STJ ST. Jude Medical, Inc.

Leading medical devices player, Medtronic’s (MDT) TSRH Spinal System has received 510 (k) clearance from the US Food and Drug Administration (FDA) to treat adolescent idiopathic scoliosis (AIS) with pedicle screws. The system, developed in collaboration with Texas Scottish Rite Hospital (TSRH), offers several types of pedicle screws, implants and other instruments to stabilize the spine.

AIS is the most common pediatric spine condition, where many patients have curved spines. Moreover, if curvature of the spine becomes more pronounced as the patient grows old; it could harm the spinal cord. TSRH and CD Horizon pedicle screws are meant for posterior use in addition to fusion in the thoracolumbar spine when treating AIS.

Spinal is the second biggest segment at Medtronic that generated $825 million in sales, flat compared to the year-ago quarter (down 3% at CER). Revenues from Core Spinal and Biologics were $610 million (down 2% year over year or down 5% at CER) and $215 million (up 4% or up 2% at CER). The company recorded a 7% growth in Spinal business in the international market based on the strength of new products.

Medtronic recorded a 2% growth (at CER) in revenues during the first quarter although sales of ICDs and Spinal continue to disappoint. Moreover, economic uncertainty is affecting procedure volume. However, the recent approval of MRI SureScan pacemaker and Protects ICDs provided some support to the CRDM segment.

Moreover, acquisitions done over the past few years are contributing to total revenues, a trend expected to continue. Meanwhile, Medtronic has increased its focus on emerging markets that have been recording significant growth.

In fiscal 2011, the company decided to restructure its business to align its cost structure to current market conditions so that it is prepared for long-term growth. With regard to this initiative, approximately 2,100 positions have been identified that would be eliminated gradually. The entire process is expected to be completed by the end of fiscal 2012 and is expected to result in $225−$250 million in annual savings.

The savings will be reinvested back in the company to drive operating leverage. We believe these steps should result in improved bottom line going ahead, which is significant since the company is witnessing several challenges to top-line growth. The company also faces tough competition from players like Boston Scientific (BSX) and St Jude Medical (STJ).

We currently have a Neutral recommendation on Medtronic.

 
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