Medtronic: A Look At The Spinal Division

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Medtronic (NYSE:MDT) is one of the largest medical device makers globally with a leadership position in many markets, including spinal. The spinal market consists of devices and implants for conditions relating to the spine and the musculoskeletal system. It also includes biologic solutions for the dental and orthopedic markets.

Medtronic currently commands over 30% market share in the $10 billion spinal market ($3.2 billion revenues from the Spinal division last year), though it has declined substantially from its 40% share in 2008. While there are several reasons behind this loss of market share including stiff competition for current products and new product launches by competitors, much of the decline can be attributed to a series of negative articles published in the Spine Journal regarding the use of its “Infuse” bone graft. Infuse constitutes a significant portion of overall revenues from the Spinal division.

Going forward, we expect overall revenues in the spinal division to decline in the near term before getting back on track. However, Medtronic will continue to concede market share before witnessing stabilization as growth in the spinal market is likely to outpace the division’s growth, due to innovative products from competitors. Below we discuss the outlook for the division in detail.

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Market Share To Continue To Decline

In 2011, a series of articles in the Spine Journal alleged that Infuse poses greater risks than earlier reported to the FDA and many doctors were paid / bribed to under-report these risks. These problems were compounded by a Senate report stating that a number of studies promoting Infuse were likely biased, as they were edited /written by Medtronic employees. [1] Sales of Infuse have been declining at an increasing pace since then. Currently, Yale researchers are reviewing the data that was submitted for FDA approval and an outcome is expected in the next couple of months. While a positive feedback from Yale would help in stemming the losses, it may not be enough to put Infuse back on the growth track.

Further, while the spinal market is expected to see annual growth of 4-6% over the next five years, the growth will be more driven by new technologies for vertebral compression fractures (VCFs) and partial and total disc replacement than traditional surgical techniques like spinal fusion. [2] In VCFs, kyphoplasty products are likely to see higher growth than vertebroplasty. [2] Initially, Medtronic was well positioned to tap the expected growth in VCFs with its Kyphon balloon kyphoplasty, a vertebral augmentation product. However, the entrance of companies like Stryker and CareFusion has challenged the company’s dominant position in the market. [3] This, coupled with pricing pressure from hospitals, has been weighing on revenues as well as market share.

While Medtronic has a presence in the disk replacement market with its Prestige cervical disk, its portfolio is not as vast as some competitors like Johnson & Johnson. A few years back, Medtronic had to dump plans to roll out its Maverick, A-Mav and O-Mav artificial disk products following patent infringement litigation with Synthes, now a part of Johnson & Johnson (NYSE:JNJ). Synthes, acquired in 2012, has brought JNJ a wide portfolio of medical devices for the trauma and spine market. This is likely to put pressure on other leading players in the spinal market, including Medtronic.

The continued adoption of Solera and the Atlantis Vision Elite cervical plates, however, will continue to lend some support for Medtronic. Further, biologic products like Magnifuse and Grafton, which were added to Medtronic’s portfolio pursuant to the acquisition of Osteotech in 2010, are also seeing consistent growth. Additionally, Medtronic has recently expanded its its Vertex reconstruction system and launched several new products like the Bryan ACD Instrument Set, AMT implant and Capstone Control, which should help offset declines in sales of key products. While these products may drive revenue growth, none of these products are likely to lift Medtronic’s market share.

Potential Upside From Chinese Acquisition

Medtronic also acquired Chinese medical device maker China Kanghui Holdings in November 2012. China Kanghui has a diversified portfolio of orthopedics, spine, and surgical instrumentation products along with strong local R&D and cheap manufacturing operations. China Kanghui had estimated annual sales (including spinal and surgical technologies) of $327 million and profit of $19 million in 2011, its last full year of independent operations.

The acquisition will strengthen Medtronic’s foothold in the rapidly growing Chinese device market and help it achieve its goal of expanding into emerging markets. China, Asia’s second-largest market for medical devices after Japan, is expected to grow at double digit rates in the near term. Further, medical devices have been grappling with pricing pressure following European austerity and healthcare reforms. Medtronic, with its wide sales network and the cheap manufacturing capabilities of China Kanghui, can achieve cost savings as well as increased sales. However, it remains to be seen if Medtronic will be able to capitalize on the opportunity. The company previously had some issues integrating Kyphon after spending $4 billion for the company. [4]

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Notes:
  1. MedtronicSpinal, ODT Magazine []
  2. Global Spine Surgery Devices Market worth $14.8 Billion by 2017,  MarketsandMarkets [] []
  3. US Market for Minimally Invasive Vertebral Compression Fracture Treatments to See Slow Growth, Millennium Research []
  4. Medtronic Spine is Bent Out of Shape. Here’s Why the Company Can’t Sell It, MDDI, March 01 2013 []
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