Infuse Furor May Force Medtronic Spine Business Sale. Who Would Buy?

A Wall Street analyst is speculating that Medtronic's (NYSE: MDT  ) woes over its blockbuster Infuse product might lead the medical device company to pull the plug on the entire spinal business.

But given the problems the spine division has, it's not clear whether there will be any takers.

Wells Fargo analyst Larry Biegelsen downgraded Medtronic's stock to market perform in a research note on Tuesday, noting that the negative impact of the Spine Journal articles, which roundly criticized the results of Infuse trials, will have a broader impact on the company. In describing five possible scenarios of what might happen -- including an FDA review of Infuse and filing of class action lawsuits -- Biegelsen says that Medtronic may decide to sell the entire spinal business.

The Infuse has been a blockbuster spinal fusion bone graft product at Medtronic. It has recently come under intense scrutiny amid charges that researchers who had financial ties to Medtronic did not adequately take into account or warn of major risks associated with the bone growth product

Sales of the product have been falling even as many studies critical of the product are published. Last week, Medtronic CEO Omar Ishrak defended the data behind Infuse in response to the Spine Journal articles.

A Medtronic spokesman declined to comment on Biegelsen's speculation about the potential sale of the spine division.

Jettisoning the spinal business, if that is one option that Ishrak might consider, may not be easy. The spine unit, which garnered fourth-quarter revenue of $875 million makes up the biggest segment of Medtronic's Restorative Therapies Grou that had Q4 revenue of $1.97 billion.

But the spine segment has not been doing well. In its annual report for fiscal 2011 which ended late May, the company said the following:

Spinal net sales for fiscal year 2011 were $3.414 billion, a decrease of 2 percent over the same period in the prior fiscal year. The decrease in Spinal net sales was primarily due to the decline in Infuse Bone Graft sales and the continued decrease in demand for Kyphon Balloon Kyphoplasty ...

The biggest white elephant in the spine division appears to be Kyphon. Acquired four years ago for $4.2 billion, the product has yet to prove itself in the marketplace. In the fourth quarter Kyphon revenue fell 9 percent.

Aside from shaky financial performance, the spinal business has had a history with the U.S. Department of Justice. In 2006, Medtronic, without admitting guilt, agreed to pay $40 million to settle charges that between 1998 and 2003, it paid kickbacks to doctors through "sham consulting agreements, sham royalty agreements and lavish trips to desirable locations."

And Biegelsen in his note Tuesday hinted that Medtronic may yet again settle with DOJ sometime this year for allegedly promoting the off-label use of Infuse. Promoting off-label use of a medical device is illegal.

Any company looking at Medtronic Spine as an acquisition target has to consider the division's financial performance and its potential legal troubles.

So the question is, who has the money, and -- to borrow a phrase from Michele Bachmann -- a "titanium spine" to take this on?

The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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