Medtronic treat old spinal patients

Deal gives Medtronic opportunity to treat young, old spinal patients.

BY CHRISTOPHER SNOWBECK

7th July 2007

Until Friday's deal for California-based Kyphon, Medtronic focused its line of device treatments for spinal conditions on relatively young patients. With the proposed acquisition, the Fridley-based medical-device maker gets an opportunity to treat elderly backs, too - potentially a big-money market as baby boomers get older.

Medtronic will spend $3.9 billion to buy Kyphon Inc. of Sunnyvale, Calif., plus an additional payment related to previous Kyphon acquisitions, pushing the deal's total transaction value to about $4.2 billion. The deal will rank among Medtronic's largest ever.

Medtronic already is the world's largest maker of spinal devices. But its spinal-surgery division has focused on treatments for younger patients with scoliosis and degenerative disc disease in the cervical and lumbar portionsof the spine, the company said Friday. Kyphon, by contrast, has developed treatments for vertebral compression fractures and spinal stenosis - problems that typically afflict an older group of patients.

William Hawkins, the incoming chief executive officer at Medtronic, said the acquisition is only the latest good news for the company's Memphis, Tenn.-based spinal division. Within the past two weeks, Hawkins noted, the U.S. Food and Drug Administration granted approval to the company's Prestige cervical disc product, while an FDA committee recommended approval for a second cervical disc.

"With this strong momentum in our spinal business, I am very excited about how this merger will further accelerate the growth of our spinal business and allow us to more rapidly enter new product segments," Hawkins said during a conference call with investors. Currently the company's chief operating officer, Hawkins will become CEO next month.

The FDA developments put Medtronic in line to market the first two cervical discs in the U.S. - a product area that analysts say will significantly drive sales for the spinal division, the company's second-largest. Medtronic's Fridley-based cardiac-rhythm-management division, which makes products such as pacemakers and implantable cardiac defibrillators, is the company's top source of revenue.

Hawkins said the announcement Friday will not result in any job losses in Minnesota, where Medtronic employs more than 8,000.

Kyphon's leading product is a treatment known as kyphoplasty, in which doctors use a balloon and then bone cement to restore the body height and shape of compressed or fractured vertebrae. The treatment alleviates pain and, theoretically, could prevent future spinal problems by resolving some of the "hunchback" appearance that comes as the bones of the spine fracture and collapse.

"It's an innovative idea that, we think, gives somewhat better results" than existing treatments for collapsed vertebrae, said Dr. David Polly Jr., professor and chief of spine surgery at the University of Minnesota.

"Kyphon was very much a niche player, whereas Medtronic is a spectrum player," Polly said of the deal. "Medtronic is weak in that niche where Kyphon is strong."

Art Collins, Medtronic's current CEO, said the Kyphon deal fits with his previous pledge to investors that Medtronic likely would add two or three "additional growth platforms" over the next three to five years.

"They could come from internal development," Collins said of these platforms during the conference call. "They could come from external acquisitions, or a combination of both."

Set to close during the opening months of 2008, the deal would have Medtronic acquire all of the outstanding shares of Kyphon for $71 per share in cash, for a total value of about $3.9 billion.

Another $320 million would go toward payments associated with Kyphon's previous acquisitions of two other spinal companies.

The acquisition price represents a 32 percent premium over Kyphon's closing stock price on Thursday of $53.68.

The Kyphon acquisition, which still requires regulatory and shareholder approval, is Medtronic's biggest since its 1999 acquisition of Arterial Vascular Engineering, a California manufacturer of stents used to prop open heart arteries.