St. Jude Realigns Units, Cuts Jobs

Medical devices major, St. Jude Medical, Inc. (STJ - Analyst Report) recently announced that it will consolidate its four operating segments into two units as a part of its cost-cutting measure to leverage future growth. The company also changed the executive heads leading the business segments and eliminated roughly 300 employees in the process.

In addition, St. Jude will centralize various support functions like human resources (HR), business development, information technology (IT), legal and many marketing functions. However, the company’s United States and International Divisions will continue to focus on product commercialization. The company also plans to provide necessary support to the employees who were laid-off.

The company is currently facing pricing pressure for its products due to the increasing cost curtailment pressure on healthcare systems, led by the U.S. healthcare reform legislation. Global economic downturn and competitive pressures continue to generate reimbursement risks and potential reduction in procedural volumes.

To counteract the above difficulties, St. Jude is focusing on improving its operating margin to enhance its economies of scale. The company anticipates that the reorganization endeavors will diminish pre-tax operating expenses by roughly $50 to $60 million annually, starting from 2013. The company plans to utilize this savings to fund its portfolio of new growth drivers and maintain its industry leading position.

Per the realignment plan, the Cardiac Rhythm Management (“CRM”) Division and the Neuromodulation (“NMD”) Division have been combined to form the Implantable Electronic Systems Division (“IESD”) whereas the Atrial Fibrillation (“AF”) Division and the Cardiovascular (“CV”) Division have been clubbed to form the Cardiovascular and Ablation Technologies Division (“CATD”). IESD and CATD will be headed by Eric Fain and Frank Callaghan, respectively, who will report to Group President Michael Rousseau.

Further, Donald Zurbay has been appointed the vice president of finance and chief financial officer and will report to John Heinmiller, who has taken on the larger role of the executive vice president, in charge of the centralization of the IT, HR, legal and business development functions.

Rachel Ellingson has been appointed as the Vice President of corporate relations, replacing Angela Craig. Angela Craig has been named the Vice President of global human resources. An additional vice presidential post has been created under global regulatory, with Kathleen Chester being appointed to the position.

Earlier, in 2011, St. Jude had undertaken a restructuring initiative to realign certain activities in the CRM division as well as sales and selling support organizations. The plan included shutting down the CRM manufacturing and research and development (R&D) operations in Sweden in an effort to reduce the company’s workforce and rationalize product lines.

Neutral on St. Jude

St. Jude is a leading medical device manufacturer with a solid rate of growth over the past decade. We are impressed by its solid fundamentals, healthy growth trajectory, strong product mix, robust pipeline and cost management initiatives.

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.

A still choppy CRM space overhangs on St. Jude and its peers Medtronic (MDT - Analyst Report) and Boston Scientific (BSX - Analyst Report). We currently have a Neutral recommendation on St. Jude, which carries a short-term Zacks #3 Rank (Hold rating).