Medtronic trying to shake off bad quarter

At first glance last week, the news seemed dim.

Medtronic Inc., one of Minnesota's signature companies and a bellwether in medical technology, reported a 69 percent plunge in quarterly earnings, cuts of up to 1,800 employees and revenue that fell flat -- literally.

Medtronic's fiscal fourth-quarter report Tuesday seemed to indicate that med-tech, seen by many as nearly bullet-proof in a recession, wasn't as resilient as previously thought.

Making matters worse, the Fridley-based company faced pointed questions from Congress about one of its paid consultants who allegedly falsified a study touting its popular spine repair product. The company also warned doctors that 37,000 pacemakers implanted in patients may have a defect that could cause the device to fail. Two deaths were tied to the malfunction.

Yet Medtronic CEO Bill Hawkins steadfastly characterized the quarter and the fiscal year results as "solid," reflecting the "underlying resilience and strength" of the company's broad slate of businesses, which focus on prevalent and chronic diseases, such as heart disease, diabetes and spine maladies. While acknowledging a difficult economic environment, Hawkins indicated his company is diversified enough to tough it out.

Revenue from the company's seven businesses actually increased 8 percent to $14.6 billion for the year. And job losses at the company were tempered by 700 hires in sales and in research and development -- not including 1,400 jobs at a new diabetes operation in Texas.

"We think the underlying fundamentals of the company remain intact," wrote Piper Jaffray analyst Timothy Lee in a note to investors, a chorus repeated by several of his brethren on Wall Street.

But there are some looming uncertainties dogging med-tech companies in general. Health care reform could involve government taking a hard look at how medical devices are reimbursed by Medicare, the nation's health care plan for those over age 65 or meet other criteria.

The medical technology industry, a powerful lobby on Capitol Hill, is already trumpeting what it sees as the cost-effectiveness of many medical devices. "I firmly believe that our industry will be part of the solution to the challenges our country and other economies are facing with rising health care costs," Hawkins said last week.

Another wild card for Medtronic and its rivals is whether the Food and Drug Administration (FDA) under the Obama administration will hamper or help the approval of new medical devices.

Competitors seize an opening

Medtronic predicted last week that its top-line growth for fiscal 2010 would increase 5 percent to 8 percent. "Revenue growth remains elusive despite the company's insistence" that market share in its core markets -- spine and heart rhythm devices -- has stabilized, wrote Raj Denhoy, an analyst with Thomas Weisel Partners.

Either way, Medtronic must find new growth drivers within these businesses or beyond, while facing bruising competition from rivals big and small.

The company has $1 billion in free cash flow, some of which will likely be used to acquire or invest in promising start-up companies.

Last year, it bought two heart-valve companies, as well as two businesses focusing on the heart condition atrial fibrillation -- seen as a promising new frontier in medical technology.

Yet Medtronic's largest business, which makes pacemakers and heart defibrillators, continued to fend off fierce competition from scrappy St. Jude Medical Inc. and a newly energized Boston Scientific Corp. Annual revenue for the division increased 1 percent to $5 billion.

The once-robust market for implantable cardioverter defibrillators (ICDs) has struggled since 2005 following several safety recalls, spooking referring physicians and patients alike. In 2007, market leader Medtronic recalled a widely used defibrillator wire called Sprint Fidelis, later linked to 13 deaths.

William Blair analyst Ben Andrew predicts Medtronic will continue to lose ICD market share in coming quarters, but said the decline will be gradual unless an unforeseen product recall occurs. The company's share erosion will likely be offset by the overall market's growth, predicted to be in the mid-single digits, he wrote.

Hawkins characterized the pacemaker product advisory last week as less serious than the 2007 recall.

"It's just a matter of restoring confidence in their products," said Frost & Sullivan analyst Venkat Rajan. "These issues are abated over time. I would be more worried if they hit a saturation point in the number of treatable patients for a device, or if a new technology came on the market that cannibalized their devices."

Hawkins said Medtronic is "now back on the offensive" with new products including a pacemaker that is compatible with magnetic-resonance imaging (MRI) procedures, and a pacemaker wire that is the smallest on the market, a feature highly coveted by surgeons.

Stabilizing the spine

Medtronic's second-biggest business, which makes devices to repair the spine, reported a 14 percent increase in revenue to $3.4 billion in fiscal 2009. Several analysts said the spine business appears to have stabilized following a tumultuous year.

Its popular bone-growth product, Infuse, was slapped with a warning from the FDA last year because of extensive "off-label" use, meaning treatments not approved by regulators. A U.S. Justice Department probe into the matter is pending.

In addition, the company's paid consulting agreements with doctors, several of them orthopedic surgeons, sparked an investigation by Congress.

Last week, U.S. Sen. Charles Grassley, R-Iowa, sent Hawkins a letter asking for information about a company consultant who allegedly falsified data regarding the use of Infuse in Iraq war veterans. Hawkins declined to comment on the matter.

Sales of Infuse, once a blockbuster, increased 3 percent to $840 million in fiscal 2009. "Infuse is not necessarily recovering from the multitude of issues last quarter," wrote Morgan Stanley analyst David Lewis. "But perhaps it's not getting worse."

The competitive theme played out in other divisions, as well.

Medtronic's pain-reducing stimulation business -- which includes a pacemaker-like device to zap the spine -- faced new competition from St. Jude's EON Mini device, the smallest rechargeable stimulator on the market. And Medtronic's drug-coated heart stent continues to fend off four rivals.

Medtronic points out that five of its seven businesses reported double-digit revenue growth in fiscal 2008. But looking forward, "investors are likely to remain in a 'show me' mode about the company's ability to deliver," wrote Leerink Swann analyst Rick Wise.

Janet Moore • 612-673-7752