Seeking to jump-start profits, pacemaker giant Medtronic last week agreed to buy Sofamor Danek Group, a maker of spinal implants, in a stock swap valued at about $3.6 billion.
Minneapolis-based Medtronic is the world's largest maker of active implantable medical devices, including pacemakers and defibrillators. But as profit growth from cardiac implants has slowed in recent years, Medtronic has pushed into neurological devices, such as electrical stimulators to manage tremors and pain.
By purchasing fast-growing Sofamor Danek, a leading manufacturer of neurological devices and products used in back surgery, Medtronic expects to bulk up its neurological business and reap the bounty of burgeoning demand for Sofamor Danek's spinal implants.
The companies' combined neurological and spinal product lines would generate more than $1 billion in revenues next fiscal year, with annual growth of 25% expected through the early years of the next century, said William George, Medtronic's chairman and chief executive officer.
Medtronic reported net income of $457 million on sales of $2.6 billion for its fiscal year ended April 30, compared with net income of $530 million on sales of $2.4 billion in the previous year. Rapidly expanding Sofamor Danek reported profits of $57 million on sales of $313 million in 1997, compared with earnings of $11 million on sales of $245 million in the previous year. Sofamor Danek expects sales to surpass $400 million this year.
To many customers, Medtronic is still perceived primarily as a cardiovascular products company, making its big-time buy into neurological and orthopedic devices a bit of a surprise.
"My first reaction was you've got to be kidding me," said Steven Howard, director of materials management for Peace Health Oregon Region, Eugene, Ore. "But now we're buying a lot of neuro stuff from (Medtronic)," he said. Upon reflection, Howard said, Medtronic's purchase decision makes sense if its goal is to make a bigger mark in neurosurgical products.
Sofamor Danek sports the leading franchise in sales of spinal implants and related devices, a rapidly growing market estimated at $850 million annually. More than 5 million people worldwide suffer from debilitating back pain, and more than 275,000 surgical procedures to relieve back pain are performed each year.
As an example of the rapid growth in those products, Howard says the Peace Health hospitals in his region are spending about $2.5 million annually on spinal implants compared with almost nothing on such products five years ago.
The transaction requires Sofamor Danek shareholder approval and is subject to regulatory approval and other customary closing conditions. The deal is expected to close early in 1999.