, and the company continues to study Infuse's safety and effectiveness after it's used in patients, the statement said.
Biegelsen wrote that the Spine Journal articles may discourage surgeons from using Infuse -- at a time when many insurance companies are balking at paying for spine fusion surgery.
The overall $2.2 billion market in North America for devices used in spine fusion surgery is still growing, said Frost & Sullivan senior analyst Aarti Shetty. "It's not where it was 10 years ago, but it's still a growing market, it's certainly not disappearing," she said.
Janet Moore • 612-673-7752
