08.05.15
$3.04 Billion ($17B total)
KEY EXECUTIVES:
Omar Ishrak, Chairman & CEO
Gary Ellis, Exec. VP & Chief Financial Officer, Medtronic
Mike Genau, Sr. VP & President, Americas Region, Medtronic
Richard E. Kuntz, M.D., Sr. VP & Chief Scientific, Clinical and Regulatory Officer, Medtronic
Chris Lee, Sr. VP & President, Greater China Region, Medtronic
Stephen N. Oesterle, M.D., Sr. VP, Medicine & Technology, Medtronic
Luann Pendy, Sr. VP, Global Quality, Medtronic
Rob Ten Hoedt, Exec. VP & President, Europe, Middle East and Africa Region, Medtronic
Bob White, Sr. VP & President, Asia Pacific Region, Medtronic
Geoff Martha, Exec. VP & President, Medtronic Restorative Therapies Group
Doug King, President, Medtronic Spine
NO. of EMPLOYEES: 5,000
HEADQUARTERS: Memphis, Tenn.
Without a doubt, Medtronic is a company of firsts.
Most of its milestones, of course, are breakthroughs in healthcare technology—the first battery-operated external pacemaker (1957); the first commercially produced implantable pacemaker (1960); the first implantable, programmable neurostimulation device for chronic pain (1983); the first implantable cardioverter defibrillator (1993); the first insulin pump with real-time glucose monitoring (2006); and there are many other examples, in innovation as well as in the company’s far-reaching philanthropic work.
But 2014 saw another—and perhaps less auspicious, depending upon your point of view—first for the world’s largest standalone medical device company. With its nearly $50 billion purchase of Dublin, Ireland-based Covidien plc, Medtronic pulled off the largest-ever “inversion” deal (at the time) in U.S. history. Medtronic Inc., once headquartered just outside Minneapolis in Fridley, Minn., became Medtronic plc, now rooted in its acquisition’s base in Dublin. Inversion deals are structured to reduce U.S. income taxes and typically involve a U.S.-based company acquiring a foreign firm and relocating there for tax purposes.
The deal for Covidien was announced in June 2014, just after the start of Medtronic’s 2015 fiscal year. The deal was completed in January this year. The cash-and-stock transaction was valued at approximately $49.9 billion, based on Medtronic’s closing stock price of $75.59 per share on Jan. 26. Under the terms of the transaction, each ordinary share of Covidien outstanding as of the closing was converted into the right to receive $35.19 in cash and 0.956 percent of an ordinary share of Medtronic plc. Each share of Medtronic Inc. common stock outstanding as of the closing was converted into the right to receive one ordinary share of Medtronic plc. (Editor’s note: Though ODT’s Top Company ranking is compiled using fiscal 2014 figures, our coverage of Medtronic in this issue in large part will examine the company’s history-making purchase, which happened in the company’s 2015 fiscal year. And though not specific to the company’s spine business, the purchase of Covidien is significantly transformative for the company as a whole and worth chronicling here.)
According to Joanne Wuensch, an analyst with BMO Capital Markets in New York, N.Y., the deal for Covidien puts Medtronic in a better position to negotiate with hospital administrators, a group that has gained purchasing power as doctors increasingly become employees and hospitals limit what brands they carry. The expanded Medtronic will have offerings in six of the top 10 purchasing arms of the hospital, she said.
“They can go in not just with a bucket of products as they have previously, but with a full buffet table,” she told Bloomberg Business after the deal was completed. “It does facilitate the partnership between the device manufacturers and the hospital providers, being able to make more purchases from a fewer number of sellers.”
Despite moving overseas to seek a lower tax rate, Medtronic officials said they would spend an additional $10 billion over the next decade in investments, acquisitions and research and development in the United States (in part, from the tax savings, according to the company). The company’s headquarters will move to Ireland, but officials said it would retain its facilities in Minnesota—and largely be run from there, as most of its executives will continue to be based in the Gopher State.
When the deal was announced, Richard Cohen, a retired Twin Cities stockbroker and decades-long Medtronic investor, noted that Medtronic’s effective departure from Minnesota felt like a slap in the face to a state that nurtured it in its initial stages with funding and investment.
“The thing that bothers me the most is that this is a Minneapolis-based company that depended on the Minnesota investment community for its initial financing, that attracted investment from Minnesota investors first,” Cohen told the Minneapolis Star-Tribune newspaper. “The ones that were there in the beginning are the ones that are going to get screwed.”
Omar Ishrak, Medtronic’s CEO, took a much broader view of the deal.
“The medical technology industry is critical to the U.S. economy, and we will continue to invest and innovate and create well-paying jobs,” Ishrak said in a statement. “These investments ultimately produce new therapy and treatment options that improve or save lives for millions of people around the world. We are excited to reach this agreement with Covidien, which further advances our mission to alleviate pain, restore health and extend life for patients around the world. This acquisition will allow Medtronic to reach more patients, in more ways and in more places.”
