Medtronic plans to lay off 4%-5% of its workforce to cut costs and will renew efforts to divest its Physio-Control automated external defibrillator business, the firm announced Feb. 22 in conjunction with its fiscal third-quarter financial results.

Reacting to challenging market dynamics, the company said it intends to eliminate 1,500 to 2,000 employees during its current fiscal quarter (February-April) as part of a restructuring plan. The firm has not yet disclosed details on how much it expects to save or which business units may be impacted the most.

The firm has not yet disclosed details on how much it expects to save or which business units may be impacted the most by the restructuring.

In addition to a general focus on driving efficiencies, "We also are obviously acknowledging the fact that our markets are somewhat softer and we have to readdress the infrastructure to reduce it to what our market growths are at this point," said Gary Ellis, Medtronic's chief financial officer, during a conference call with analysts.

"What the savings are ... we don't have any estimate for that," Ellis said.

The exec specified that slower-growth business units and geographic markets will be targeted for cuts over higher-growth areas. He also stressed that the reductions will, for the most part, target general infrastructure functions rather than sales or R&D positions.

The announcement came as Medtronic reported 3% revenue growth (to $3.96 billion) and 11% net earnings growth (to $924 million) for the fiscal third quarter (ended Jan. 28). The earnings were largely driven by favorable tax rates, the company acknowledged. However, “we obviously are seeing that our pre-tax earnings are not where we need them to be," Ellis said. "We are going to have to take some costs out and that is what we are attempting to do here."

The restructuring plan will include an undisclosed one-time charge to fourth-quarter earnings.

Physio-Control Separation Plans Reinitiated

Separately, Medtronic said it was restarting efforts to unload its Physio-Control AED unit. The company originally announced plans to spin off Physio-Control in December 2006, but a month later the subsidiary halted U.S. shipments of its flagship LifePak line of AEDs to address quality concerns raised during FDA inspections.

When FDA gave the go-ahead to resume unrestricted shipments last February, Medtronic said it would wait for the unit to build to full capacity and for supportive economic conditions before seeking a possible spin off or sale. (See " Also see "Medtronic Still Plans Physio-Control Spinoff, But Timing Is Uncertain" - Medtech Insight, 1 March, 2010. " – "The Gray Sheet" March 1, 2010.)

"Now that the business has been operating at full strength for the past year and performing well, we believe it is the right time to reinitiate our efforts to divest Physio-Control," Ellis said.

The move would be favorable for Medtronic because of the unit's relatively low profit margin compared to many of Medtronic's other businesses, Ellis said. At the same time, Physio-Control executives will likely gain added flexibility to pursue strategic priorities, he noted.

Physio-Control reported revenue of $104 million for fiscal Q3, up 4% from the prior-year period. Ellis said the business is facing slowing demand as local governments and other AED customers deal with budget constraints.

In addition, FDA is contemplating tougher pre-market review requirements for AEDs. (See " Also see "FDA Advocates PMAs For Automated External Defibrillators" - Medtech Insight, 31 January, 2011. " – "The Gray Sheet" Jan. 31, 2011.)

Moderate Growth Or Declines In Core Units

Medtronic's largest businesses generally reported either moderate growth or declines for the quarter.

Worldwide sales of implantable cardioverter defibrillators ($735 million) and pacemakers ($450 million) each fell 2% on a constant currency basis from the same period last year.

The sector is facing challenges on multiple fronts, including downward pressure on pricing and an increased public and legal focus on use of ICDs outside of clinical guideline recommendations. (See " Also see "St. Jude Downplays ICD Scrutiny Impact, But Jury Is Still Out, Analysts Say" - Medtech Insight, 31 January, 2011. " – "The Gray Sheet" Jan. 31, 2011.)

Beyond that, U.S. approval for Medtronic's next-generation Protecta ICDs and cardiac resynchronization therapy defibrillators is delayed as the firm works with FDA to resolve a 2009 warning letter citing deficiencies at its Mounds View, Minn., facility.

The warning letter is also holding up an important neurostimulation submission ( Interstim sacral nerve stimulation for fecal incontinence), but it did not prevent FDA from approving early in February Medtronic's Revo MRI SureScan , which is the first pacemaker labeled for compatibility with magnetic resonance imaging. (See " Also see "Medtronic Revo MRI Pacer Approved, But Still Faces Reimbursement Hurdle" - Medtech Insight, 14 February, 2011. " – "The Gray Sheet" Feb. 14, 2011.)

"We are pretty bullish that this is going to be a product platform that ... is going to enable us to gain really meaningful [market] share," CEO Bill Hawkins said of the Revo.

Hawkins said Revo is so far being accepted by the market at a premium price to standard pacemakers. However, some challenges remain with regards to Medicare reimbursement for MRI in pacemaker patients. (See in this issue, " Also see "MRI For Pacer Patients: Coverage Limited To Studies" - Medtech Insight, 28 February, 2011. ".)

Medtronic says it has the largest share of the total stent market (bare metal stents plus drug-eluting stents) in Europe and other CE-mark-accepting regions where both Integrity and Resolute Integrity have been launched.

The firm’s cardiovascular business, including stents, structural heart and endovascular products, grew 8% on a constant currency basis to $774 million in Q3.

Hawkins said the firm has made substantial gains recently in the stent arena with the worldwide launch of the Integrity bare-metal stent and the European launch of the Resolute Integrity zotarolimus-eluting stent last year. (See " Medtronic's Integrity Coronary Stent " – "The Gray Sheet" Sept. 27, 2010.)

The firm now says it has the largest share of the total stent market (bare metal plus drug-eluting) in Europe and other CE-mark-accepting regions where both Integrity and Resolute Integrity have been launched. And, globally, including the U.S., Medtronic is number one in bare-metal stent market share, Hawkins said.

The Integrity platform employs sinusoid technology to improve stent deliverability, according to the company.

Meanwhile, revenue in Medtronic’s spine segment, another area where the firm is facing several growth challenges including off-label-use scrutiny, increased 2% to $861 million.

Hawkins stressed in particular the opportunity to grow the spine business faster with the CD Horizon Solera posterior fixation system, launched in the U.S. in January. Solera is the first system to integrate with the firm's minimally invasive surgery technologies and its surgical navigation/imaging tools.

"This differentiated technology is something only Medtronic is doing and it is starting to change the basis of competition in the spine market," said Hawkins, who was likely leading his final Medtronic earnings call with a retirement date set for April. (See " Also see "Medtronic’s Hawkins To Retire; Company Sets External Search For New CEO" - Medtech Insight, 3 January, 2011. " – "The Gray Sheet" Jan. 3, 2011.)

The executive noted that there was no additional information to report on the firm's search for his successor.

By David Filmore

Medtronic Plans Company-Wide Layoffs, Restarts Physio-Control Divestiture

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