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St. Jude Medical Inc. (STJ - Analyst Report) has won CE Mark approval for its Ellipse and SJM Assura portfolio of implantable cardioverter defibrillators (ICDs) and cardiac resynchronization therapy defibrillators (CRT-Ds). The advanced devices from the company’s Cardiac Rhythm Management (CRM) segment incorporate unique features that are capable of delivering high-voltage treatment to patients with heart failure and lower risk of lead-to-can abrasion.

Market Potential

According to the American Heart Association, there are about 5 million heart failure patients in America, with 550,000 new cases diagnosed every year. ICDs are used to treat abnormal heart rates, which might lead to sudden cardiac deaths (SCD). In the U.S., roughly 325,000 die due to SCD, annually. The CRT-D device is used to resynchronize heart beat in patients with heart failure and provide back up support for SCD.

CRM under Scrutiny

St. Jude’s core CRM division is still underperforming. Revenues from the CRM division fell 8% year over year in the first quarter of 2013. The beleaguered ICD market, as reflected by sustained implant volume pressure and the Riata/Durata lead issue, continues to hurt CRM results. ICD sales declined 5% in the first quarter but we believe that market trends will stabilize soon.

St. Jude is currently trying to solve manufacturing and quality systems-related problems at its Sylmar facility, which manufactures the highly controversial Riata ST Optim and Durata leads. The company received a warning letter from the FDA in Jan 2013. The FDA is concerned that the newer generation high-voltage Durata leads might face the same problem as the Riata leads, which the company recalled in 2011 due to potential risk of serious injury or deaths.

The downside to the warning letter is that the company will no longer receive any regulatory approval in the U.S. related to any products in the Sylmar facility until the issue is resolved. Despite these headwinds, management is confident that the Durata defibrillation lead with Optim lead insulation is safe and effective based on available data.

Our Take

Amid several downsides, the CE Mark approval and positive news regarding Durata sparked market optimism as shares of this Zacks Rank #3 (Hold) stock achieved a new 52-week high, touching $43.86 on Friday, May 10, above its previous 52-week high of $43.76. Orthopedic major, Stryker Corporation (SYK - Analyst Report) also attained a new 52-week high of $67.36 on May 9.

New products from the CRM division should drive top-line growth for St. Jude, once the warning letter is resolved. Hence, the company is focused on selling its products in international markets and the CE Mark approval should further bolster physician confidence in St. Jude’s cutting-edge product lines. Recently, the company has also won CE Mark for the Allure Quadra Cardiac Resynchronization Therapy Pacemaker (CRT-P) and has already launched the product in Europe.

Other medical stocks such as Conceptus carrying a Zacks Rank #1 (Strong Buy), and AtriCure (ATRC - Snapshot Report) carrying a Zacks Rank #2 (Buy), warrant a look.
 

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