(STJ) St. Jude Medical Beats by a Penny – Trims Outlook

Medical devices major, St. Jude Medical, Inc.’s (STJ) second quarter 2012 adjusted earnings of 88 cents per share beat the Zacks Consensus Estimate by a penny and surpassed the year-ago earnings of 85 cents per share. Earnings were in line with the company’s previously announced guidance.

Adjusted earnings exclude extraordinary and one-time charges such as restructuring expenses to modernize manufacturing at the Cardiac Rhythm Management (CRM) segment; costs associated with improvement of its sales force and an income tax benefit. In the reported quarter, profits inched up 1.2% to $244 million (or 78 cents a share) as lower expenses offset weak revenue generation.

Revenues

St. Jude reported net revenues of $1,410 million, down 2% year over year. Revenues missed the Zacks Consensus Estimate of $1,430 million. Net sales rose 1% on constant currency basis. Continued poor performance across the CRM unit and lower vascular product sales more than offset growth at the company’s smaller Atrial Fibrillation (AF) and Neuromodulation franchises.

On a geographic basis, revenues from the domestic and international markets were $664 million (down 2%) and $746 million (down 3%), respectively.

Segment Analysis

Revenues from the core CRM business dropped 6% year over year (down 3% in terms of constant currency) to $746 million.

Within CRM, revenues from Implantable Cardioverter Defibrillator (ICD) declined 4% (down 1% in constant currency) to $459 million. Sales from the pacemaker division dipped 9% (down 5% in constant currency) to $287 million.

On a positive note, AF sales increased 5% (up 8% in constant currency) to $218 million in the quarter. Neuromodulation sales rose 2%, (up 5% in constant currency) year over year to $106 million.

Revenues from St. Jude’s Cardiovascular segment inched down 1% (up 3% in constant currency) to $340 million. Within the Cardiovascular segment, structural heart devices sales increased 5% to $160 million offset by revenues from vascular offerings, which fell 5% year over year to $180 million.

Margins

Gross margin remained roughly flat year over year at 72.8%. Selling, general and administrative expenses, as a percentage of sales, edged down to 35% from 35.5% a year ago. Research and development expenses (as a percentage of sales) were 12.3%, flat year over year. Operating margins increased to 24% from 22.5% a year ago.

Balance Sheet

St. Jude exited second quarter 2012 with cash and cash equivalents of $1,214 million, 45.7% higher than the previous year. Long-term debt (including current obligations) increased 15.4% year over year to $2,963 million.

Recent Developments

St. Jude recently announced the launch of its Unify Quadra cardiac resynchronization therapy defibrillator (CRT-D) in Japan to treat heart failure. The company also announced early phase-I results of its Riata Lead Evaluation Study. It was found that externalized conductors occurred less frequently in Riata ST 7F with a small diameter in comparison to the thicker Riata 8F leads.

Management asserted that the results are consistent with other published studies. The company’s Leads Medical Advisory Board did not make any changes to existing patient management recommendations.

Also worth mentioning in this context is the limited impact of negative data on Durata on the company’s performance during the reported quarter. However, we are wary of investor reactions due to the highly sensitive nature of the product in the soft ICD market.

During the quarter, St. Jude’s Cardiovascular business achieved two milestones. In May, the company received the CE Mark approval for its EnligHTN renal denervation system for treating patients with hypertension. Also in June 2012, the company announced U.S. Food and Drug Administration (FDA) approval for its Amplatzer Vascular Plug 4 (“AVP4”) device in the U.S.

Guidance

For full-year 2012, St. Jude lowered its adjusted earnings forecast to the range of $3.40 – $3.45 per share from the earlier band of $3.44 – $3.49. On a reported basis, the company expects earnings to be in the range of $3.00 – $3.05 per share.

For the third quarter, the company expects adjusted earnings in the band of 80 cents – 82 cents a share. On a reported basis, the company expects earnings to be between 74 cents and 76 cents for the third quarter.

While a host of new growth drivers (including new products and cost saving measures) are expected to boost results in 2013 and beyond, we remain cautious about increased competition, restructuring expenses within the CRM business and the overall soft CRM market.

A still choppy CRM space is a cause of concern for St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX). Our long-term Neutral recommendation on St. Jude is in agreement with a short-term Zacks #3 Rank (Hold).

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