STJ ST. Jude Medical, Inc.

Recently, Boston Scientific (BSX) launched its Energen and Punctua cardiac resynchronization therapy defibrillators (CRT-Ds) and implantable cardioverter defibrillators (ICDs) in Europe and other international markets.

The company had received CE Mark approval for these devices in October 2010. Boston Scientific expects  to receive approval for these products from the US Food and Drug Administration (FDA) in late 2011 or early 2012.

Cardiac Rhythm Management (CRM) is the second biggest contributor to Boston Scientific’s top line. This segment recorded a 4% increase in sales to $559 million. A 6.9% rise in defibrillators sales to $417 million coupled with a 4% decline in sales of pacemakers to $142 million contributed to the overall increase. However, the year-ago period included a $72 million negative impact due to shipment hold of defibrillators and associated product removal actions.

Boston Scientific has been witnessing several challenges in the CRM segment for the past few quarters. Having witnessed a reduction in the estimated size of the US CRM market, the company recorded a $723 million of goodwill impairment charge associated with its US CRM business unit during the first quarter.

In an attempt to boost its CRM segment, Boston Scientific recently announced a new warranty program in the US that covers its CRT-Ds and leads for chronic phrenic nerve stimulation (PNS). Under the program, implanting centers in the US will be eligible for a full refund in case of replacement of Cognis CRT-D, attached to the company’s bipolar left ventricular lead with a competitive device due to unmanageable PNS within six months post-implant.

The European launch of Energen and Punctua will provide some cushion to the CRM segment. The company’s biggest segment, Cardiovascular, also continues to disappoint. We therefore remain concerned about the core businesses where Boston Scientific is witnessing significant pricing pressure and loss of market share. Additionally, economic uncertainty is impacting procedure volume.

The CRM market is highly competitive with the presence of players such as Medtronic (MDT) and St. Jude Medical (STJ). However, Boston Scientific has undertaken several acquisitions in the recent past to strengthen its portfolio. Moreover, the divestiture of the Neurovascular business was a smart move, which enabled it to prepay a portion of the debt thereby, improving the capital structure.

We are currently Neutral on the stock.

 
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