Medical Device Daily Washington Editor

The board of Medtronic (Minneapolis) yesterday afternoon unveiled a plan to send its 1998 acquisition, Physio-Control (Redmond, Washington), back out on its own sometime in the first half of the company’s fiscal 2008. The spin-off, said Art Collins, Medtronic CEO and chairman, is being made because Physio-Control “is not central to our long-term strategic business.”

In an afternoon conference call, Collins described the spin-off of its division making automated external defibrillators (AEDs) as a win-win situation. He said, “[w]e believe this transaction ... will allow Physio to renew its focus, while allowing Medtronic to focus” on opportunities that align better with its strategic aims. Those aims, he said, include pursuing growth in the mid-teens.

The company, which operated as Medtronic’s Emergency Response Systems division, will continue operations with its headquarters in Redmond, Washington, location of its headquarters prior to the Medtronic buy-out.

Medtronic picked up the firm for $538 million in stock in June of 1998. Earlier in that year, the company laid off 600 Medtronic employees and closed eight plants.

Gary Ellis, Medtronic’s CFO, said the move will offer Physio-Control “new levels of investment and operating flexibility” and that for the next six to nine months, the spin-off will have “no impact on current fiscal year per-share guidance, ... but our fiscal ‘08 guidance” will be affected. Ellis said that transaction-related costs “are not expected to be significant.”

“The final capital structure of the new company has not been determined,” Ellis said, adding that Physio-Control “basically built the business” of AEDs.

Physio-Control has not suffered for the entirety of its time under the Medtronic umbrella. Ellis noted that Physio had $178 million in sales in 1998 and should ring up about $450 million in fiscal 2007.

However, he suggested that Medtronic’s flagging interest in Physio-Control’s product line might eventually have resulted in under-investment.

Brian Webster, who will assume the title of CEO of the new Physio-Control, said that the emergence from the Medtronic umbrella represents “a chance to assume all control of our operations and our strategic direction.” He said that the firm as an independent entity “will continue to provide the state-of-the-art technology and the world class service our customers have come to expect.”

Medtronic picked up the smaller unit in a pooling-of-interests stock transaction that netted Physio shareholders $27.50 in Medtronic stock for each share of Physio-Control. However, the subsequent explosion of sales of implantable defibrillators and coronary stents pushed AEDs into the background, despite the fact that Physio-Control grew its revenue stream at about the anticipated rate of 8% to 12% a year.

“Medtronic is a very different business” than it was in 1998, Collins said, adding that the resources that Physio-Control needs to grow may not be available from the Medtronic checkbook. Medtronic said it will pump the freed-up financial resources into other units.

Implantable cardioverter defibrillators are still an “attractive growth platform” as are several other technologies, Collins stated. The firm’s drug-eluting stent (DES) business will benefit from the sale, too, “but not exclusively,” he said, a rather clear reference to the potential roll-out of the company’s Endeavor DES in the U.S., which it hopes to see happen by the second half of next year.

Medtronic officials made an effort to avoid painting Physio-Control as a dead-end operation.

Collins characterized it as “an attractive business, but perhaps more so as an independent company.”

None of the company representatives on the conference call would comment on the prospect of further sale or acquisition action.

Medtronic senior managers are “constantly reallocating resources” and the firm is “taking a harder look at the portfolio businesses,” Collins noted. Each unit is reviewed to see whether it is “central [to our overall business] and do they have the growth prospects to meet corporate objectives.”

He said that a problem with attempting to build and promote both AEDs and ICDs is that “[t]here are not enough tangible operating synergies to make business sense.” They are mechanically very different and, for Medtronic, made in different locations.

“The selling and servicing requirements are different,” and even sales to hospitals are not that closely tied, he said.

Ellis also noted that Medtronic was never able to create any sales synergies between the products in the hospital market since AEDs are a capital equipment purchase while ICDs are purchased as therapeutic devices.

“There really is very little synergy on the [sales] call side,” Ellis observed.

Physio-Control will continue on with about 1,200 employees and a market share of 45% to 50% for defibrillator monitors and roughly 35% for AEDs. Company officials billed it as a fairly freestanding unit that will require little transition help from Medtronic. Webster said that there is “not likely to be a huge strategy change” as Physio-Control takes flight on its own, but “one area in which we’ll have a heavy emphasis is our international business.”

Physio-Control, he said, “is well positioned to remain the world’s preeminent supplier of life-saving external defibrillators and related emergency response products and services.”

Shares of Medtronic opened yesterday at $52.33 and reported at $53.23 at yesterday’s close.

Investment banker Goldman Sachs (New York) will coordinate the transaction.