Many U.S. lawmakers were not convinced. Medtronic’s purchase of Covidien along with other similar deals where domestic companies use mergers to reincorporate overseas for tax reasons created consternation on Capitol Hill. U.S. lawmakers moved swiftly to block such efforts.
“These transactions are about tax avoidance, plain and simple,” Sen. Carl Levin (D-Mich.) said in a prepared statement. “Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans.”
In September, the U.S. Treasury Department announced tax restrictions that would make it harder and more expensive for U.S. companies to reincorporate abroad.
The measures included the prohibition of financial maneuvers called “cash boxes” and inversions, and they would prevent “hopscotch” loans that allow American firms to access foreign cash without paying U.S. taxes.
“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” U.S. Treasury Secretary Jacob J. Lew said after the department’s announcement. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”
Venture capitalists also expressed concern over the blockbuster deal. Large mergers such as this only consolidate the medtech market more, leaving less space for small companies, and less opportunity for small startups to find buyers.
“The impact of this [deal] will be felt for many years,” Mir Imran, chairman of medical technology accelerator InCube Labs, told The Wall Street Journal. Imran has launched 19 companies since the 1980s, and has done business with both Medtronic and Covidien.
Last year, Nfocus Neuromedical Inc., a hemorrhagic-stroke treatment company launched by InCube, was acquired by Covidien, he said.
“Prior to this merger, Covidien was very acquisitive of startup companies, and Medtronic was also quite active,” he said. “But post-merger, the new Medtronic will be focused on integrating the two businesses … so, for the next two or three years, [it] will be less focused on investing in and acquiring young companies. For the world of medtech startups, this is not good news.”
Casper de Clerq, a partner at Norwest Venture Partners who has been investing in medical technologies for more than two decades—and whose firm last year invested alongside Medtronic in a $20 million Series D round for sinus-implant company Intersect ENT Inc.—said that certain areas of emerging medical technology could be hit especially hard by a merger that, at least temporarily, takes two major buyers off the grid.
In October, the company reiterated, despite government action, that the deal was still a strategic one, including the belief that the combination would “support and accelerate” Medtronic’s three strategies of:
Medtronic also revealed the proposed management structure of the new company. The new Medtronic is composed of four major business segments, headed by Medtronic’s three existing group presidents plus Covidien group president Bryan Hanson. The four segments are Medtronic’s Cardiac and Vascular Group, valued at $8.8 billion; its Restorative Therapies Group (which includes the company’s spine business) worth $6.5 billion; its Diabetes Group, worth $1.7 billion; and the fourth, the Covidien Group (which was quickly renamed the Minimally Invasive Therapies Group not long after the merger closed), currently valued at $10.4 billion.
Covidien’s neurovascular business will function as an independent business under the umbrella of Medtronic’s restorative therapies group. The company also announced four geographic regions around which the combined company will operate: Asia Pacific, the Americas, EMEA (Europe, the Middle East and Africa) and Greater China—down from Medtronic’s present seven regions.
“While we will move to four regions in the future—versus the seven regions represented in the Medtronic structure today—this is in no way intended to reflect a diminished importance or focus on those markets that previously served as regions, nor will I remain any less focused on seeing that these markets reach their potential and objectives,” Ishrak said. “Rather, this approach will ensure we have the appropriate leadership involvement in these markets on a daily basis as we grow our overall scale and complexity.”
Spinal Adjustment
Medtronic’s spine business may have taken a bit of a sales hit in 2014, but the company continues to stand firmly behind its portfolio of back-saving products. In the last few years, CEO Ishrak repeatedly has denied that the company is exploring ways to divest its spine business, though the business continues to be under pressure—particularly with smaller companies nipping at its heels—and core technology. For example, startup firms such as Santa Clara, Calif.-based Benvenue Medical, are challenging their larger competitors. Recent clinical trial results showed that Benvenue’s Kiva VCF System—which has U.S. Food and Drug Administration (FDA) clearance—to treat vertebral compression fractures performs as well as or is better than Medtronic’s KyphX kyphoplasty system.
Medtronic’s lineup of spine technology includes artificial cervical discs, balloon kyphoplasty devices, biologic fusion systems, minimal-access spine technologies, and reconstructive spinal systems.
An artificial disc is a prosthetic device inserted between the vertebrae to replace a natural spinal disc. It is designed to preserve mobility throughout the treated vertebral segment.
Balloon kyphoplasty is minimally invasive procedure for repairing vertebral compression fractures in the spine caused by osteoporosis or cancer. The procedure uses balloons designed to restore the vertebral body height. Bone cement is inserted into the vertebral body to stabilize the fracture.
