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St. Jude Medical Inc: Durata Share Losses Positive For Boston Scientific

 April 10, 2013 12:25 PM

(By Mani) St. Jude Medical Inc. (NYSE: STJ) could face market share losses in the implantable cardioverter-defibrillator (ICD) space due to ongoing concerns with its Durata lead. This may be a positive for Boston Scientific Corporation (NYSE: BSX).

A lead connects an implanted defibrillator to a patient's heart. A Medtronic-sponsored study regarding the insulating material that is used to coat Durata (Optim) was published in Macromolecules, an American Chemical Society journal. The researchers evaluated the materials' interaction with liquid (water) as a potential failure mechanism.

[Related -St. Jude Medical, Inc. (NYSE:STJ): A Stock With Potential To Outperform Peers]

These results indicate that physicians that were fringe STJ users might be more were vulnerable to switching on the back of unfavorable press. Most recently a case study in the Heart Rhythm Journal also warned of inside-out insulation failure of Durata lead with abrasion-resistant coating.

In the letter, dated Jan. 10, the FDA also wrote a strongly-worded letter to St. Jude over Durata concerns after the agency's inspection last fall of a company factory in California.

"We believe that the risk of incremental share loss for STJ is growing larger," RBC Capital Markets analyst Glenn Novarro wrote in a note to clients.

In the ICD market, Medtronic, Inc. (NYSE:MDT) has about 40 percent share while Boston Scientific and St. Jude has 23 percent and 28 percent share, respectively.

[Related -Optimism Moving Back Into The Equation]

St. Jude has indicated in the past that the Heart Rhythm Conference (HRS) conference in late May (21-23) will feature several single center Durata studies, which support the durability of Durata. However, one cannot rule out the possibility of Durata failures appearing over the near and intermediate term on the FDA's MAUDE database, which represents reports of adverse events involving medical devices.

"Although we do not expect "one-off" failures to result in an FDA recall, we believe they will be enough to continue to reduce EPs' confidence in Durata and result in share declines for STJ," Novarro said.

A survey of about 50 electrophysiologists (EPs) by RBC Capital Markets suggests STJ may lose about 300bps of U.S. ICD market share over the next two years.

"As a point of sensitivity, we estimate that every ~1 point of worldwide ICD market share loss translates into ~$100M of lost annual sales and an EPS hit of ~$0.10," Novarro said

In this scenario, ICDs and their features are similar across manufacturers, and switching to a MDT or BSX generator and/or lead offers more favorable risk/reward for the implanting physician.

By the end of 2013, the survey respondents expect the market share to shift more favorable to BSX, with STJ ceding share. By the year-end, BSX could have 27 percent share and dropping to 26 percent in 2014.

"We believe the results are directionally correct," the analyst added.

Notably, St. Jude's pipeline may not offset Durata risk. The company has a respectable pipeline, with new products targeted to enter multi-billion markets, such as transcatheter aortic valve replacement, or TAVR ($2 billion plus market in 2015) and $3 billion plus renal denervation market.

However, in both cases, STJ will be late to market, without game changing technology. Also, the pipeline would not have the financial strength to offset ICD declines or a potential Durata recall.

"While we do not believe a Durata recall is likely in the near term, our analysis shows that ~$500-600M in lost sales (or 1/3 of STJ's worldwide franchise) yields an EPS hit of ~$0.60 in 2014 (assuming a 40% operating margin)," Novarro noted.

St. Jude could eliminate any Durata recall risk by developing a new ICD lead. Recall, Medtronic had a major lead recall (Fidelis) in 2007, but it had the backup option of selling its Spring Quatro lead. If STJ develops a new lead, this could mitigate some of the Durata risk. However, STJ is not developing a new ICD lead system at this time.



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