Will Organization Restructuring Increase Profits?

By Ankit Agrawal - September 14, 2012 | Tickers: COV, STJ, SYK, ZMH | 0 Comments

• Email
• Print

St. Jude Medical (NYSE: STJ) is the leading developer and supplier of mechanical valves, and a top supplier in cardiac rhythm management (CRM) products and neuro-stimulation. In my view, St. Jude’s has strong long-term growth prospects given a replacement cycle tailwind and an upgraded product portfolio in CRM as well as leading positions in some of Med Tech's highest growth potential markets. Over the next few years, I expect top line growth at St. Jude to accelerate to the upper single digit and bottom line growth to accelerate into the double digit range given the following events.

Organizational Restructuring To Leverage Operating Expenses
Recently, St. Jude has announced its intention for an organizational restructuring into two units - Implantable Cardiovascular & Ablation Technologies Division (CATD) and Electronic Systems Division (IESD). I believe that the restructuring will reduce organizational complexity and back office spending. The company will combine the CRM and Neuro-modulation divisions to form the IESD and will combine its Cardiovascular and Atrial Fibrillation divisions to form the CATD. The company will also eliminate approximately 300 jobs in IT, HR, legal, business development, and marketing. I think St. Jude is following the footsteps of several other large cap companies like Stryker (NYSE: SYK), Covidien (NYSE: COV) as these companies are also taking preemptive action to help offset the MedTech device tax in 2013 onwards. I believe this restructuring will lead to ~$55 million in pre-tax operating expense savings beginning in 2013.

Strong Support from FAME II
On 28th August, the complete results from the St. Jude-sponsored FAME II study were presented as a late-breaking session at the European Society of Cardiology (ESC) conference. FAME II was stopped early in January 2012 due to increased risk of adverse cardiac events. But now it has regained its strength as evidenced by results. Interventional cardiologists increasingly adopt fractional flow reserve (FFR) for stable angina patients (about 40% of all stent patients) given the increasing focus on the appropriateness of stenting in these patients. Therefore, I expect the visibility over success of FAME II to gain traction among investors.

Strong Product Pipeline
Recently, St. Jude has exposed an impressive portfolio of interesting new technologies. I believe the company's long-term new product pipeline among the most compelling.

• a trans catheter aortic valve replacement (TAVR) program
• a percutaneous mitral valve replacement (PMVR) program,
• a renal denervation for chronic resistant hypertension program.

Products from each of these programs could begin to launch in Europe in the end of 2012.  I believe visibility over strong product pipeline of St. Jude is not fully factored into its valuation. Its peer group of Stryker, Covidien, and Zimmer Holdings (NYSE: ZMH) are trading at little premium valuation, even though expected annual growth for next 5 years is comparable. The following table shows the expected EPS growth for next 5 years and forward PE of Stryker, Covidien, Zimmer, and St. Jude:

Going forward, I expect impressive product pipeline to provide edge to the company’s valuation in the near term.
Despite a still weak ICD market and recent Riata lead abrasion, I believe St. Jude has superior execution, growth oriented product portfolio, and multiple sources to drive potential upside will allow St. Jude to again deliver top and bottom line results that are at the high end of comparable MedTech companies. Thus, I view St. Jude shares as an attractive investment.

• Email
• Print
• Feedback