UPDATE: St Jude Medical 2Q Profit Falls 5.2% On Charges

St. Jude Medical Inc.'s (STJ) second-quarter earnings fell 5.2% on acquisition and restructuring charges while revenue got a boost from currency-aided international sales, but also reflected a weakened U.S. market for heart-rhythm devices.

The St. Paul, Minn., company lowered its full-year guidance to reflect this weakness, which more than offsets an improved outlook in other product areas. Wall Street analysts were anticipating a more troubled environment for heart-rhythm sales based on signs of market struggles in recent months.

St. Jude hadn't forecast these issues back in April, when it raised guidance after its first-quarter report, but Chief Executive Daniel Starks said Wednesday that factors like economic "malaise" and an ongoing Justice Department probe of defibrillator implant practices were dampening sales.

The U.S. heart-rhythm market "fell into a pothole during the second quarter," Starks told analysts on a conference call. "A pothole by definition is finite, and we will climb out."

The company expects to continue taking market share from competitors Boston Scientific Corp. (BSX) and Medtronic Inc. (MDT), but now believes the global heart-rhythm market--which includes pacemakers and defibrillators--will contract by 2% this year. That translates to a $11.4 billion market, $500 million less than St. Jude assumed in April.

St. Jude shares recently traded up 1.8% to $47.68. They had declined about 8% in a three-month span through Tuesday's close as investors fretted about a worsening market, and Wednesday's guidance cut "resets the bar and removes an investor overhang," Collins Stewart analyst Tao Levy said.

St. Jude reported a second-quarter profit of $240.9 million, or 72 cents a share, down from $254 million, or 77 cents a share, a year earlier. Excluding charges, earnings were up at 85 cents from 79 cents. Analysts surveyed by Thomson Reuters had projected earnings of 84 cents.

The restructuring includes moving heart-rhythm manufacturing out of Sweden and into Malaysia and Puerto Rico, where costs are cheaper.

Revenue rose 10% to $1.45 billion, about matching Wall Street expectations. St. Jude, which now generates most sales outside the U.S., got a $75 million boost from favorable currency rates.

While international sales surged, U.S. sales were down 2%, reflecting the heart-rhythm struggles. St. Jude's U.S. defibrillator sales tumbled 9%, and were still down 5% when factoring in a one-time benefit last year when Boston Scientific had a temporary sales halt due to regulatory paperwork issues.

Domestic pacemaker sales were also weak, falling 8%. St. Jude Chief Financial Officer John Heinmiller noted comparisons with a strong quarter last year, when the company may have seen a carryover benefit from Boston Scientific's defibrillator troubles.

On the defibrillator front, Starks said more St. Jude customers were contacted by the Justice Department in the second quarter regarding an ongoing probe into reimbursement submissions than in prior periods, weighing on sales. This probe appears focused on doctors and hospitals, Heinmiller said, and questions about whether implants met guidelines. The government foots the bill for many patients through Medicare.

St. Jude's heart-rhythm business could get a lift when then company launches heart-failure defibrillator systems featuring a new type of cable for connecting devices to the heart. The company on Wednesday said it now anticipates FDA approval early in the fourth quarter, rather than its previous estimate for mid-year approval.

Starks said the sales organization and product inventory are set, "and we are prepared to initiate a full launch of these products within days of receiving FDA approval."

Elsewhere, sales of devices for treating the common rhythm disorder atrial fibrillation surged 18% in the second quarter while sales of cardiovascular devices, helped by an acquisition last November, jumped 35%.

St. Jude raised full-year sales forecasts for these businesses, but that wasn't enough to offset degraded expectations for the heart-rhythm market. The company lowered its overall 2011 sales guidance to a range of $5.61 billion to $5.73 billion, down from a raised forecast in April of $5.69 billion to $5.85 billion.

The company also lowered its 2011 earnings guidance by three cents to $3.25 to $3.30, reversing April's three-cent guidance boost. For the current quarter, the company projected per-share earnings of 74 cents to 76 cents, below views of analysts polled by Thomson Reuters for 80 cents.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

--Tess Stynes contributed to this article.

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