Summary:
St. Jude is set to be acquired by Abbott Laboratories in a $25 billion deal. St. Jude
shareholders will receive $46.75 in cash and 0.8708 shares of Abbott common stock,
representing approximately $85 per share. St. Jude's consistent earnings growth
reflect strong momentum at the company’s Heart Failure (HF), Atrial Fibrillation and
Neuromodulation businesses. The raised full-year 2016 earnings guidance will also
boost investor’s confidence. Meanwhile, estimates have been stable lately ahead of
the company’s second-quarter earnings release. We note that the company has
positive record of earnings surprises in recent quarters. We believe that an expanding
total addressable market and innovative product portfolio will drive growth in 2016.
Further, the suspension of the Medical Device Excise tax will help in margin
improvement.
Reasons To Buy:
- Neuromodulation presents significant growth prospect for St. Jude. The company’s expanding chronic pain product portfolio that offers radiofrequency ablation (RFA), spinal cord stimulation (SCS) and dorsal root ganglion (DRG) stimulation therapy solutions is a key growth catalyst. According to St. Jude, the chronic pain market worth almost 2 billion and is growing in the mid to high single digits, which is quite fast compared to some other markets, the company operates. CE Mark approval and the European launch of its Invisible Trial System will further drive growth outside the U.S. The company will also benefit largely from its increasing presence in the Asian markets. China and India are expected to be the fastest growing pain management device markets in the long haul. New product launches including Protege and Prodigy MRI product lines, Penta 5-column paddle lead, Proclaim Advanced Primary Cell, and Infinity deep brain stimulation system will drive top-line growth over the long term.
- Atrial Fibrillation (AF) has become one of the best growth opportunities in the MedTech space. AF market is growing in low teens and is significantly underpenetrated. Management noted ablation catheter segment of the electrophysiology (EP) market is currently worth $1.1 billion in annual sales. FDA approvals of TactiCath ablation cathetar for the treatment of paroxysmal AF and the Flexibility ablation catheter expanded the company’s fast growing ablation technology portfolio. We believe that the availability of these devices and new products in EP portfolio in the U.S. will drive AF’s top-line growth in 2016 and beyond.
- St. Jude is well positioned to benefit from the growing adoption of CardioMEMS, which is a first-of-its-kind FDA-approved heart failure monitoring device. The company believes that CardioMEMS has immense growth potential owing to its ability to reduce hospital readmission rates in heart failure patients, as demonstrated by the latest CHAMPION trial data. Most recently, new data from Northwell Health demonstrated that monitoring pulmonary artery pressure with the CardioMEMS technology leads to significant improvements in quality of life. the study monitored 34 New York Heart Association (NYHA) Class III heart failure patients. For 2016, sales expectation from this product line is approximately $65 million. St. Jude plans to pioneer an entirely new market with CardioMEMS and expects the same to become a major new growth driver in the long run.
- The acquisition of Thoratec will significantly augment St. Jude’s portfolio of heart failure products and technologies. Thoratec, an established player in the global VAD space, holds approximately 60% share, which we believe will substantially help St. Jude gain market traction. The acquisition will pave way for the company to foray into new markets, which in total, are valued in excess of $1 billion and are likely to exhibit an annual growth rate of approximately 10%.
- We believe that St. Jude is well positioned in the CRM market due to a strong product portfolio and favorable replacement cycle. The company is expected to gain market share in the CRT segment of the ICD market based on new product launches (Endurity and Assurity MRI product lines in the U.S. and Japan). Launch of the Quadra Allure MP CRT-P device, greater adoption Magnetic Resonance Imaging (MRI) pacemaker and higher demand for the multi-point pacing quadripolar CRT-D device in international markets will drive sales. The resumption of the U.S. IDE trial for the evaluation of Portico Transcatheter Aortic Valve Implantation System is significantly positive, in our view. St. Jude anticipates FDA approval for MRI compatible pacemaker in the first half of 2016 and MRI compatible ICD in the first half of 2017. The company also expects approval of MRI compatible ICD in Japan during the first half of 2016. These anticipated approvals present strong growth opportunity in the CRM market over the long haul.
- St. Jude reckons FFR and OCT, the two innovative emerging technologies, as important growth drivers for its vascular business, providing a combined market opportunity of roughly $2.7 billion. Positive data from the FAME II trial revealed that FFR-guided treatment was far more economical for percutaneous coronary interventions (PCI) when compared to the best available medical therapy. Moreover, latest data from the study showed that FFR-guided PCI plus medical therapy in patients suffering from stable coronary artery disease lowered the need of urgent revascularization as well as death from heart attack as compared with patients who received medical therapy alone. The company expects that further clinical studies will show that an improving patient recovery rate drives growth for medical caregivers. We believe that the company’s focus on developing products that reduces healthcare costs will continue to drive its market share and penetration in the long run.
Risks:
- Although CardioMEMS presents significant growth opportunity, reimbursement uncertainty is a concern at least in the near term. Moreover, lower demand for capital equipment owing to a tough hospital budget environment remains a major headwind.
- The legacy CRM business contributes almost 50% to St. Jude’s top line. However, the sluggish CRM market continues to affect the company’s revenues. The prevailing macroeconomic factors, pricing pressure, austerity measures and the impact of the Health Care Reform are expected to weigh on the CRM market going forward. Moreover, the ongoing internal restructuring charges associated with the realigning of the CRM business, following the closure of a facility in Sweden, and costs related to leveraging of the sales and sales support organization are additional charges borne by the company. Furthermore, the company and its peers Medtronic and Boston Scientific are constantly vying for CRM market share. The pacemaker franchise is facing tough competition as well as volume/pricing pressure in the international markets, resulting in market share losses, which is also a significant concern.
- Acquisitions have given the company increased scale and cross-selling opportunities across products and vertical markets. While this improves revenue opportunities, it adds to integration risks. The frequent acquisitions can negatively impact its balance sheet in the form of a high level of goodwill and intangible assets, which totaled $7.88 billion, or 60.3% of its total assets at the end of 2015.
- St. Jude’s balance sheet is highly leveraged. As of Jan 2, 2016, the company’s total debt stood at approximately $6.39 billion. Such high debts may limit the company’s future expansion and worsen its risk profile. Higher interest rate on its debt is also expected to impact profits going forward.
- Foreign exchange movements are unfavorably impacting St. Jude’s results. The company derives more than half of its revenues from international operations, primarily in Europe and Japan. The strong U.S. dollar against Japanese yen and Euro will continue to impede sales growth in 2016 and beyond.
