Recall bites Medtronic earnings

-TwinCities.com

11/20/2007- A massive product recall in October cut revenue and increased expenses during the second quarter for Fridley-based Medtronic, but the financial damage wasn't quite as bad as many feared.

Medtronic reported Monday that the recall of its Sprint Fidelis lead wire - a product used in conjunction with implantable cardiac defibrillators - had an estimated negative sales impact of $130 million. Additionally, the company incurred expenses of about $31 million in inventory write-offs and other direct costs associated with the recall.

In October, Medtronic forecast that second-quarter revenue could be cut between $150 million and $250 million because of the Sprint Fidelis problem. At the time, the company expected inventory write-offs of at least $15 million in the second quarter, and other related costs of between $10 million and $20 million.

"Yes, it was a rough quarter, but it wasn't as bad as it could have been," said Scott Thoma, an analyst with Edward Jones in St. Louis.

Implantable defibrillators work by shocking the heart to restore its normal rhythm, and lead wires are used to connect the pager-size devices to the hearts of patients at risk of sudden cardiac arrest.

An estimated 235,000 patients currently are using the Sprint Fidelis leads. Medtronic recalled the leads after receiving reports of an unexpected number of fractures in the products - a problem that can cause the device to needlessly shock patients, or fail to provide a jolt in an emergency.

The impact on sales during the quarter was less than expected because Medtronic was able to meet customer demand with supplies of a different lead wire called Sprint Quattro, said Gary Ellis, the company's chief financial officer. At the time of the recall, it was unclear how successful Medtronic would be in using Quattro to meet this demand, Ellis said.

The company still has a problem in meeting demand in Japan, he noted, because the Sprint Fidelis lead was the only such product approved for sale in that country. Japanese approval of the Quattro lead is not expected before the fourth quarter.

Implantable defibrillators are the biggest product line at Medtronic, and the devices already have weathered a series of controversial recalls since 2004 primarily because of problems with batteries in the devices. The market for the $30,000 devices is dominated by companies with strong ties to the Twin Cities, including Little Canada-based St. Jude Medical and Natick, Mass.-based Boston Scientific, which makes implantable defibrillators in Arden Hills.

The number of past product recalls likely is part of the reason the impact of the Sprint Fidelis recall wasn't worse, said Thoma.

"Unfortunately, I think the doctors and hospitals are used to these recalls," he said. "And I think, for the most part, the company was able to get out there and get in front of it with customers."

Medtronic apparently maintained its market share during the quarter, said Jan Wald, an analyst with Stanford Group, but he noted the company was unable to fill all orders from large customers going forward. That could open the door to competitors in coming quarters, he said.

Overall, Medtronic reported sales of $3.12 billion for the quarter, an increase of 1.6 percent over the same quarter last year. Net income for the quarter was $666 million, or 58 cents per share, down 2.2 percent from $681 million, or 59 cents per share, in the year-ago period.

Analysts surveyed by Thomson Financial were expecting, on average, earnings per share of 56 cents on revenue of $3.1 billion for the quarter.

Medtronic reported its results after the market closed Monday. Earlier, Medtronic shares had fallen 52 cents, closing at $45.25. In after-hours trading, shares advanced $1.25, or 2.8 percent, to $46.50.

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