Medical device maker Medtronic (NYSE:MDT) recently announced in its quarterly filing that about 700 lawsuits have been filed by patients against the company over its Infuse synthetic bone graft product, and more could be expected in the future. Although investigations are pending and Medtronic has not been held liable in any of the cases at this point, it highlights the problems that the company has faced with the product in the last few years.
The Infuse product first came into question in 2011, when a report in the Spine Journal accused Medtronic of bribing doctors to hide some serious side-effects associated with Infuse, including cancer and infertility in men.   This was followed by a Senate report in 2012, which stated that a number of studies promoting Infuse were likely biased, as they were edited/written by Medtronic employees. A recent independent review by Yale University also suggested that the Infuse bone graft surgery did not show significant benefits over conventional spine surgery. ((First-of-Its-Kind Independent Review of INFUSE® Bone Graft Coordinated by Yale University is Complete, Medtronic, June 17 2013))
Infuse sales have been rapidly declining since 2011 and have weighed on Medtronic’s sales in the Spinal division. Some improvement in the division’s sales was seen in the third quarter (ending January 31 this year), but concerns over Infuse are likely to negatively impact sales and Medtronic’s share in the global spinal market in the near term.
- Medtronic’s Earnings Preview: What To Expect
- How Has Medtronic’s Revenue And Gross Profit Changed Over The Last Five Years?
- What Is Medtronic’s Fundamental Value Based On Expected 2016 Results?
- How Has Medtronic’s Revenue Mix Changed In The Last five Years?
- Why Is Medtronic Acquiring Heartware?
- What Is Medtronic’s Revenue And Gross Profit Breakdown?
Our price estimate for Medtronic’s stock is currently around $59, which is about in line with the market price.
New Products Could Improve Medtronic’s Declining Spinal Market Share
The Infuse bone graft product is used in the treatment of degenerative disc disease, helping in bone formation using genetically engineered proteins. Following negative reports about the Infuse product in 2011, Medtronic’s spinal sales and share in the global spinal market started to decline rapidly. It was also impacted by growing competition from other players such as Johnson and Johnson, Stryker, NuVasive and Globus Medical.
In addition to spinal fusion products such as Infuse, Medtronic offers Balloon Kyphoplasty (BKP) products, interbody devices and disk replacements as part of its Core Spine business. The company was well-positioned to dominate the BKP market a few years ago but the entrance of players such as Stryker and CareFusion challenged the company’s position and provided new innovative alternatives which became very popular with surgeons. This negatively impacted Medtronic’s spinal division sales, which declined from $3.3 billion in 2011 to about $3 billion in 2013.
While Medtronic has a presence in the disk replacement market with its Prestige cervical disk, its portfolio is not as vast as some competitors such as Johnson & Johnson(NYSE:JNJ). 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. However, the growing adoption of Medtronic’s Solera and Atlantis Vision Elite cervical plates continues to offset some of the company’s sales decline. Spinal sales could get a boost in the coming quarters as the Minneapolis-based company is planning a summer launch of its Prestige LP next-generation cervical disc in the U.S. this year.
Medtronic Expanding In Emerging Markets
Medtronic 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. The acquisition could strengthen Medtronic’s foothold in the rapidly growing Chinese device market and help it achieve its emerging markets expansion targets. In its recently reported quarterly results, Medtronic reported that its Kanghui business was consistently delivering strong sales growth in China as well as other emerging markets, although it did not provide any specific sales figures.  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 push in China should help Medtronic offset weakness in Europe, where medical device makers have been grappling with pricing pressure following austerity measures and healthcare reforms. China, Asia’s second-largest market for medical devices after Japan, is expected to grow at double-digit rates in the near term. Medtronic, with its wide sales network and China Kanghui’s cheap manufacturing capabilities, could achieve increased sales and cost savings if it capitalizes on this opportunity in China and expands in other emerging markets as well.Notes:
- Investigation Links Sterility to Bone Growth Product, MedPageToday, May 25 2011 [↩]
- Adverse Events Common With rhBMP-2 Device, MedPageToday, June 28 2011 [↩]
- Medtronic’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, Feb 18, 2014 [↩]