Recently, Medtronic (MDT) completed the acquisition of Osteotech for $123 million, thereby further strengthening its biologics portfolio. Osteotech develops biologic products consisting of MagniFuse bone grafts and Plexur biocomposites, which are used for musculoskeletal surgeries.
The company is awaiting clearance from the US Food and Drug Administration (FDA) for its human collagen technology platform. The acquisition should expand Medtronic’s biologics bone healing portfolio. The company will also be able to target areas of joint reconstruction, foot and ankle, and sports medicine.
After Cardiac Rhythm Disease Management, the next biggest segment for Medtronic is Spinal which contributed 22% to its top line in fiscal 2010. However, the company posted a disappointing first quarter with two of its largest segments recording sales declines.
Both divisions of the Spinal segment – Core Spinal and Biologics have been struggling for the past few quarters. Sales from the Spinal segment have declined 9% annually to reach $829 million. Revenues from Core Spinal and Biologics were lower by 10.6% ($622 million) and 5.5% ($207 million), respectively.
The dismal performance of the Spinal business can be attributed to current macroeconomic conditions which are causing delays in elective procedures due to high co-pays and expired benefits. This, in turn, has resulted in lower growth for the overall market driven by decline in both procedures and price mix. Leading orthopedic medical devices company, Zimmer (ZMH), also recorded a decline in sales during the third quarter driven by pricing pressures and the market slowdown.
According to Medtronic’s estimates, during the first quarter, growth in the US spine market has declined by 400 basis points sequentially. Based on current conditions, Medtronic expects revenue growth from this segment to remain flat with a 3%-4% growth in the spine market.
Medtronic is targeting to revive the Spinal segment gradually by introducing new products. We believe the acquisition of Osteotech should accelerate the growth rate of the Spinal business of Medtronic.
We are currently Neutral on the stock.
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