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Cloud over Medtronic spine division could force sale, analyst says
From: McClatchy-Tribune Information Services -- Unrestricted

Jul-09-2011 1:55 AM (15 hours, 22 minutes ago)

A Wells Fargo analyst told investors this week that Medtronic's troubles with its Infuse bone graft product could ultimately lead to the sale of the company's Memphis-based spine division, which employs about 1,500 here.

Lawrence Biegelsen, an analyst with Wells Fargo Securities, downgraded Medtronic stock from "outperform" to "market perform" in a note to investors this week. He said papers about Infuse published late last month in The Spine Journal will have "broader implications" for the company.

The medical journal devoted its entire last issue to what was a public repudiation of the research behind Infuse, a bioengineered material used in spinal fusion surgeries. The articles charged that researchers with financial ties to Medtronic overstated Infuse's benefits and vastly understated its risks by claiming there were none.

Those implications include a "significant reduction" in the company's spine biologics franchise, lower sales of Medtronic's spinal devices, a potential FDA review of Infuse, penalties from the Department of Justice, possible class-action lawsuits and "the potential sale of the entire spine business."

A Medtronic official said today the company does "not comment on rumor or speculation."

Net sales for Medtronic's spinal division were $3.4 billion in fiscal 2011, according to the company's annual report. Revenues for its biologics division were $884 million in 2011.

A research report this week from J.P. Morgan analysts predicts sales of Infuse will slide 25 percent in 2012 and 33 percent in 2013. The company surveyed 48 high-volume spine surgeons who said they would cut back on their use of Infuse in light of The Spine Journal controversy.

"The results confirm that Medtronic's biologics franchise is at significant risk, with average utilization among our respondents expected to fall by 26 percent over the next year," the report said.

The J.P. Morgan analysts also said much of Medtronic's businesses are unlikely to grow in the next three to five years.

"In light of these challenges, Medtronic is increasingly focused on cutting costs and reallocating resources among its businesses," the report said.

This article notes that revenue from the biologics division (Infuse sales are housed within biologics, which is housed within Spinal) were $884 million.

Let's do some quick math...

If we assume the worst case, Infuse sales make up 100% of biologics, and Infuse sales drop 25% in 2012, thats only $221 MM in lost sales (1.4% of MDT annual sales). Hardly catastrophic.

To be fair, the cost of clearing the air, fighting lawsuits, performing additional tests, and spending energy on this matter instead of other matters is real -- and not a good thing. However, I continue to believe Medtronic's long-term earnings power remains strong and shares compensate us adequately for this issue.

The largest potential risk here is that the pay-for-research arrangement is pervasively impure and the ethics throughout Medtronic are suspect. Aside from this issue, I have no idea to believe that is the case.

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