For Medtronic, Much Rides on Spinal Discs - TheStreet

For Medtronic, Much Rides on Spinal Discs

The highly touted Maverick lumbar disc could trounce rivals'.
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As the world's leading spine player,

Medtronic

(MDT) - Get Report

has a lot to prove.

The giant medical device maker is set to introduce three new artificial discs to the U.S. market over the next couple of years. The first two are cervical discs for the upper spine that face no immediate competition. The third is a lumbar disc for the lower spine that, if successful, could supplant two rival devices that have

encountered problems and raised concerns about the entire industry.

Medtronic fans see big opportunities. Experts say cervical discs promise greater benefits and fewer risks than their lumbar counterparts. Moreover, some say the company's own lumbar disc works far better than the two competing discs -- especially

Johnson & Johnson's

(JNJ) - Get Report

Charite -- that have already hit the market.

Still, Medtronic has plenty of doubters. Some observers fear that setbacks with the Charite and other earlier disc replacements may depress the market for newer, better products -- potentially holding down Medtronic's returns on its costly disc-replacement investments.

"We remain cautious about the adoption of artificial discs," CIBC World Markets analyst Chad Suggs wrote last fall after a regulatory panel recommended approval of Medtronic's Prestige cervical disc. "It is too early to tell how the market for artificial discs will take off, as the adoption of JNJ's Charite disc has been somewhat disappointing given patient complications, lack of superiority data and reimbursement hurdles."

Since then, Medicare has announced plans to block coverage of lumbar disc replacements for senior citizens. Commercial insurers often follow Medicare's lead when establishing their own coverage policies and could refuse to cover lumbar disc replacements in the younger patients for whom they are intended as well.

Moreover, regulatory advisers have urged the Food and Drug Administration to bar Medtronic from claiming that its Prestige cervical disc works better than fusion surgery despite evidence that it may. The FDA has yet to evaluate Medtronic's Bryan cervical disc and will probably not even examine the company's Maverick lumbar disc until next year.

Rather than fretting over those woes, however, Medtronic seems eager to distinguish itself from the pack and prove that artificial discs can in fact revolutionize the industry.

"Our trials were designed to demonstrate superiority, not just equivalence, which is what the competitive trials did," William Hawkins, Medtronic's incoming CEO, stressed during an investor conference in late May. Indeed, "there are a number of differences between what we've done and what our competitors have done. ... So we're optimistic that we'll be able to get private payers to pay for our technology and, ultimately, that Medicare will see fit to pay for this technology" as well.

Airing Concerns

For the most part, FDA advisers -- who were often critical during their review of the Charite -- seemed impressed by Medtronic's evidence on the Prestige.

But the advisory panel rebuffed Medtronic's attempts to classify the Prestige as superior, rather than simply equivalent, to modern fusion surgery. The panel also wants to block Medtronic from claiming that its disc prevents degeneration in adjacent spine segments -- a key rationale behind the devices -- and, therefore, could lower the chances for future surgeries.

At one point, in fact, the panel seemed ready to delay approval of the Prestige altogether. While the panel agreed that the Prestige in fact works, some of its members worried that the metal-on-metal device could release particles that pose a cancer risk to patients. Therefore, they suggested a new animal study -- prior to the device's approval -- that could help dispel those concerns.

"What's the alternative?" panel member Stuart Goodman asked near the end of the session. "From the way I see this, there are some questions that have been raised about where the particles are going. ... So explain to me how having this

animal study done after approval will answer my questions."

But another panel member portrayed the premarket study as an "onerous" requirement, and the entire group -- seeing little cancer risk in the end -- agreed on a postmarket study instead. Indeed, the panel urged Medtronic to track the device's overall performance for some time.

Notably, while artificial discs should last decades in the young patients who receive them, they have only been studied during clinical trials for a few short years. Judy Cope, an FDA official who monitors post-approval performance of devices, noted that another cervical disc has encountered problems already and worried that the Prestige could eventually do the same.

When raising her concerns, Cope quoted a published review of the earlier cervical disc, saying: "These results are quite sobering, as implanted devices are intended to function for many decades. It remains to be seen whether similar problems will arise with other disc-replacement devices -- particularly the metal-on-metal variety -- and I suspect that they also will be affected to some degree."

Advisory panel member Pamela Adams seemed stunned that the FDA had raised such concerns near the end of the hearing -- without giving Medtronic a chance to prepare a response -- and felt it "entirely inappropriate" for that revelation to influence the group's decision. Apparently agreeing, the panel went on to unanimously recommend approval of the Prestige disc with calls for postmarket studies of the device's long-term performance.

Bernstein Research analyst Bruce Nudell immediately started adding up Medtronic's potential winnings in the meantime.

"While many questions persist as to long-term revision rates and adjacent segment motion preservation, the data presented at yesterday's panel meeting reinforce our supposition that cervical artificial discs are likely to receive reimbursement in a timely fashion and enjoy relatively rapid adoption," Nudell wrote last fall. "We anticipate a $550 million worldwide market opportunity for cervical discs in the 2010 timeframe -- with MDT likely to maintain a dominant share through the end of the decade."

Since then, Nudell's firm has gone on to upgrade Medtronic's stock from market-perform to outperform. Nudell himself has portrayed the company as his favorite name in the group.

Chasing Returns

Despite problems involving similar devices, experts have high hopes for Medtronic's lumbar disc as well.

That disc, known as the Maverick, has reportedly fared better than modern fusion surgery during clinical trials. Given those strong results, experts hope that Medtronic will sail through the FDA approval process next year and even secure permission to make superiority claims about its artificial disc this time around.

John Peloza, a former Medtronic consultant involved in the Maverick's clinical trials, feels that the company's new lumbar disc certainly deserves better treatment than the competing devices that have preceded it. Still, Peloza will be more frustrated than surprised if Medicare follows its current pattern by denying coverage of the Maverick and -- because of the agency's powerful influence -- leads other payers to do the same.

"But if they make a decision like that, they're ignoring the science," Peloza insists. "Patients went from being disabled to enjoying normal activities. The improvement was drastic."

Peloza, for one, wishes that the Maverick -- rather than the Charite -- had hit the U.S. market first. Worried about fallout for the entire industry, Peloza in fact argued against approval of the Charite during a contentious FDA hearing that raised serious concerns about the device.

During the three years since that device's approval, Peloza -- watching as payers restricted coverage of the Charite and ProDisc alike -- has seen some of his worst fears materialize.

Clearly, device makers have struggled to recoup their hefty investments in artificial discs so far. Medtronic alone has shelled out plenty. In fact, HealthPoint Capital suggested years ago that Medtronic started an expensive industry trend when it paid $270 million for the maker of its Bryan cervical disc -- which is set for an FDA panel hearing this month -- with no return in sight.

Others -- including Johnson & Johnson, Switzerland's Synthes and

Stryker

(SYK) - Get Report

-- have since followed suit.

"Maybe paying such exceptional sums to buy early-stage disc arthroplasty companies is now routine," HealthPoint Capital, a firm that specializes in orthopedic research, declared back in the summer of 2004. But "to paraphrase an old Robin Williams comedy routine, paying more than $200 million for an early-stage disc arthroplasty company is God's way of telling you that you have too much money."

Less than a month later, as the Charite began facing reimbursement challenges even before its formal approval, HealthPoint Capital reiterated its concerns.

"Nothing is coming easily for disc arthropolasty," the firm stressed. "It is beginning to look like a struggle every step of the way."