Reason To Own STJ Is Gone, Pressure Remains On The Stock

Shares of St. Jude Medical (NYSE:STJ) fell Thursday after the company announced negative results from the RESPECT trial, which was expected to support U.S. approval of the Amplatzer PFO Occluder (PFO) for the prevention of recurrent cryptogenic stroke. While some analysts concluded that the product may be approvable because the trial showed a numerical benefit, but not a statistically significant benefit, the stock is expected to weaken further as the market for PFO is likely to be much smaller than originally expected given the lackluster trial results. Other analysts are downgrading the stock. In fact, after several downgrades with last week’s earnings results, this morning Credit Suisse took its rating on STJ down from Outperform to Neutral.

PFO was supposed to be a key growth driver for STJ and a major reason to own the stock. Analysts were predicting between half a billion and one billion in sales for PFO, and because this level of sales seems unattainable after the RESPECT results, the stock is likely to remain weak. In addition to the RESPECT trial failure, STJ has bigger problems. On Wednesday, the company confirmed the early warning by CEO Dan Starks on its 3Q earnings call that the FDA had found manufacturing deficiencies at the company, and issued a Form 483. The 483 cited 11 observations that must be addressed at the company’s California manufacturing facility, and STJ stated that it expects to provide written response to the agency by November 7th. The form can lead to an official warning letter, but the FDA has yet to issue this citation and will probably wait for a response from STJ. However, many analysts expect a warning regardless, due to the CEO’s tactic of letting Wall St. know ahead of time. The facility in question makes pace-makers and defibrillator devices, and STJ noted that operations and manufacturing continues at the plant. The risk is that the problems may take substantial time and resources to resolve, which could cause supply disruptions and may negatively impact margins due to the costs to fix such problems.

Beyond the two issues noted above, the company continues to battle the negative press over its cardiac defibrillator leads, called Durata (see PropThink’s prior story) On its earnings call, STJ reported weaker-than-expected sales of this product line and it appears that the company is losing market share over the Durata skepticism. With so much risk in the story, and the absence of a clear growth driver to put STJ back on the path to strong growth, investors are likely to exit the stock and seek out opportunities that have more upside potential like Medtronic (NYSE:MDT).