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Originally published Tuesday, February 22, 2011 at 8:36 AM

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Medtronic will divest Redmond's Physio-Control

Medical device giant Medtronic said Tuesday it is reviving plans to divest its Redmond-based Physio-Control unit, an early pioneer of the...

By Seattle Times business staff

Medical device giant Medtronic said Tuesday it is reviving plans to divest its Redmond-based Physio-Control unit, an early pioneer of the local life sciences industry that now employs about 750 here.

Before quality-control issues with Physio's external defibrillators were raised by the Food and Drug Administration in January 2007, Medtronic announced it would spin off the unit as a separate public company with an estimated market valuation of up to $1 billion.

That plan died as Physio pursued a three-year effort to convince regulators its quality controls were sufficient. Physio suspended U.S. sales in 2007 and the following year signed a consent decree agreeing to limit sales to emergency-service providers until improvements were completed.

Last February the company got FDA permission to resume full, unrestricted worldwide sales.

Medtronic said Tuesday that Physio had fiscal third-quarter revenue of $104 million, up 4 percent. Its revenues last year were $425 million.

"Given the solid performance of Physio over the past year we feel it's in a place where we can reinitiate those discussions," said Medtronic spokesman Brian Henry.

Physio makes defibrillators that are used by emergency personnel and hospitals, as well as automated units designed for modestly trained lay people such as hotel staff. Defibrillators can restore proper rhythm when a person's heart goes into cardiac arrest.

The company isn't giving a timetable for divesting Physio, and won't say whether it aims to spin off the Redmond unit or sell it.

In a conference call with analysts, Medtronic Chief Financial Officer Gary Ellis said shedding Physio would lift the parent company's financial performance because "overall, Physio-Control gross margins and operating margins are probably some of the lower ones in the company overall, and clearly below the company's average."

According to a transcript, he told analysts Physio also would be better off apart from Medtronic because its relatively low profit margins mean it's "hard for them to ever compete against the investments we have to make" in other business lines.

For both Physio and its rivals, Ellis said, demand from emergency responders has softened "as municipalities continued to face budget constraints." He added that "we expect this weak demand to continue" in the current quarter.

Medtronic also announced Tuesday plans to reduce its workforce by 4 to 5 percent, or 1,500 to 2,000 positions, during the current quarter. Henry said it's too early to say how that plan might affect individual units such as Physio.

A year ago Physio had 1,100 employees, three-quarters of them in Redmond.

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