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St. Jude Medical, Inc. (NYSE:STJ)

Barclays Global Healthcare Conference

March 12, 2013 10:15 am ET

Executives

John C. Heinmiller - Executive Vice President

Analysts

Matthew Taylor - Barclays Capital, Research Division

Matthew Taylor - Barclays Capital, Research Division

Thanks for joining us. We have another presentation this morning from St. Jude Medical. And Executive Vice President, John Heinmiller; and J.C. Weigelt from Investor Relations. I'm really pleased to have St. Jude joining us this morning, the company that we think has -- going to have improving growth prospects for the year. And we think they have very attractive flexibility from the restructuring and buybacks that they put in place. And so we think it's a fact that it should outperform over the next 12 months. I think this morning, John is going to go through some slides, and then we'll do some brief Q&A after the presentation. So with that, let me turn it over to John.

John C. Heinmiller

First, the forward-looking statement here that any comments we make on a forward-looking basis are tied back to the risk factors that are disclosed in our recent 10-K filing. The other thing I would mention this morning before we get into our slides is a lot of these slides are going to look familiar to you if you attended the St. Jude Medical Analyst Day presentation in early February. None of the comments that I'm going to make today are meant to change any of the guidance that we have or really give any kind of a inter-quarter update of any kind. So just make sure that -- stay disciplined to that perspective.

And then as Matt mentioned, I've got a number of slides here. I'm going to purposely work through the slides quickly so that we save time for the Q&A portion of this morning's presentation.

So when we think about 2013, it really brings us back just to put some context on it, is what did we learn in 2012 and how did we come into the year 2013 with our attitude with the 2012 results. And we missed our revenue expectations when we go back and scorecard ourselves in 2012 from where we thought revenues where going to come in at the beginning of the year to where they ultimately came in. There were a number of influences in the market that were negative during 2012, and we were mindful of that as we came into 2013. We have a very disciplined operating environment. We're focused on the cost structures that we're managing. And during the August through the end of the year of 2012, we initiated a restructuring of our organizational structure and generated significant savings.

So you go back, despite the challenges of 2012, we delivered earnings per share expectations and we went through the end of 2012 and really changed the organizational structure.

That generated savings when we look into 2013 of about $100 million, and that gives us confidence that, that will give us the funding we need to continue to invest in the research and development activities and manage the market development activities through the SG&A line.

What we focused on is trying to develop innovative technologies that have -- that will improve patient outcomes and reduce the cost of health care, and that's what really drives our strategic thinking. We know that when we were able to accomplish that, where we think of our quadripolar CRT-D technology and then this year coming to a pacemaker platform that, that can become a standard of care and has the characteristics of improving patient outcomes and reducing costs. Our FFR or PressureWire technology is a good example of that, where the improvement in patient care demonstrated in clinical studies and the reduction in the cost of coronary artery disease treatment.

The first quarter of 2013, as we look at our guidance for 2013, we expect our quarter to be down here if we hit the midpoint of our guidance ranges. On a constant currency basis, revenue would be down 2.5% year-over-year. The full year 2013 sales, and Matt alluded to this in his opening comments, that we expect our revenue growth to accelerate during the year and part of that is tied to the new products that we're introducing during 2013.

Here is our 2013 guidance by product category, including our earnings per share guidance for the year. So total sales up 1.4% on a constant currency basis, assuming that we hit the midpoint of our guidance ranges, and earnings per share up 6.5%. So you see the leverage in the earnings per share tied to the benefit of the cost savings that we achieved in our restructuring, as well as the recent share repurchases.

So we see that on this slide we kind of highlight the impact of those 2 initiatives. And what we remind ourselves is there a number of things that, including the medical device tax that's coming into our earnings statement for the first time in 2013, as well as funding a number of the growth initiatives that we have that then factors all that into our guidance. So the guidance that we're providing incorporates the impact of the medical device tax. And that if 2013, if we can meet our revenue goals, then we have a good chance of delivering or exceeding the earnings per share expectations.

The real challenge for us is to generate sales growth in 2013. And this is our -- with the backdrop of the share repurchase and the restructuring, we've got leverage in our income statement, the real challenge is delivering on the sales growth.

And we have a number of product opportunities that we're working on that we view as pioneering technology, which really requires a lot of patience in how we ultimately achieve the revenue from these product categories. But we've been managing this with FFR and OCT and other parts of our business, and so it's something that were geared up and were built for growth to manage these growth opportunities.

Now, the quadripolar pacing has become a new standard of care in CRT therapy. There's a broad publication of clinical data supporting the use of CRT in the Quadpole configuration or providing 4 electrodes on the left ventricular pacing lead.

Here, the data from the National ICD Registry, which is a database that's managed by ACC in collaboration with the Heart Rhythm Society. When we look at the data in the first 6 months of clinical experiences with this product, we see that our Quadra system outperformed the non-Quad systems dramatically. And this is an 88% reduction in failed implants. So where you can't get the right stimulation from the left ventricular pacing lead with 4 electrodes, it's intuitive that you have more choices of how you do that. And here, the data is really coming through, that there is a significant benefit in using that technology with your patients.

