Medtronic 2008 Annual Report Download - page 48

institutions that have potential exposure to the sub-prime housing
market. This uncertainty has created reduced liquidity across the fixed
income investment market, including certain securities in which we
have invested. As a result, some of our investments have experienced
reduced liquidity including unsuccessful monthly auctions for our
auction rate security holdings. During the third quarter of fiscal year
2008, we reclassified all of our auction rate fixed income securities,
which had a cost basis of $198 million, from short-term investments to
long-term investments on our consolidated balance sheet due to the fact
that they are currently not trading, and current conditions in the general
debt markets have reduced the likelihood that the securities will
successfully auction within the next 12 months. Auction rate securities
that did not successfully auction reset to the maximum rate as
prescribed in the underlying indenture and all of our holdings continue
to be current with their interest payments.
For the fiscal year ended April 25, 2008, we recognized a $3 million
impairment loss on AFS debt securities. Based on our assessment of the
credit quality of the underlying collateral and credit support available
to each of the remaining securities in which we are invested, we believe
no other-than-temporary impairment has occurred as we have the
ability and the intent to hold these investments long enough to avoid
realizing any significant loss. Additionally, if we required capital, we
believe we could liquidate the majority of our portfolio and incur no
material impairment loss and we have capacity under our commercial
paper program and lines of credit that we could access. As of April 25,
2008, we do not believe that we have material risk in our current
portfolio of investments that would impact our financial condition or
liquidity. As of April 25, 2008, we have $70 million of gross unrealized
losses on our aggregate investments of $2.631 billion; however, if market
conditions continue to deteriorate further, some of these holdings may
experience other-than-temporary impairment in the future. For further
information about the liquidity risks associated with our investments,
see the “Liquidity and Capital Resources” section and the section
entitled “Risk Factors” in our Form 10-K.
We lend certain fixed income securities to enhance our investment
income. These lending activities are collateralized at an average rate of
103 percent, with the collateral determined based on the underlying
securities and creditworthiness of the borrowers. The value of the
securities on loan at April 25, 2008 and April 27, 2007 was $610 million
and $1.318 billion, respectively.
Government Regulation and Other Considerations
Our medical devices are subject to regulation by numerous government
agencies, including the FDA and comparable foreign agencies. To
varying degrees, each of these agencies requires us to comply with laws
and regulations governing the development, testing, manufacturing,
labeling, marketing and distribution of our medical devices.
Authorization to commercially distribute a new medical device in the
U.S. is generally received in one of two ways. The first, known as the
510(k) process, requires us to demonstrate that our new medical device
is substantially equivalent to a legally marketed medical device. In this
process, we must submit data that supports our equivalence claim. If
human clinical data is required, it must be gathered in compliance with
FDA investigational device exemption regulations. We must receive an
order from the FDA finding substantial equivalence to another legally
marketed medical device before we can commercially distribute the
new medical device. Modifications to cleared medical devices can be
made without using the 510(k) process if the changes do not significantly
affect safety or effectiveness. A very small number of our devices are
exempt from 510(k) clearance requirements.
The second, more rigorous process, known as pre-market approval
(PMA), requires us to independently demonstrate that the new medical
device is safe and effective. We do this by collecting data, including
human clinical data for the medical device. The FDA will authorize
commercial release if it determines there is reasonable assurance that
the medical device is safe and effective. This process is generally much
more time-consuming and expensive than the 510(k) process.
Both before and after a product is commercially released, we have
ongoing responsibilities under FDA regulations. The FDA reviews design
and manufacturing practices, labeling and record keeping and
manufacturers’ required reports of adverse experience and other
information to identify potential problems with marketed medical
devices. We may be subject to periodic inspection by the FDA for
compliance with the FDA’s good manufacturing practice regulations
among other FDA requirements, such as restrictions on advertising and
promotion. These regulations, also known as the Quality System
Regulations, govern the methods used in, and the facilities and controls
used for, the design, manufacture, packaging and servicing of all
finished medical devices intended for human use. If the FDA were to
conclude that we are not in compliance with applicable laws or
regulations, or that any of our medical devices are ineffective or pose
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
(continued)
44 Medtronic, Inc.