Medtronic Spine Takes Market Share

Medtronic, Inc.’s fourth quarter spine revenue of $811 million was flat, but the company gained market share for the first time since the fourth quarter of 2007. That math doesn’t say much good about the overall spine market.

Outperforming the Market

If you exclude sales of balloon kyphoplasty, the company’s core spine business grew in the low single-digits on a constant currency basis globally and in the U.S. The company believes it outperformed the U.S. market and market share was gained on both a sequential and year-over-year basis.

BMO Capital Market analyst Joanne Wuensch said core spine sales experienced “nice growth” in the U.S. while the company estimated that it has increased its share by 2% in the past year. “In our spine model, which includes Kyphon, the improvement is a bit less pronounced, but still remarkable, as the company gained share for the first time since CY4Q07; we estimate the company’s share increased to 35.1% from 34.7% y/y.”

In a May 21, 2013 announcement, the company said the core spine business continues to see “solid adoption of its new products and procedural innovations.” The company also noted that BMP revenue of $140 million declined by 1% on a constant currency basis. The much anticipated Yale study of the company’s Infuse product is expected to be released in June.

Management pointed out that growth stemmed from new product innovations (e.g., Solera, Bryan Cervical Disc) and pull-through opportunities with its imaging, navigation and powered surgical instruments.

“Considering hospitals are investing in capital equipment in spine surgeries, Medtronic is capitalizing on this opportunity to use navigation to drive implants sales. Case in point, when its O-Arm is placed with an account, the company is seeing implant growth rates that are 10% above those of other accounts, ” said Wuensch.

Stability

Wall Street analysts abhor stability (who needs analysts during stable markets?), as for the first time in recent memory analysts didn’t ask one question about spine or Infuse during the quarterly conference call with company CEO Omar Ishrak.

Ishrak told analysts he believes the stabilization of sales will continue as new products are rolled out. He added that Medtronic is differentiating itself from the competition in the spine business through enabling technologies from the company’s surgical technologies business including imaging, navigation, and powered surgical instruments.

“Hospitals are investing in our capital equipment for spine surgery as they see clear value from improved surgical precision and more efficient procedures. This shows up not only in increased revenue and share for our spinal implant, but also in the strong capital equipment performance in our surgical technologies business. We believe we’re still only on the leading edge of this large, differentiated opportunity in spine, ” said Ishrak.

China, Hospital Purchasers and Big Cash

Ishrak also said the integration of Kanghui, their Chinese orthopedic subsidiary, is going well, with the business growing over 20%. “We are excited about the long term value segment opportunity that Kanghui represents in the global orthopedics market.”

Over the next five years, the company expects to generate over $25 billion of free cash flow. That’s a lot of cash to spend on growth and new distribution models.

With evolving payment models, Ishrak said successfully addressing the growing importance of economic value considerations “while still delivering clinical value will position us as the premier global medical technology solutions partner, creating value for healthcare systems around the world.”

“In general, our industry has been slow to adapt to this changing landscape, which I believe has led to increased pricing pressure and ultimately slow market growth. Whereas in the past, physicians alone were the ones who were making purchasing decisions, increasingly other stakeholders are influencing or making those decisions. Thus, medical technology innovation must evolve to meet the needs of a broader set of stakeholders, proven through both clinical as well as compelling economic evidence.”

This past quarter was a milestone for the quarter. Soon we’ll know if it was a turning point.