Another quarter of weak sales in Medtronic’s division for spine devices stirred talk Tuesday about whether the Fridley-based manufacturer eventually might sell the business unit.
For months, stock analysts have questioned whether Medtronic should divest itself of the Memphis-based division for spine surgery devices, which generates about 20 percent of the company’s revenue.
Revenue from that unit has fallen in recent quarters due to increased competition, insurance company limits on spine surgeries and questions about the safety and effectiveness of a key Medtronic product called Infuse.
During a conference call Tuesday morning to discuss third-quarter financial results, Medtronic chief executive Omar Ishrak signaled that a dramatic change of some sort is needed in the spine business.
“While we continue to believe in the potential of this market, we urgently need to see meaningful signs of improvement from our current initiatives,” said Ishrak, who became Medtronic’s chief executive last year. “If we do not, we will need to reassess our strategy and approach for this business.”
Such a reassessment could lead to a decision to “sell off certain product lines, or maybe we need to add new product lines,” chief financial officer Gary Ellis said in an interview following the conference call. Medtronic also might implement “organic” changes within the confines of the existing business, Ishrak said in the interview.
But stock analysts seized on Ishrak’s comments during the conference call as an important sign that Medtronic might eventually be open to a sale.
“He did mention it as a possibility for the first time,” said Tim Nelson, an analyst in Minneapolis with Nuveen Asset Management. “Here we have the first indication that the new CEO is willing to stir the pot.”
In a research note to investors issued Tuesday, analyst Greg Simpson of Wunderlich Securities argued that spinning off the spine business would remove a financial drag for Medtronic. Simpson added, “ongoing problems in spine could…re-ignite speculation of a possible divestiture.”
Overall third-quarter revenue at Medtronic came in at $3.92 billion, an increase of 2 percent over the same period last year. Third-quarter earnings were $935 million, or 88 cents per share, up slightly over earnings of $924 million, or 86 cents per share, in the same quarter last year.
After adjusting for one-time factors, Medtronic reported earnings of 84 cents per share, which matched the estimate of analysts surveyed by Thomson Reuters. Revenue for the quarter, however, fell short of expectations.
Spine revenue of $784 million during the quarter was down 10 percent compared with last year after controlling for changes in currency exchange rates. Sales from Medtronic’s other big source of revenue – heart rhythm devices made at a division based in Mounds View – came in at $1.19 billion, down 3 percent after controlling for currency.
Medtronic shares closed on Tuesday at $38.99, down 95 cents on the day.
Christopher Snowbeck can be reached at 651-228-5479. Follow him attwitter.com/chrissnowbeck.