Medtronic May Halt Physio-Control Development Over Cooling Market

These days, they seem to be everywhere: Schools, airports, health clubs, shopping malls. The size of a lunchbox and usually inconspicuous until needed, they lie in wait, should someone suddenly go into cardiac arrest. Part of a growing $350 million market, automated external defibrillators (AEDs) deliver brief but powerful jolts of electricity to help restore the heart’s natural rhythm. They’re programmed with voice prompts and screen displays that easily guide the user through the process. The market for these devices — and more sophisticated versions used by emergency responders and in hospitals — has been in turmoil since market leader Medtronic Inc. suspended shipments of its products in January because of quality issues at its Redmond, Wash., plant. Until those issues are resolved, the Fridley-based company likely will delay a planned spin-off of the external defibrillator business, called Physio-Control Inc. — a move announced this past December. Meanwhile, Physio-Control’s rivals have circled. Cardiac Science Corp., of Bothell, Wash., said domestic sales of AEDs shot up 83 percent in the second-quarter, compared with the same quarter last year. Over the past year, its stock rose 28 percent. Zoll Medical Corp., of Chelmsford, Mass., said sales in its North American pre-hospital market, which includes defibrillators for public places, increased 43 percent in the third fiscal quarter. But its stock has performed erratically — up sharply after Physio-Control announced it was suspending product shipments, but losing steam in recent months. (Another competitor, Philips Medical, a unit of Dutch giant Royal Philips Electronics, does not divulge sales figures for defibrillators.) The financial news hasn’t been as positive for Physio-Control. In the first fiscal quarter, the subsidiary’s revenue of $60 million was down 41 percent, attributed to the suspension of product shipments. (Each defibrillator sells for $1,500 to $2,000.) Medtronic executives noted last month that Physio-Control has resumed shipments to a small number of U.S.-based “critical need” customers. At the same time, Medtronic said Physio-Control said it probably won’t resume full U.S. shipments until the “back half” of 2008. Since Medtronic’s fiscal year ends in April, shipments may begin after November. “Medtronic’s comments about shipments to ‘critical need’ customers [is] rather curious, considering that there is no standard industry or regulatory definition of a ‘critical need’ customer,” wrote RBC Capital Markets analyst Phil Nalbone in an Aug. 22 note to investors. In September 2006, the FDA notified the company that some of its quality processes — which guide the way products are made– needed more work. When FDA inspectors returned to Redmond in January, “they were interested in more data, and it was clear to us they weren’t fully satisfied with all our responses,” said Cameron Pollock, Physio-Control’s vice president of global marketing and solutions. “We decided to voluntarily shut down to really show we’re focusing on our quality system and putting a lot of resources into some of the changes we needed to make,” he said. (The company still ships products abroad.) Meanwhile, Physio-Control has laid off about 30 percent of its workforce, now employing 750 people. “I always thought it would be six to 12 months [before resuming shipments],” said Timothy Nelson, an analyst at Piper Jaffray & Co. “Fixing a quality system in this case doesn’t seem to me to be as daunting a task as lots of other quality system breakdowns we’ve seen, like Boston Scientific, for instance.” (Boston Scientific is working to resolve quality issues at multiple facilities.) SOURCE: Minneapolis-St. Paul Star Tribune