UPDATE 3-Medtronic stumbles, profit misses Wall Street view

* Takes charges for litigation, inventory writedown

* Revenue rises 14 percent to $3.57 billion

* Lowers fiscal 2009 profit and revenue forecasts

* Shares fall 12 percent (Adds analyst comments, byline)

By Susan Kelly

CHICAGO, Nov 18 (Reuters) - Medtronic Inc (MDT.N) posted a 14 percent drop in quarterly earnings on Tuesday, due in part to a shortfall in spine product sales, prompting the company to cut its profit forecast and sending its stock down 12 percent.

Revenue and earnings came in below average Wall Street estimates as charges for a legal settlement and inventory writedowns also dragged on results.

Sales of the company's bone-growth protein, InFuse, contracted after U.S. regulators said the product was linked to life-threatening complications in spine repair surgeries in which it is not approved for use.

Medtronic said poor execution hurt its Kyphon spinal-fracture business, production problems dampened sales of neuromodulation devices and external heart defibrillators, and it lost market share in heart rhythm devices.

The missteps dismayed investors, who sent the company's shares to their lowest level in more than six years.

"Those things are more worrisome because they reflect operational problems versus macroeconomic problems that are beyond their control, and I think that's why they are getting hit. People are mad," said Tim Nelson, analyst at asset management firm FAF Advisors, which holds Medtronic shares in several funds.

But he said the stock sell-off was overdone given the modest reduction to the company's fiscal 2009 forecast.

Medtronic lowered its full-year earnings per share forecast to a range of $2.90 to $2.98 and its revenue forecast to $14.6 billion to $15 billion, saying it was comfortable with the midpoint of those ranges. The company had previously predicted earnings per share of $2.94 to $3.02 and revenue of $15 billion to $15.5 billion.

Medtronic, the world's largest stand-alone maker of medical devices, said net earnings were $571 million, or 51 cents a share, for the fiscal second quarter ended Oct. 24, compared with $666 million, or 58 cents a share, a year earlier.

Excluding one-time charges, the Minneapolis-based company earned 67 cents per share, 4 cents below analysts' average forecast, according to Reuters Estimates.

The charges included $229 million paid to Johnson & Johnson (JNJ.N) to settle stent patent litigation, and $40 million for a writedown of old inventory after a U.S. court ruled Medtronic could begin selling an alternative heart stent implant system.

Revenue rose 14 percent to $3.57 billion, short of analysts' average forecast of $3.69 billion.

Cardiac rhythm disease management revenue rose 8 percent to $1.24 billion, with revenue from implantable cardioverter defibrillators up 13 percent to $724 million and pacemakers up 2 percent to $506 million.

In ICDs, Medtronic said it lost as much as 2 percentage points of U.S. market share. Rivals Boston Scientific Corp (BSX.N) and St. Jude Medical (STJ.N) swooped in after Medtronic recalled a key component last year.

Spine division revenue grew 26 percent to $829 million, boosted by the Kyphon acquisition, but rose just 3 percent excluding Kyphon.

Cardiovascular revenue, which includes stents to treat clogged heart arteries, rose 22 percent to $596 million, neuromodulation revenue increased 7 percent to $343 million, and diabetes products revenue rose 11 percent to $272 million.

Medtronic said it still expects double-digit earnings growth in the second half. It has fixed the production problems in neuromodulation, has cut manufacturing costs and is focused on turning around the Kyphon business and launching new ICD products.

"Clearly, this was a tough quarter, and there are some things that I am not happy about in terms of our share loss; but in no way does this change the outlook in terms of how we see the opportunities ahead of us, and particularly when you think about it relative to what other industries are going through," Medtronic Chairman and Chief Executive Bill Hawkins told analysts on a conference call.

Jeff Jonas, portfolio manager for the Gabelli Health and Wellness Trust, which holds Medtronic shares, said the company will be challenged in the coming quarters.

"They have a bunch of issues in their business that they have to fix. They are admitting they are losing share in their ICDs. That's no surprise, but they don't have a great way to turn that around," Jonas said. Still, the stock's valuation at 11 times forward earnings is very attractive, he said.

The company's shares were down $4.50 or 12.4 percent to $31.92 in afternoon trading on the New York Stock Exchange. Earlier they fell as far as $31.25. (Editing by Gerald E. McCormick and John Wallace)