Why D.E. Shaw adds new position in St. Jude Medical

Market Realist

Must-know: D.E. Shaw's 1Q14 positions (Part 4 of 8)

(Continued from Part 3)

D.E. Shaw and St. Jude Medical

D.E. Shaw bought new small positions in Crescent Point Energy (CPG), Knowles Corp. (KN), and St. Jude Medical (STJ). Notable position decreases were in Apple (AAPL) and Bank of America (BAC). The fund increased positions in Liberty Global PLC (LBTYK) and Time Warner Cable (TWC).

D.E. Shaw initiated a small position in St. Jude Medical (STJ) that accounts for 0.08% of the company’s U.S. long portfolio.

Little Canada-based St. Jude Medical Inc., develops, manufactures, and distributes cardiovascular medical devices for global cardiac rhythm management, cardiovascular, atrial fibrillation therapy areas, and neurostimulation medical devices for the management of chronic pain. Its largest geographic markets are the United States, Europe, Japan, and Asia Pacific.

Its principal products are: IESD—tachycardia implantable cardioverter defibrillator systems (or ICDs), bradycardia pacemaker systems (pacemakers), and neurostimulation products (spinal cord and deep brain stimulation devices); and CATD—vascular products (vascular closure products, pressure measurement guidewires, optical coherence tomography (or OCT) imaging products, vascular plugs, and other vascular accessories), structural heart products (heart valve replacement and repair products and structural heart defect devices) and atrial fibrillation (or AF) products (electrophysiology (or EP) introducers and catheters, advanced cardiac mapping, navigation and recording systems, and ablation systems). St. Jude said, “A significant portion of our consolidated net sales are comprised of cardiac rhythm management devices—ICDs and pacemakers.”

St. Jude Medical undergoing restructuring to trim costs and grow

The company announced a corporate restructuring in January under which it is merging its global manufacturing and supply chain operations and combining its Implantable Electronic Systems Division (or IESD) and Cardiovascular and Ablation Technologies Division (or CATD) operating divisions. It said, “Our continuing global restructuring efforts are focused on streamlining our organization to improve productivity, reduce costs and leverage its scale to drive additional growth.” In 2012, the cardiovascular medical-devices maker had eliminated 800 jobs in a move to cut expenses. A November, 2012, report in StarTribune noted that the new federal medical device tax was also one of the reasons for the job cuts.

The company said in its recent 1Q that, “We expect competitive pressures in the industry, global economic conditions, cost containment pressure on healthcare systems and the implementation of U.S. healthcare reform legislation to continue to place downward pressure on prices for our products, impact reimbursement for our products and potentially reduce medical procedure volumes.”

Completes acquisition of CardioMEMS

St. Jude Medical recently announced it has completed the acquisition of privately held CardioMEMS Inc., the developer of the CardioMEMS HF System, which is an FDA-approved heart failure (or HF) monitoring device proven to significantly reduce hospital admissions when used by physicians to manage heart failure. In September, 2010, St. Jude Medical invested $60 million for 19% ownership of CardioMEMS, with an exclusive option to purchase the remaining 81% of the company for $375 million. Wells Fargo Securities analyst Larry Biegelsen forecasted that CardioMEMS will see $259 million annual sales by 2018. He added last year that, “approval of CardioMEMS would increase STJ’s EPS by $0.24 or 5.1% in 2017.”

Net sales driven by ICD and new product launches

Recent 1Q14 results saw earnings top estimates and revenues in line with consensus. The company reported net sales of $1.363 billion in 1Q14—a 2% increase over net sales of $1.338 billion in 1Q13. Foreign currency translation had an unfavorable impact of $25 million on net sales. In the first quarter, the company recognized after-tax charges of $25 million, or $0.09 per share, primarily relating to restructuring actions. Including these items, reported net earnings was $249 million or $0.86 per share, compared with  $223 million or $0.78 per share in the same period last year.

Its AF products sales benefited from an increase in EP catheter ablation procedures and increased sales volumes associated with intracardiac echocardiography imaging product offerings. It also saw a net sales benefit from 2013 product launches, but saw net sales decline in other neuromodulation chronic pain products, mechanical valves, due to a market preference for tissue valves, and third party vascular products distributed in Japan. Under IESD, ICD net sales increased while pacemaker systems and neuromodulation products net sales were flat during the quarter. U.S. 1Q14 ICD net sales of $267 million increased 5% due to the June, 2013, FDA approval of  next-generation Assura and Ellipse devices. Under the Cardiovascular and Ablation Technologies Division (CATD), AF products and structural heart products net sales increased while vascular products net sales decreased.

For the second quarter, St. Jude Medical expects revenue to be in the range of $1.380–$1.460 billion. For the entire year of 2014, it expects total revenue to be in the range of $5.610–$5.760 billion.

Creates value for shareholders

St. Jude Medical repurchased 6.7 million shares for $434 million at an average repurchase price of $65.00 per share during 1Q14. Its board also authorized quarterly cash dividends of $0.27 per share. The dividend declarations represent an 8% per share increase over the same period in 2013. The dividend yield stands at 1.7%.

Continue to Part 5

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