WASHINGTON (AP) -- Shares of St. Jude Medical plummeted Wednesday after regulators released a report criticizing the company's testing of its heart wires, a development that analysts said could further reduce sales of the products.
THE SPARK: On Tuesday the Food and Drug Administration released a nine-page inspection report on the company's Sylmar, Calif., facility, where St. Jude manufactures its Durata wires. The wires are used to connect heart-pacing implantable defibrillators to the heart. Inspectors noted a number of problems with the company's testing procedures, indicating staffers were not following their own quality control guidelines. Wells Fargo analyst Lawrence Biegelsen downgraded company shares to "Market Perform" from "Outperform" and said the report could lead physicians to turn to competing products.
THE BIG PICTURE: Defibrillators are lifesaving devices implanted in the chest to correct dangerous heart rhythms, monitoring the heart for irregular beats and occasionally triggering electrical shocks that correct the problem. In the past year St. Jude has been dealing with concerns about the reliability of its defibrillator wires. St. Jude has stopped selling Riata and Riata ST wires and took the products off the market last November. The company said that if the insulation on the wire is eroded, there is a greater chance the device could malfunction and either deliver a shock when none is needed, or fail to shock the patient's heart when it is not beating properly. Around 79,000 Riata leads are implanted in U.S. patients. Early in 2012 St. Jude recalled two other wires.
Durata is a newer wire with a different type of insulation, and St. Jude Medical says the insulation on Durata wires is more resistant to abrasion. The FDA has ordered St. Jude to collect more data on Riata as well as Durata.
THE ANALYSIS: Biegelsen warned investors that the latest FDA report is "likely to heighten physicians' concerns about Durata because the letter highlights flaws in the design verification and validation." More data on Durata's reliability are expected next year. But a physician consultant cited by Biegelsen believes "the odds of Durata losing its viability as a result of hysteria is 30 to 50 percent simply because the lead is under such scrutiny."
Jefferies analyst Raj Denhoy similarly advised investors to proceed with caution in light of the FDA report: "Any action by the agency will only add more pressure on an already skittish physician customer base to move away from these products." Denhoy has a "Hold" rating on shares of the St. Paul, Minn.-based company.
SHARE ACTION: St. Jude Medical Inc. fell $5.01, or 14 percent, to $30.70 in midday trading. The stock is down 10 percent in the year to date.