Challenging Quarter for Medtronic Spine

It was, in the words of Medtronic, Inc. CEO, Omar Ishrak, a challenging quarter for Medtronic Spine.

Revenue of $746 million declined 3% on a constant currency basis or 5% as reported.  Core Spine revenue of $636 million was down 1% while BMP revenue of $110 million declined 17%.

There was some good news. The thoracolumbar, cervical, and other biologic product lines all grew this quarter, both globally and in the U.S., driven, says the company, by procedural innovation and new technologies. There were declines in balloon kyphoplasty and interbody devices.

“We are performing at or better than the market in almost every one of our business lines, ” said Ishrak. “This quarter also represented another quarter where our overall organization delivered consistent, dependable growth, with strong performances in some areas offsetting challenges in other parts of our business.”

“In spine, we continue to work with the FDA to bring our next generation cervical disc to the U.S. market. And we expect to follow that launch with a series of cervical plate launches in 2015.”

Challenges

Analysts asked Ishrak why the company’s spine business wasn’t performing better. Ishrak noted that last quarter’s spine results were good and he has every confidence that “the cadence of product launches we have in spine actually will deliver over the next few quarters.”

Chris O’Connell, president of Medtronic’s Restorative Therapies Group said there were a couple of holes in the product line, particularly in the interbody space, and a couple of small categories like peek rods that remain under pressure. “But overall I think our perspective is it’s a relatively stable situation and we expect that the core spine business to be stable into the back half of the year. As pointed out, the BMP and the BKP businesses are both hurting us right now, although the kyphoplasty business does seem to be showing signs of stabilization in the U.S. and we watch the BMP part closely.”

Jefferies Analyst Raj Denhoy said the weak performance reflected “continued end-market weakness and InFuse sales that continue to plummet, with management now expecting a mid-teens sales decline for the year.”

Stable Spine Market, Innovators Taking Share

After Medtronic’s report, Piper Jaffray analyst Matt Miksic says he continues to view the overall spine market as stable and modestly improving low single digit market growth, with smaller innovative players like LDR, Globus, and NuVasive taking share from larger legacy players like DePuySynthes and Medtronic. He expects those companies to continue to gain share and outperform the market going forward

“Based on our analysis of Q3 results across the spine market we estimate the market grew ~3% again in Q3, which is slightly higher than Medtronic’s ‘flattish’ commentary but roughly in line with ~3% growth reported in Q2.”