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Medtronic ready to divest Physio-Control, again

Even before problems arose, the decision to spin off Physio-Control into a separate company in 2006 may have been an inkling that its acquisition in 1998 had not gone as planned by Medtronic executives.

In its fiscal third-quarter earnings call on Tuesday, Medtronic expressed the desire to divest its automated external defibrillator business, Physio-Control, once again.

Roughly four years ago — in December 2006 — the Fridley, Minnesota-based medical device company signaled its intent to spin off the emergency response systems business unit. Medtronic said that after being divested, Physio-Control would function as a stand-alone, publicly traded company. In its 2006 announcement, the company described Physio-Control as “the world’s leader in the $1 billion external defibrillator market.”

Since then, the business has suffered, partly because of a number of Class I recalls by the U.S. Food and Drug Administration. FDA considers Class I recalls to be the most severe because they involve situations where continued use of the product may lead to serious injury or death.

In July 2009, Medtronic and Physio-Control were hit with a Class I recall of certain LIFEPAK automated external defibrillators that were manufactured and distributed between July 9, 2008, and Aug. 19, 2008. They were recalled because the devices, which are intended to shock a person suffering a cardiac arrest back to life, were not functioning properly in extremely humid weather.

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Less than a year later in April 2010, the FDA issued another Class I recall. This time it was because Medtronic had voluntarily decided to correct a problem in its LIFEPAK 15 monitor/defibrillators. These defibrillators, the company said, were manufactured with a component that could cause an electrical short that prompted the device to lose power, or turn on or off by itself.

And then again a few months later in July, problems affected another family of external defibrillators because of a malfunctioning battery.

Even before such problems arose, the decision to spin off Physio-Control into a separate company in 2006 may have been an inkling that its acquisition in 1998 had not gone as planned by Medtronic executives. In the 2006 divestiture announcement, Medtronic said Physio-Control’s annual revenue was about $450 million. But in 1998, Medtronic announced that it would acquire the company in a deal valued at $538 million.

On Tuesday, Medtronic signaled that Physio-Control was on the mend and ready to restart divestiture efforts. The business’ revenue increased 4 percent to $104 million, compared with the same period a year ago. The results were driven by gains in the LIFEPAK 15 monitor/defibrillator, the company said.

In the fiscal, third-quarter earnings call Tuesday, Medtronic CFO Gary Ellis said that Physio-Control would do better as a separate company.

“Physio-Control has strategically not benefited Medtronic as we would have liked to see,” Ellis said. “It cannot compete with the investments we have to make” in other divisions because it has lower operating margins than other businesses.

But a Medtronic spokesman declined to comment on the nature of the divestiture and whether Medtronic still plans to spin it off as a separate, publicly traded company.