KH China Kanghui Holdings American Depositary Shares (Each Representing Six Ordinary Shares, $0.001 Par Value)

To overcome the ongoing difficulties and challenges in the spinal business, leading medical device player Medtronic, Inc. (MDT) is currently focusing on portfolio expansion. As part of this strategy, the company recently initiated the U.S. launch of its ACD Instrument Set that will be used to insert the company’s BRYAN Cervical Disc in a simplified process compared to the original instrument set.

The BRYAN disc, one of the two clinically proven artificial cervical discs in Medtronic’s portfolio, was first introduced in 2000. Since then the company has sold 20,000 units of the same worldwide. This disc was approved by the U.S. Food and Drug Administration in 2009 for the treatment of single-level cervical disc disease (radiculopathy and/or myelopathy), a common diagnosis for neck and arm pain.

Medtronic has been witnessing disappointing performance from the spinal implants in the U.S. market mainly due to pricing pressure and reduced procedure volume. During the first quarter of fiscal 2013, this segment generated $786 million in sales, down 5% y/y (down 3% at constant exchange rate or CER). The company’s Biologics business suffered from continuous declines in the sales of Infuse (following the publication of articles in The Spine Journal).Revenues from BMP[comprising Infuse bone graft (InductOs in the European Union) sales] declined 19% year over year (same as at CER) during the quarter with a 20% drop in the U.S.  

We are also concerned about the persisting economic uncertainties across the world, leading to reduction in healthcare budgets and increased pressure on utilization. This results in fewer procedures, a trend that is expected to continue in the near future and affect revenue growth of the company. These headwinds have also adversely affected the company’s peers including St Jude Medical (STJ) and Boston Scientific (BSX).

However, we are encouraged with Medtronic’s portfolio expansion strategies, although we believe contributions from new products are not significant yet to drive top-line growth. The company is currently focusing on the emerging markets, especially China, primarily to offset the hindrances it faces in two of its largest markets – US defibrillators and US spinal implants. Earlier in September, Medtronic decided to acquire China Kanghui Holdings (KH), which is in sync with its focus on globalization due to the opportunity rife in international destinations.

We have a ‘Neutral’ recommendation on Medtronic. The stock retains a Zacks #3 Rank (Hold) in the short term.

 
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