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Medtronic Inc (MDT - Analyst Report), the world’s leading spinal technology company, announced the launch of the latest addition to its cervical surgical technique portfolio at the 40th annual meeting of the Cervical Spine Research Society.

The company diversified its portfolio with Cervical FaceliftsM ID/S, a breakthrough surgical technique that stabilizes the cervical spine and decompresses the neural foramen indirectly. The placement of the Cornerstone Facet MicroGrafts in the posterior cervical facet joints supports carrying out the innovative technique. Medtronic’s recent launch should improve cervical surgery patient outcomes.

Our Take

The launch underlines Medtronic’s focus on portfolio expansion to overcome ongoing challenges in its spinal business, one of its core franchises. The company has been witnessing disappointing performance from spinal implants in the U.S. market mainly due to pricing pressure and reduced procedure volume. This, in turn, has impacted Medtronic’s overall performance. The domestic spine market (accounting for 14% of company-wide revenues) continues to be dragged down by declining Infuse sales.

The U.S. core spine market showed signs of stability in the second quarter of fiscal 2013. It improved modestly over the past three quarters. We expect the company to benefit from improving trends in its core markets.

The sluggish growth in Cardiac Rhythm Management segment is another area of concern. Medtronic’s peers including St. Jude Medical (STJ - Analyst Report) and Boston Scientific (BSX - Analyst Report) are also adversely affected by these headwinds.

However, increased focus on innovation and emerging markets should help dilute the impact of these challenges. Medtronic expects contribution of 150 to 200 basis points from emerging market for fiscal 2013. By fiscal 2016, the company targets 20% of revenue mix to come from emerging markets.

We are optimistic about revival of solid growth as the company aggressively expands its portfolio and gains a foothold in emerging markets. This should offset softness in the domestic market for spinal implants and defibrillators; two of the largest markets served by Medtronic. We currently have a long-term ‘Neutral’ recommendation on the stock which carries a short-term Zacks #3 Rank (Hold).

Moreover, Medtronic should gain from the upbeat business environment in the neuromodulation market. Allergan (AGN - Analyst Report) and Urologix , the company’s peer in the neuromodulation market carry a Zacks #2 Rank (Buy).

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