With two cervical discs set to hit the market soon -- including one approved by federal regulators on Monday -- Medtronic ( MDT - Get Report) is ready to strut its stuff. The world's leading spine player has secured permission from the Food and Drug Administration to start marketing the nation's first artificial disc for the upper spine. The device, known as the Prestige, is expected to enjoy rapid adoption as patients rush for an alternative to traditional spinal fusions. Meanwhile, Medtronic's second cervical disc -- a device known as the Bryan, being evaluated by regulatory advisors today -- could give patients yet another choice by early next year. Piper Jaffray analyst Timothy Nelson believes that the new discs will become immediate hits for the company, which competes in the market for orthopedic implants with the likes of Johnson & Johnson ( JNJ - Get Report) and Zimmer ( ZMH). "Given the substantial appeal of motion preservation to patients and the nine months of extended post-panel review, many physicians we talked to on the eve of the Bryan panel review feel there is a healthy backlog of patients who have delayed fusion surgery waiting for the Prestige," Nelson wrote on Tuesday. "There are 100,000 single-level fusion cases per year, and physicians here in support of the Bryan panel review feel cervical discs will be 50% of procedures in two to three years."
Thus, he added, "we believe cervical discs will be key to rejuvenated spinal device growth" for Medtronic going forward. Importantly, Nelson feels that Medtronic's new cervical discs will win over insurers who have refused to pay for lumbar disc replacements in the lower spine. He estimates that cervical disc replacements will cost just 10% to 15% more than fusion surgery, making them much more affordable than lumbar discs. Furthermore, he says that cervical disc replacements should allow patients to resume working about two weeks faster than if they had undergone spinal fusions instead. Given such advantages, Nelson adds, the Prestige has in fact "marshaled significant reimbursement support" on a case-by-case basis already. Nelson reiterated his outperform rating on Medtronic on Tuesday. He values the stock, which is hovering just above $52 right now, at $60 a share. Medtronic's new cervical discs -- which should further bolster the company's dominance over the spinal industry -- make Nelson feel especially optimistic. "Medtronic's market share in the current cervical fusion market is significantly lower than its overall 40% spinal share," stressed Nelson, whose firm has provided investment banking services to the company in the past. Ultimately, "we believe that cervical discs will be a key factor in the return of Medtronic's spinal business to a 20% growth track in 2008 and beyond."
Cowen analyst Dhulsini de Zoysa feels upbeat about this market opportunity as well. Although she has modest expectations for profits early on, due to the costs of training surgeons to implant the new discs, she sees huge potential down the road. Meanwhile, de Zoysa looks for "an easy and straightforward" panel review of Medtronic's Bryan cervical disc today. She expects the Bryan to join the Prestige on the U.S. market -- with no outside competition -- by next spring. "Medtronic is well-positioned to exploit this market with anticipated launches of two artificial cervical discs in the next 12 months," writes de Zoysa, who has an outperform rating on Medtronic's stock. And "in the end ... we think the cervical disc segment of the market could approach a $1 billion market opportunity in the U.S."