Biologic fusion systems consist of two elements. The first is a bone graft (such as InFuse), a bone morphogenetic protein (BMP) that stimulates the body to regrow bone that will fuse, or join, two vertebrae together to stabilize the lumbar spine. It eliminates the need to harvest bone from another area of the patient’s body, such as the hip, thus eliminating an additional, often painful, surgery. The second element is a small, hollow metal cylinder, called a cage, that holds the biologic material and restores the degenerated disc space to its original height. It helps to relieve the pressure on nerves, which is commonly associated with back and/or leg pain.
Minimally invasive spine surgery is performed through smaller incisions than traditional open surgery and may lead to decreased muscle trauma, less intraoperative blood loss, and shorter hospital stays. Minimally invasive surgery can be percutaneous (through the skin) or mini-open (operating through a small incision), and can be used to treat all areas of the spine.
Reconstructive spinal systems include screws, rods, and connectors that are implanted along the affected area of the spine to provide support for a spinal fusion. A spinal fusion is simply the uniting of two bony segments, whether a fracture or a vertebral joint. The instrumentation acts as an “internal cast” to stabilize the vertebra until the fusion, or bony re-growth, can occur.
Spine sales for fiscal year 2014 were $3.04 billion, a decrease of 3 percent compared to the prior fiscal year. The decrease in sales for FY14 primarily was driven by declines in bone morphogenetic protein (BMP/InFuse) products and balloon kyphoplasty products (BKP) of 11 percent and 9 percent, respectively, and unfavorable foreign currency translation. Net sales in BKP for fiscal year 2014 declined 9 percent compared to the prior fiscal year due to increased competition, pricing pressures, and reimbursement challenges with select payers.
InFuse had been a major source of revenue growth for Medtronic until 2011, when an article in the Spine Journal, published by NASS, suggested that Medtronic had covered up risks of BMP, including higher-than-expected incidence of cancer, and encouraged off-label use. The Spine Journal publication led to a 2,300-page report from the U.S. Senate Finance Committee documenting efforts by Medtronic to influence early studies of InFuse to downplay cancer risks. Following this, InFuse sales took a dive. Before the Journal article, InFuse had revenue close to $1 billion a year. For FY14, Medtronic had only $471 million in InFuse sales.
There might be a little light at the end of the InFuse tunnel, however. According to data released during the North American Spine Society (NASS) annual meeting last November in San Francisco, Calif., InFuse is safe for most patients though it increases risks of cancer when used in high doses with high-risk patients. Doctors can mitigate those risks, based on the analysis, an expert said during a presentation. Data was presented at NASS by Wellington Hsu, M.D., director of orthopedic surgery research at Northwestern University in Chicago, Ill. Hsu presented the results of his examination of several large-scale studies. Hsu’s research was based on a survey of half a dozen studies covering many thousands of patients and supports Medtronic’s assertions that InFuse doesn’t increase cancer risks when spinal surgeons use it appropriately.
“My conclusion is that InFuse, when used judiciously and responsibly, does not increase your risk of cancer. But that there are [cancer] mechanisms that we need to be aware of,” Hsu said. “I would still not recommend using BMP in somebody who has a history of cancer. But I believe that it is safe to use in proper doses in the general population.”
Hsu said the risk of cancer in InFuse patients seems to have dropped off as physicians became aware that BMP should not be used in patients with a history of cancer.
“The complications that we used to see regarding BMP were probably a result of not understanding the potency of the product,” he said. “Now that we have a better understanding, we are not seeing as many of these complications anymore.”
Past studies found that many doctors used the device for procedures at higher doses than sanctioned by the FDA.
Medtronic has set aside hundreds of millions of dollars to potentially resolve nearly 5,000 patient claims alleging injuries due to InFuse implants. Medtronic recorded expenses of $37 million and $140 million in fiscal years 2015 and 2014, respectively, related to InFuse. In addition, investors have filed lawsuits claiming that the company harmed its value with the handling of InFuse. On top of that, last summer, health insurance company Humana filed a racketeering lawsuit alleging Medtronic had promoted InFuse for uses not approved by the FDA. The lawsuit cites the Racketeer Influenced & Corrupt Organizations statute, commonly called RICO, and was filed in Tennessee Western District Court. “Defendants paid for and sponsored publication of academic and peer-reviewed literature that falsely represented InFuse and [recombinant bone morphogenetic protein-2] as safe and effective for uses not approved by the Food & Drug Administration. Defendants knew or should have known that Humana would rely on the fraudulent literature to pay for Infuse and/or BMP,” according to text from the suit.
For the third quarter of 2015 (ended Jan. 23), BMP revenue was $122 million, up 9 percent. For the final quarter of the company’s fiscal 2015 (ended April 24), BMP revenue was up mid-single digits, though overall spine sales for the year continued their slide (see overall company results for the most recent fiscal year below).
