BUY OR SELL-Taking the pulse of a med tech bellwether

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* Bulls see attractive valuation, healthy pipeline

* Bears cite product recalls, share erosion in key markets

By Susan Kelly

CHICAGO, July 14 (Reuters) - Shares of medical technology
bellwether Medtronic Inc (MDT.N) have shed 40 percent of their
value from a year ago and now trade at a discount to peers in
the device sector.

The Minneapolis-based pacemaker pioneer and world's largest
stand-alone maker of medical devices has a promising pipeline
destined to enhance its stable of proven products to treat
prevalent ailments ranging from heart disease and diabetes to
neurological disorders and back pain.

Yet Medtronic's shares rate a "buy" or "outperform" rating
from just half of the Wall Street analysts who follow the
company, according to Reuters Estimates.

What's not to like?

DOGGED BY QUALITY ISSUES

"They have a great pipeline and look attractive from a
valuation point of view, and they keep stubbing their toe every
time they turn around," said Tim Nelson, healthcare analyst
with First American Funds, which holds a small position in
Medtronic.

He ticks off a list of woes: last week's recall of infusion
sets for Medtronic's Paradigm insulin pumps, the recent federal
subpoenas related to a former U.S. Army surgeon accused of
fabricating study data on the company's Infuse bone protein
product, the continued overhang from a 2007 recall of its
Fidelis brand of leads for connecting implantable
defibrillators to the heart.

"You just shake your head -- there they go again," said
Nelson, who does not currently recommend buying the stock.
"It's hard to get excited when you have quality concerns
floating around."

MARKET SHARE EROSION

Analysts point to a second persistent concern giving pause
to would-be Medtronic bulls: Rivals are chipping away at the
company's dominant position in both the spine products and
heart rhythm device markets.

"My opinion on Medtronic is, while it certainly does look
cheap from a valuation perspective, the issue I'm watching is
they continue to lose market share," said Bernstein Research
analyst Derrick Sung, who rates the stock "market perform."

Both Boston Scientific Corp (BSX.N) and St Jude Medical Inc
(STJ.N) are snagging new customers for implantable
cardioverter defibrillators that treat too-rapid heartbeats.

"More physicians are looking to diversify their share of
ICD utilization across the manufacturers," said Sung. "Doctors
want to make sure they are using all three, because they want
to stay abreast of the technology, and now more than ever, they
are looking to diversify their quality risk."

Meanwhile, competitors both large and small are nipping at
Medtronic's core spinal fusion franchise. "Especially in spine,
I don't really see a clear end in sight to their share losses,"
Sung said.

PAYS TO BE PATIENT?

Medtronic trades at a discount to its peers, at 10 times
estimated 2010 earnings, compared with a price-to-earnings
ratio of more than 13 for both St. Jude and Boston Scientific,
Nelson said. But it will take a couple of quarters of solid
earnings growth before he would recommend buying more shares.

"Investors are looking for consistent, steady performance
on the bottom line, and those who are really optimistic hope to
see it on the top line as well," he said.

William Blair & Co analyst Ben Andrew said that while
Medtronic will continue to cede modest market share in the
coming quarters, it is poised to recapture share starting in
2010 with the help of new spine and heart device products.

"Medtronic remains among the best-positioned medical
technology companies under healthcare reform, given its focus
on clinical and cost effectiveness evidence," Andrew, who rates
the stock "outperform," said in a recent note to clients.
(Reporting by Susan Kelly, editing by Matthew Lewis)