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We reiterate our Neutral recommendation on St. Jude Medical (STJ - Analyst Report). St. Jude reported second quarter 2012 adjusted earnings per share of 88 cents beating the Zacks Consensus Estimate by a penny and surpassing the year-ago earnings of 85 cents per share.

Reported net revenues of $1,410 million were down 2% year over year and missed the Zacks Consensus Estimate of $1,430 million. Net sales rose 1% on constant currency basis. Weak Cardiac Rhytm Management (“CRM”) and vascular product sales more than offset growth of the smaller Atrial Fibrillation (“AF”) and Neuromodulation franchises.

The company reduced its forecast for the second half of 2012 by about $35 to $40 million (or $0.04-$0.05) mainly due to adjustments in currency assumption. However, profits inched up as lower expenses offset weak revenue generation.

St. Jude is a leading medical device manufacturer producing healthy growth over the past decade. We believe that revenue growth will be fueled by numerous product introductions and technological advancements. The company unveiled a number of growth drivers (7 in the cardiovascular segment alone) which are expected to drive accelerated sales growth over the long term.

The Trifecta and the Epic product lines represent some of the major new drivers for the company’s Cardiovascular business. St. Jude’s tissue valve business is currently growing at a rate of around 45%, and with hardly 20% market share in the $1 billion worth global market, this business has a huge potential to expand its market size in the long term.

St. Jude remains optimistic about its entry into the transcatheter aortic valve replacement (“TAVR”) market with its Portico valve. Other new growth drivers include the patent foramen ovale (“PFO”) closure and the left atrial appendage (“LAA”) closure system within the structural heart program, which are used to treat patients with severe stroke.

The Ilumien product line is a major catalyst to Fractional Flow Reserve (“FFR”) revenue growth. The new renal denervation catheter and generator system, EnligHTN, for treating resistant hypertension is another emerging opportunity expected to accelerate growth in 2013. St. Jude received CE Mark approval and launched the product in Europe during the EuroPCR 2012. 

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 the increased competition, weakening Euro, the soft CRM business and the overall tough macroeconomic conditions.

Foreign exchange movements are unfavorably impacting results in 2012. The company derives more than half of its revenues from international operations, primarily Europe and Japan. Therefore, the strengthening U.S. dollar, primarily against the Euro is expected to hurt its international revenues and subsequently its bottom line.

Apart from the weakening Euro, the company also attributed its downward revision of guidance to competitive pressures and the risk of a sluggish market uptick considering the ongoing difficult macroeconomic conditions. The company expects these factors to affect growth for the next two quarters.

A still choppy CRM space overhangs on St. Jude and its peers Medtronic (MDT - Analyst Report) and Boston Scientific (BSX - Analyst Report). Our long-term Neutral recommendation on St. Jude carries a short-term Zacks #4 Rank (Hold) rating.

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