Recent Noteworthy Product Rollouts
New Division Chief
In June this year, Medtronic named Geoff Martha as executive vice president and president, Medtronic Restorative Therapies Group. Martha replaced Christopher J. O’Connell, who was selected to become CEO of a public company. Martha joined Medtronic in 2011, most recently serving as senior vice president of corporate strategy and business development, global communications and Medtronic philanthropy. Prior to joining Medtronic, Martha served as managing director of business development at GE Healthcare, where he was responsible for global business development efforts, including acquisitions, divestitures, joint ventures and equity investments. In his 19-year career with GE, Martha held several leadership roles in business leadership, corporate development, strategic marketing, and sales management.
Overall Numbers
For Medtronic across the board, the company reported fiscal year 2014 revenue of $17 billion, an increase of 4 percent on a constant currency basis after adjusting for a $175 million negative foreign currency impact, or 3 percent as reported. As reported, fiscal year 2014 net earnings were approximately $3.1 billion or $3.02 per diluted share, a decrease of 12 percent and 10 percent, respectively. The Cardiac and Vascular Group (cardiac rhythm disease management, coronary, structural heart and endovascular) posted sales of $8.9 billion (up 2 percent). The Restorative Therapies Group (spine, neuromodulation and surgical technologies) recorded $6.5 billion in revenue (also up 2 percent). The Diabetes Group had $1.7 billion in sales (flat compared to FY13). Overall company sales for FY15 were $20.3 billion. Spine sales dipped 2 percent to $2.97 billion.
KEY EXECUTIVES:
Omar Ishrak, Chairman & CEO
Gary Ellis, Exec. VP & Chief Financial Officer, Medtronic
Mike Genau, Sr. VP & President, Americas Region, Medtronic
Richard E. Kuntz, M.D., Sr. VP & Chief Scientific, Clinical and Regulatory Officer, Medtronic
Chris Lee, Sr. VP & President, Greater China Region, Medtronic
Stephen N. Oesterle, M.D., Sr. VP, Medicine & Technology, Medtronic
Luann Pendy, Sr. VP, Global Quality, Medtronic
Rob Ten Hoedt, Exec. VP & President, Europe, Middle East and Africa Region, Medtronic
Bob White, Sr. VP & President, Asia Pacific Region, Medtronic
Geoff Martha, Exec. VP & President, Medtronic Restorative Therapies Group
Doug King, President, Medtronic Spine
NO. of EMPLOYEES: 5,000
HEADQUARTERS: Memphis, Tenn.
Without a doubt, Medtronic is a company of firsts.
Most of its milestones, of course, are breakthroughs in healthcare technology—the first battery-operated external pacemaker (1957); the first commercially produced implantable pacemaker (1960); the first implantable, programmable neurostimulation device for chronic pain (1983); the first implantable cardioverter defibrillator (1993); the first insulin pump with real-time glucose monitoring (2006); and there are many other examples, in innovation as well as in the company’s far-reaching philanthropic work.
But 2014 saw another—and perhaps less auspicious, depending upon your point of view—first for the world’s largest standalone medical device company. With its nearly $50 billion purchase of Dublin, Ireland-based Covidien plc, Medtronic pulled off the largest-ever “inversion” deal (at the time) in U.S. history. Medtronic Inc., once headquartered just outside Minneapolis in Fridley, Minn., became Medtronic plc, now rooted in its acquisition’s base in Dublin. Inversion deals are structured to reduce U.S. income taxes and typically involve a U.S.-based company acquiring a foreign firm and relocating there for tax purposes.
The deal for Covidien was announced in June 2014, just after the start of Medtronic’s 2015 fiscal year. The deal was completed in January this year. The cash-and-stock transaction was valued at approximately $49.9 billion, based on Medtronic’s closing stock price of $75.59 per share on Jan. 26. Under the terms of the transaction, each ordinary share of Covidien outstanding as of the closing was converted into the right to receive $35.19 in cash and 0.956 percent of an ordinary share of Medtronic plc. Each share of Medtronic Inc. common stock outstanding as of the closing was converted into the right to receive one ordinary share of Medtronic plc. (Editor’s note: Though ODT’s Top Company ranking is compiled using fiscal 2014 figures, our coverage of Medtronic in this issue in large part will examine the company’s history-making purchase, which happened in the company’s 2015 fiscal year. And though not specific to the company’s spine business, the purchase of Covidien is significantly transformative for the company as a whole and worth chronicling here.)
According to Joanne Wuensch, an analyst with BMO Capital Markets in New York, N.Y., the deal for Covidien puts Medtronic in a better position to negotiate with hospital administrators, a group that has gained purchasing power as doctors increasingly become employees and hospitals limit what brands they carry. The expanded Medtronic will have offerings in six of the top 10 purchasing arms of the hospital, she said.
