STJ ST. Jude Medical, Inc.

When are the woes for the Cardiac Rhythm Management (CRM) market going to end? This question continues to nag us as sliding sales of the stalwarts of this market do not show any sign of abatement.

This hi-tech specialized niche includes implantable cardioverter defibrillators (ICDs), cardiac resynchronization therapy devices (CRTs), and pacemakers, all catered to address cardiac abnormalities.

Though pressed against the wall, we would like to believe that the segment holds attractive opportunities over the long term, given the growing aging population, higher incidence of heart diseases, as well as technological advancements that are keeping pace with lifestyle diseases.

According to a report by Global Industry Analysts (GIA), the CRM market is scheduled on a growth path, estimated to reach $27.7 billion by 2017. Moreover, the future looks bright given the untapped potential of the developing markets such as Asia-Pacific, Eastern Europe and Latin America.

Though the long-term prospects of the CRM market remain intact, the unfavorable state of affairs over the recent past has unduly put this segment under pressure. The business had hitherto thrived not withstanding the financial and debt crisis.

Medical devices players with significant exposure to this segment such as Medtronic (MDT), Boston Scientific (BSX) and St Jude Medical (STJ) have been the hardest hit. Boston Scientific also faced the brunt of a goodwill impairment charge of $697 million in the first quarter of the current fiscal due to reduction in the estimated size of the US CRM market.

Manufacturers of CRM devices are struggling to stem the rot of declining sales. The downside issued mainly from negative publicity from an article published in the Journal of the American Medical Association on ICD utilization that affected implant volume. The Department of Justice investigation into hospital utilization also did not help matters.   

Besides, macro issues like the European debt crisis, austerity measures, healthcare reforms and resulting pricing pressure are continuing to haunt the financial world at large. The dark shadows are reflected in the latest earnings reports, a trend we believe would persist for some time to come.

The worst affected among the three industry giants has probably been St. Jude with roughly 54% of its revenues being derived from the CRM niche followed by Medtronic and Boston Scientific garnering a respective 30% and 27% of their total revenue from this market.

The Counters

Undaunted by a lackluster CRM market, the device makers are looking to launch new, state-of-the-art products to recover failing sales. In this respect, positive developments over the recent past could be a saving grace for these companies.  

Last week, Boston Scientific received US approval for CRT-Ds and ICDs like Incepta, Energen and Punctua. Though expected, the US approval comes even earlier than the company’s original guidance of late 2011 or early 2012. CE Mark approval for these defibrillators was received in the second quarter of 2011.

Moreover, St. Jude also received FDA approval for its much awaited Unify Quadra CRT-D and Quartet Left Ventricular Quadripolar Pacing Lead. Though the launch of the device was delayed from mid-2011 to year-end, it surely represents a big break for beleaguered St. Jude.

Breakthrough approvals of new devices offer both Boston Scientific and St. Jude with the potential to turn around the ailing ICD business. Earlier this year, Medtronic had received approval for its next generation Protecta ICD, capable of partially offsetting pricing pressure. Besides, Boston Scientific’s next generation Ingenio family of pacemakers is slated for launch in the US and EMEA in the first half of 2012, subject to regulatory approvals.

Recently, Medtronic received a favorable recommendation from an advisory panel of the US Food and Drug Administration (FDA) for expanded use of its defibrillators. The panel voted in favor of the device on twin criteria of safety (5 versus 0) and efficacy (3 versus 2) concluding that the overall benefits of the device outweigh possible risks in treating mildly symptomatic heart failure patients.

Medtronic’s defibrillators are already approved for patients with moderate-to-severe heart failure. The FDA had approved, in September 2010, the expanded use of Boston Scientific’s defibrillators for patients with mild heart failure, even including those without symptoms.

We consider label expansion of the defibrillator to be a certain positive for Medtronic. But is this enough to offset the headwinds currently at work?

In Conclusion

The million dollar question, at this point, is whether these recent product launches are sufficient enough to pull it off, reviving a sagging CRM market? Product launches will definitely provide some cushion to this segment though nothing spectacular is expected in the near term. We eagerly await information on the adoption of St Jude’s paradigm shifting Unify Quadra defibrillator.

The players in the CRM market also acknowledge that it is difficult to predict a timeline for resolution of these pressing problems. As a result, to safeguard their top line, they have resorted to other strategies such as developing up-and-coming therapies, a focus on emerging markets, and restructuring initiatives.

The latter would also help improve the bottom line in a scenario where the top line is growing at a snail’s pace. Strong balance sheets help these majors to target suitable acquisitions to aid growth.       

Over the long term, we have Neutral recommendations for Medtronic, Boston Scientific and St Jude Medical, in line with the short-term Zacks #3 Ranks (Hold) on the companies.

 
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