Medtronic Goes for Shock Value

Critics of the study say it may lack accuracy because it depends on Americans self-reporting their weight and height -- which often leads to people underreporting their weight and overestimating their height.

Medtronic is buying Transneuronix for about $260 million and will make added milestone payments if certain revenue targets are met. Transneuronix has been researching electrical stimulation to treat obesity for more than eight years in the U.S. and Europe.

More than 700 patients have been implanted with Transcend, and about 300 patients are enrolled in Transneuronix-sponsored trials that so far have shown meaningful weight loss and a good safety profile for the device. The product is currently in trials in the U.S., and results are expected later this year. The Transcend could go on sale as early as the end of 2006.

Transcend is currently approved for use in Europe and Canada, but sales are so far minimal, according to Morgan Stanley's Reicin. Morgan Stanley does business with the companies it covers.

"This is more of a long-term project," Wittes says.

Medtronic's management hasn't commented on the device's expected effect on earnings, Wittes says, so he hasn't yet changed his estimates. He has a market-perform rating on the stock.

"Anyone in neurostimulation is interested in gastric stimulation," says Ryan Rauch of Jefferies & Co. "If it's clinically effective, it could clearly be a significant market opportunity." Jefferies doesn't have an investment banking relationship with Medtronic.

Because of the possibilities of broader interest, the Transcend could see competition from companies such as Cyberonics (CYBX Quote), maker of a vagus nerve stimulator used in epilepsy and depression, and Advanced Neuromodulation Systems (ANSI Quote), a producer of spinal-cord stimulation devices.

Try It On for Size

While the stomach normally contracts at a rate of three times a minute, the Transcend stimulates the stomach 12 times a minute, causing it to distend and creating a feeling of fullness, according to Medtronic.