“They can go in not just with a bucket of products as they have previously, but with a full buffet table,” she told Bloomberg Business after the deal was completed. “It does facilitate the partnership between the device manufacturers and the hospital providers, being able to make more purchases from a fewer number of sellers.”
Despite moving overseas to seek a lower tax rate, Medtronic officials said they would spend an additional $10 billion over the next decade in investments, acquisitions and research and development in the United States (in part, from the tax savings, according to the company). The company’s headquarters will move to Ireland, but officials said it would retain its facilities in Minnesota—and largely be run from there, as most of its executives will continue to be based in the Gopher State.
When the deal was announced, Richard Cohen, a retired Twin Cities stockbroker and decades-long Medtronic investor, noted that Medtronic’s effective departure from Minnesota felt like a slap in the face to a state that nurtured it in its initial stages with funding and investment.
“The thing that bothers me the most is that this is a Minneapolis-based company that depended on the Minnesota investment community for its initial financing, that attracted investment from Minnesota investors first,” Cohen told the Minneapolis Star-Tribune newspaper. “The ones that were there in the beginning are the ones that are going to get screwed.”
Omar Ishrak, Medtronic’s CEO, took a much broader view of the deal.
“The medical technology industry is critical to the U.S. economy, and we will continue to invest and innovate and create well-paying jobs,” Ishrak said in a statement. “These investments ultimately produce new therapy and treatment options that improve or save lives for millions of people around the world. We are excited to reach this agreement with Covidien, which further advances our mission to alleviate pain, restore health and extend life for patients around the world. This acquisition will allow Medtronic to reach more patients, in more ways and in more places.”
Many U.S. lawmakers were not convinced. Medtronic’s purchase of Covidien along with other similar deals where domestic companies use mergers to reincorporate overseas for tax reasons created consternation on Capitol Hill. U.S. lawmakers moved swiftly to block such efforts.
“These transactions are about tax avoidance, plain and simple,” Sen. Carl Levin (D-Mich.) said in a prepared statement. “Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans.”
In September, the U.S. Treasury Department announced tax restrictions that would make it harder and more expensive for U.S. companies to reincorporate abroad.
The measures included the prohibition of financial maneuvers called “cash boxes” and inversions, and they would prevent “hopscotch” loans that allow American firms to access foreign cash without paying U.S. taxes.
“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” U.S. Treasury Secretary Jacob J. Lew said after the department’s announcement. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”
Venture capitalists also expressed concern over the blockbuster deal. Large mergers such as this only consolidate the medtech market more, leaving less space for small companies, and less opportunity for small startups to find buyers.
“The impact of this [deal] will be felt for many years,” Mir Imran, chairman of medical technology accelerator InCube Labs, told The Wall Street Journal. Imran has launched 19 companies since the 1980s, and has done business with both Medtronic and Covidien.
Last year, Nfocus Neuromedical Inc., a hemorrhagic-stroke treatment company launched by InCube, was acquired by Covidien, he said.
“Prior to this merger, Covidien was very acquisitive of startup companies, and Medtronic was also quite active,” he said. “But post-merger, the new Medtronic will be focused on integrating the two businesses … so, for the next two or three years, [it] will be less focused on investing in and acquiring young companies. For the world of medtech startups, this is not good news.”
Casper de Clerq, a partner at Norwest Venture Partners who has been investing in medical technologies for more than two decades—and whose firm last year invested alongside Medtronic in a $20 million Series D round for sinus-implant company Intersect ENT Inc.—said that certain areas of emerging medical technology could be hit especially hard by a merger that, at least temporarily, takes two major buyers off the grid.
In October, the company reiterated, despite government action, that the deal was still a strategic one, including the belief that the combination would “support and accelerate” Medtronic’s three strategies of:
- Therapy innovation: With its expanded portfolio of products and services and ability to accelerate strategic investments and investments in technology, the “new” Medtronic would be a preeminent leader in developing, investing in and delivering therapy and procedural innovations to address the major disease states impacting patients and healthcare costs in the United States and around the world;
- Globalization: With a presence in more than 150 countries, the combined entity would be better able to serve global market needs. Medtronic and Covidien have combined pro forma revenues of approximately $27 billion including approximately $13 billion from outside the U.S., of which $3.7 billion comes from emerging markets. Covidien’s capabilities in emerging market research and development (R&D) and manufacturing, joined with Medtronic’s clinical expertise across a much broader product offering, significantly increases the number of attractive solutions the new company would be able to offer globally; and
- Economic value: Medtronic has adopted an intense focus on aligning with its customers to create more value in healthcare systems around the world by combining products, services and insights into solutions aimed at expanding access and reducing healthcare costs. With Covidien, Medtronic would be able to provide a broader array of complementary therapies and solutions that can be packaged to drive more value and efficiency in healthcare systems.
