STJ ST. Jude Medical, Inc.

Recently, the District Court of the Southern District of California in San Diego ruled in favor of Medtronic (MDT) in a patent suit. The court found that some products of NuVasive (NUVA) – CoRoent XL implants, MaXcess II and III retractors, and Helix and Helix mini anterior cervical plates infringe three patents of Medtronic. As a result, Medtronic was awarded $101.2 million as compensation for damages.

Medtronic’s three patents in question are related to thoracic and lumbar spine implants, a plate and screw system for the cervical spine and a tissue retractor. The company’s Spinal business, based in Memphis, Tennessee, is a leading player in the spine market.

During the most recent quarter, the Spinal segment 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.

Revenues from Core metal constructs declined 3%.  New product launches including Solera, Vertex Select and Atlantis Vision Elite cervical plate are generating growth, though accounting for only a small proportion of Core Spinal revenue mix in the US at present.

Medtronic recorded a 7.4% year-over-year growth (2.4% at CER) in revenues during the last reported quarter. Although the Spinal segment is the second biggest at Medtronic, it has been witnessing several challenges in the recent past.

Moreover, economic uncertainty is affecting procedure volume. With the presence of players such as St Jude Medical (STJ) and Boston Scientific (BSX), Medtronic is certain to face tough competition.

According to the company, about 60% of its business is growing at a rate of 8% driven by new products that have improved its pricing and market share. However, ICDs and Spinal, accounting for the remaining 40% of the business declined 6%. Given these near-term headwinds, we have a Zacks #4 Rank (Sell) in the short-term.

Despite several challenges, the company is undertaking initiatives to revive its top line. This includes penetration of international markets, portfolio expansion and restructuring initiatives, which we believe should benefit the company over the long term. As a result, we have a long-term Neutral recommendation on the stock.

 
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