Medtronic also revealed the proposed management structure of the new company. The new Medtronic is composed of four major business segments, headed by Medtronic’s three existing group presidents plus Covidien group president Bryan Hanson. The four segments are Medtronic’s Cardiac and Vascular Group, valued at $8.8 billion; its Restorative Therapies Group (which includes the company’s spine business) worth $6.5 billion; its Diabetes Group, worth $1.7 billion; and the fourth, the Covidien Group (which was quickly renamed the Minimally Invasive Therapies Group not long after the merger closed), currently valued at $10.4 billion.
Covidien’s neurovascular business will function as an independent business under the umbrella of Medtronic’s restorative therapies group. The company also announced four geographic regions around which the combined company will operate: Asia Pacific, the Americas, EMEA (Europe, the Middle East and Africa) and Greater China—down from Medtronic’s present seven regions.
“While we will move to four regions in the future—versus the seven regions represented in the Medtronic structure today—this is in no way intended to reflect a diminished importance or focus on those markets that previously served as regions, nor will I remain any less focused on seeing that these markets reach their potential and objectives,” Ishrak said. “Rather, this approach will ensure we have the appropriate leadership involvement in these markets on a daily basis as we grow our overall scale and complexity.”
Spinal Adjustment
Medtronic’s spine business may have taken a bit of a sales hit in 2014, but the company continues to stand firmly behind its portfolio of back-saving products. In the last few years, CEO Ishrak repeatedly has denied that the company is exploring ways to divest its spine business, though the business continues to be under pressure—particularly with smaller companies nipping at its heels—and core technology. For example, startup firms such as Santa Clara, Calif.-based Benvenue Medical, are challenging their larger competitors. Recent clinical trial results showed that Benvenue’s Kiva VCF System—which has U.S. Food and Drug Administration (FDA) clearance—to treat vertebral compression fractures performs as well as or is better than Medtronic’s KyphX kyphoplasty system.
Medtronic’s lineup of spine technology includes artificial cervical discs, balloon kyphoplasty devices, biologic fusion systems, minimal-access spine technologies, and reconstructive spinal systems.
An artificial disc is a prosthetic device inserted between the vertebrae to replace a natural spinal disc. It is designed to preserve mobility throughout the treated vertebral segment.
Balloon kyphoplasty is minimally invasive procedure for repairing vertebral compression fractures in the spine caused by osteoporosis or cancer. The procedure uses balloons designed to restore the vertebral body height. Bone cement is inserted into the vertebral body to stabilize the fracture.
Biologic fusion systems consist of two elements. The first is a bone graft (such as InFuse), a bone morphogenetic protein (BMP) that stimulates the body to regrow bone that will fuse, or join, two vertebrae together to stabilize the lumbar spine. It eliminates the need to harvest bone from another area of the patient’s body, such as the hip, thus eliminating an additional, often painful, surgery. The second element is a small, hollow metal cylinder, called a cage, that holds the biologic material and restores the degenerated disc space to its original height. It helps to relieve the pressure on nerves, which is commonly associated with back and/or leg pain.
Minimally invasive spine surgery is performed through smaller incisions than traditional open surgery and may lead to decreased muscle trauma, less intraoperative blood loss, and shorter hospital stays. Minimally invasive surgery can be percutaneous (through the skin) or mini-open (operating through a small incision), and can be used to treat all areas of the spine.
Reconstructive spinal systems include screws, rods, and connectors that are implanted along the affected area of the spine to provide support for a spinal fusion. A spinal fusion is simply the uniting of two bony segments, whether a fracture or a vertebral joint. The instrumentation acts as an “internal cast” to stabilize the vertebra until the fusion, or bony re-growth, can occur.
Spine sales for fiscal year 2014 were $3.04 billion, a decrease of 3 percent compared to the prior fiscal year. The decrease in sales for FY14 primarily was driven by declines in bone morphogenetic protein (BMP/InFuse) products and balloon kyphoplasty products (BKP) of 11 percent and 9 percent, respectively, and unfavorable foreign currency translation. Net sales in BKP for fiscal year 2014 declined 9 percent compared to the prior fiscal year due to increased competition, pricing pressures, and reimbursement challenges with select payers.
InFuse had been a major source of revenue growth for Medtronic until 2011, when an article in the Spine Journal, published by NASS, suggested that Medtronic had covered up risks of BMP, including higher-than-expected incidence of cancer, and encouraged off-label use. The Spine Journal publication led to a 2,300-page report from the U.S. Senate Finance Committee documenting efforts by Medtronic to influence early studies of InFuse to downplay cancer risks. Following this, InFuse sales took a dive. Before the Journal article, InFuse had revenue close to $1 billion a year. For FY14, Medtronic had only $471 million in InFuse sales.
There might be a little light at the end of the InFuse tunnel, however. According to data released during the North American Spine Society (NASS) annual meeting last November in San Francisco, Calif., InFuse is safe for most patients though it increases risks of cancer when used in high doses with high-risk patients. Doctors can mitigate those risks, based on the analysis, an expert said during a presentation. Data was presented at NASS by Wellington Hsu, M.D., director of orthopedic surgery research at Northwestern University in Chicago, Ill. Hsu presented the results of his examination of several large-scale studies. Hsu’s research was based on a survey of half a dozen studies covering many thousands of patients and supports Medtronic’s assertions that InFuse doesn’t increase cancer risks when spinal surgeons use it appropriately.
“My conclusion is that InFuse, when used judiciously and responsibly, does not increase your risk of cancer. But that there are [cancer] mechanisms that we need to be aware of,” Hsu said. “I would still not recommend using BMP in somebody who has a history of cancer. But I believe that it is safe to use in proper doses in the general population.”
Hsu said the risk of cancer in InFuse patients seems to have dropped off as physicians became aware that BMP should not be used in patients with a history of cancer.
“The complications that we used to see regarding BMP were probably a result of not understanding the potency of the product,” he said. “Now that we have a better understanding, we are not seeing as many of these complications anymore.”
Past studies found that many doctors used the device for procedures at higher doses than sanctioned by the FDA.
Medtronic has set aside hundreds of millions of dollars to potentially resolve nearly 5,000 patient claims alleging injuries due to InFuse implants. Medtronic recorded expenses of $37 million and $140 million in fiscal years 2015 and 2014, respectively, related to InFuse. In addition, investors have filed lawsuits claiming that the company harmed its value with the handling of InFuse. On top of that, last summer, health insurance company Humana filed a racketeering lawsuit alleging Medtronic had promoted InFuse for uses not approved by the FDA. The lawsuit cites the Racketeer Influenced & Corrupt Organizations statute, commonly called RICO, and was filed in Tennessee Western District Court. “Defendants paid for and sponsored publication of academic and peer-reviewed literature that falsely represented InFuse and [recombinant bone morphogenetic protein-2] as safe and effective for uses not approved by the Food & Drug Administration. Defendants knew or should have known that Humana would rely on the fraudulent literature to pay for Infuse and/or BMP,” according to text from the suit.
For the third quarter of 2015 (ended Jan. 23), BMP revenue was $122 million, up 9 percent. For the final quarter of the company’s fiscal 2015 (ended April 24), BMP revenue was up mid-single digits, though overall spine sales for the year continued their slide (see overall company results for the most recent fiscal year below).
Recent Noteworthy Product Rollouts
- The Prestige LP Cervical Disc System for the treatment of single-level cervical disc disease (radiculopathy and/or myelopathy) is the third clinically proven artificial cervical disc in the Medtronic portfolio and builds upon the same design principles as the original Prestige Cervical Disc introduced in 2007. While incorporating the same ball-and-trough articulation, which is designed to allow the two components to move with respect to one another in a range of motions, including bending, rotation and translation, the LP Disc represents a departure from the original stainless steel device in terms of materials and fixation mechanism. Instead of using bone screws to attach to the vertebral bodies as in the original design, the LP design incorporates two rails positioned off midline that press-fit into two pre-drilled holes created during the surgical procedure. In addition, the LP Disc is composed of a proprietary titanium-ceramic composite that has been shown to have a lower wear rate and produce less scatter on postoperative magnetic resonance imaging than stainless steel.
- In September 2014, the company launched the Kyphon Express II Balloon Kyphoplasty Platform, which includes the next-generation Kyphon Cement Delivery System. The new platform is the latest advancement from Medtronic in the BKP technology for the treatment of vertebral compression fractures. The new system features a maximum pressure rating of 700 psi, providing the treating physician a more powerful option for reducing fractures, according to the company. The new system also gives physicians the option of using the cement resistant technique, which allows one balloon to remain inflated during contralateral cement fill, helping to maintain the goal of fracture reduction. In addition, this system includes an expanded tools portfolio that is more versatile, allowing for the treatment of a variety of different levels of the spine. The Cement Delivery System (CDS) includes new features designed to increase the efficiency and precision of delivering bone cement into a vertebral body. The re-designed cement cartridges can be filled simultaneously with a provided T-adapter, increasing procedure efficiency. In addition, Kyphon CDS has a longer shelf life for enhanced usability. The CDS continues to allow the physician to deliver highly viscous bone cement to the patient from up to 4 feet away from the radiation source while maintaining tactile feel. It also still includes a Quick Release Button that provides the ability to halt the flow of bone cement on demand, giving the physician precise control over the amount of cement flow.
- In October, Medtronic introduced its Pure Titanium Coating (PTC) platform of interbody fusion devices for the spine. The PTC platform includes four products: the Capstone PTC Spinal System, Clydesdale PTC Spinal System, Anatomic PEEK PTC Cervical Fusion System and Cornerstone-SR Ti-Coated Anatomical Cervical Cage. These devices are used to treat patients experiencing pain caused by compression of the spinal cord or nerve roots by helping to restore normal disc height. Disc height restoration may reduce the pressure on the nerve roots and the spinal cord and help alleviate much of the patient’s pain. Medtronic’s PTC devices are constructed of a combination of the two materials most commonly used in interbody fusion procedures: titanium and polyether ether ketone (PEEK). Both materials have a long clinical history of being used in orthopedic and other medical implants. Surgeons historically have preferred interbody spacers made of titanium because of their strength and long clinical history. However, over the last 10 years PEEK has largely replaced titanium as the material of choice because it has a modulus of elasticity that is similar to human cortical bone and it does not show up on X-rays. This radiolucency enables the surgeon to more easily assess the surgical site over time after surgery. With the application of a thin layer of textured pure titanium about 1/10th of a millimeter thick to the top and bottom of each PEEK implant, the PTC devices possess attributes of both PEEK and titanium. Specifically, as demonstrated in mechanical testing compared to PEEK alone, the pure titanium coating has a greater coefficient of friction. Additionally, this textured coating increases the surface area of the implant, which means there is more area for bone to come into contact with the surface of the implant. Yet, the titanium layer is thin enough that it does not change the radiolucency or mechanical properties of the underlying PEEK implant. Capstone PTC and the Clydesdale PTC received FDA 510(k) clearance in March 2014 and launched in the United States in August last year. CE mark was received for both systems in July last year. Capstone is expected to launch in Japan in November and Clydsdale is expected to launch in Japan in January 2016. Anatomic PEEK PTC received FDA 510(k) clearance and launched in the United States in September. Cornerstone-SR Ti-Coated Anatomical Cervical Cage received a CE mark and launched in Western Europe in July last year.
- Medtronic received FDA 510(k) clearance and launched the Shilla Growth Guidance System. The system is designed for treatment of skeletally immature pediatric patients less than 10 years of age diagnosed with severe, progressive, life-threatening, early-onset spinal deformities. The system is a new growth-sparing technology that allows correction of the deformity while maintaining the corrections over time, minimizing the need for periodic lengthening procedures. This is different than current operative treatments, which are distraction-based systems that require lengthening every six to nine months. “Early onset scoliosis is extremely difficult to treat. The current gold standard technique to manage scoliosis long-term is to fuse the spine, but in children who are still growing this can have serious complications,” said Richard McCarthy, M.D., an orthopedic surgeon and faculty member at the University of Arkansas for Medical Sciences/Arkansas Children’s Hospital, and inventor of the device. “Until now we were only able to offer operations which use implants to stabilize the curve in the spine, but these frequently mean twice-yearly surgeries as a child grows. The clearance of the Shilla Growth Guidance System marks the first time we can offer effective management of the curvature of the spine while still harnessing the child’s natural growth.” The system uses a unique non-locking set screw at the proximal and distal portions of the construct’s rods. This specific feature allows the rod to slide through the screw heads as the child’s spine grows, while still providing correction of the spinal deformity. The device received CE mark in 2012.
New Division Chief
In June this year, Medtronic named Geoff Martha as executive vice president and president, Medtronic Restorative Therapies Group. Martha replaced Christopher J. O’Connell, who was selected to become CEO of a public company. Martha joined Medtronic in 2011, most recently serving as senior vice president of corporate strategy and business development, global communications and Medtronic philanthropy. Prior to joining Medtronic, Martha served as managing director of business development at GE Healthcare, where he was responsible for global business development efforts, including acquisitions, divestitures, joint ventures and equity investments. In his 19-year career with GE, Martha held several leadership roles in business leadership, corporate development, strategic marketing, and sales management.
Overall Numbers
For Medtronic across the board, the company reported fiscal year 2014 revenue of $17 billion, an increase of 4 percent on a constant currency basis after adjusting for a $175 million negative foreign currency impact, or 3 percent as reported. As reported, fiscal year 2014 net earnings were approximately $3.1 billion or $3.02 per diluted share, a decrease of 12 percent and 10 percent, respectively. The Cardiac and Vascular Group (cardiac rhythm disease management, coronary, structural heart and endovascular) posted sales of $8.9 billion (up 2 percent). The Restorative Therapies Group (spine, neuromodulation and surgical technologies) recorded $6.5 billion in revenue (also up 2 percent). The Diabetes Group had $1.7 billion in sales (flat compared to FY13). Overall company sales for FY15 were $20.3 billion. Spine sales dipped 2 percent to $2.97 billion.