MediGuide is a system that was highlighted in our Analyst Day in early February. It's something that has been in the research and development activity since the end of 2008, a very broad platform that can enable the visualization of catheters in the heart fluoroscopic image without the use of radiation. And so it really is a miniaturized GPS system that tracks a device in the heart that has a sensor that is recognized by the system. It can allow for complex procedures that use a lot of radiation to be done in a way where there's a significant reduction in the amount of x-ray exposure that the physician, the physician staff and the patient are exposed to.

We expect to have FDA approval of some key ablation cardiac ablation tools in the first half of 2013 that can help really establish this as a platform that we can grow from over the years.

With our ILUMIEN and QUANTIEN system of the OCT platform just coming in the first half of 2013, another new product that provides the kind of visualization and procedure planning for stent procedure. Again, this is a product in the United States and in most geographies only available from St. Jude Medical.

The enlightened first and second generation products for renal denervation, another pioneering new product category that we're working with, we expect to launch a second generation product here in the middle of 2013 and are committed to a significant clinical evidence development as we initiated the first landmark trial that will focus on heart endpoints of heart attacks, stroke and death. So really generating the clinical data that the market will be hungry for demonstrating the efficacy of renal denervation systems for the treatment of hypertension.

Our Portico transcatheter valve program, again, this is being introduced in stages as we get different sizes approved. Currently, we have the 23-millimeter size Portico valve available. We're enrolling in the CE Mark clinical trial for the 25-millimeter valve and expect to have that during 2013. And then continue to roll out this product in the European markets, as well as ultimately in an IDE study in the U.S.

Again, we have a number of growth opportunities in our more established markets. We think about the cardiac rhythm management market as a very well established and a huge market opportunity with an $11 billion established market. The -- in 2012, as now all the companies have reported, when we look at our market model, we believe we've taken about 20 basis points of share in all of 2012 for the entire worldwide CRM market. And now in 2013, we have an attractive pacemaker product line coming into the market with our -- a new platform. A leadless pacemaker that we're working on that we expect to bring into the business before the end of 2013. And we're working on our MRI safe technology. We expect to have that product in Japan in the middle of 2013.

The tissue valve market is something that we have the Trifecta pericardial tissue valve is still early in its adoption and penetration. And so we're continuing to grow that part of our business at a double-digit rate. And in spinal cord stimulation, it's an established market that we expect to have better growth in 2013.

Just to talk about the new -- the pacemaker platform a little bit. This is a really a significant new product introduction during 2013. Probably the most exciting thing is the leadless pacemaker that you see depicted down there, how small that is, a single chamber pacemaker technology that will be introduced at the end of 2013. We think in CE markets -- CE Mark during the end of 2013 and available for a single chamber pacing. We view that segment of the market as about $700 million established market worldwide.

Again, here's the new low voltage platform, smaller size, better diagnostic tools for atrial fibrillation, and the strong uptake in European markets where our MRI lead has been very well accepted with leading handling capabilities.

When we talk about our high-voltage lead performance, I won't spend a lot of time on this, but we're looking at the data being very strong with our active registries and the number of leads that we're following, and the performance of the Durata lead has been excellent, as documented in this.

So in 2013, we have a balanced portfolio of growth drivers in established markets and some more pioneering technologies that we're managing. We expect to launch more than 20 new products and we're -- we have a strong history and have worked hard to have the reputation of being disciplined and do what we say we're going to do, and that's reflected in our cost management, as well as our strong balance sheet and the ability to return capital to shareholders.

So with that, I think we've got a few minutes left for some questions. Matt?

Question-and-Answer Session

Matthew Taylor - Barclays Capital, Research Division

Sure. Thanks, John. So maybe I'll start out with kind of an open-ended one, which is what do you think investors are missing? Or what do you think is underappreciated about your story, whether it would be the top line growth, room for margin improvement or some of the stuff you're doing on the cap allocation side with the recent buyback and certainly the dividends that are increasing over time, too? So is there something that you feel like -- is the message that you want to communicate that maybe people don't fully get about your story that should show up in the numbers in the next 12 months?

John C. Heinmiller

All right, I think that it's hard for people to appreciate than just the sheer number of growth opportunities that we're managing and the upside that each of them really represents and how that really will play out over time. And so the -- we think it's fairly well understood that we've been disciplined with our cost structure. We've got our -- we've made all the changes that we need, we think, to manage our business appropriately from a cost standpoint. You wouldn't hear from us that we're -- we've got a rolling adjustment of headcount that we're working to manage. That's not the case in our business. All of our operating plans that our management is working to deliver in 2013 are established and they're not going to change. We have been aggressive with our share buybacks and that is obviously baked into our guidance. And so I think that really -- the -- we're looking forward to delivering 2013. And as -- I think you pointed out, as the year develops, the improvement in our revenue growth will become visible, and then it will be encouraging as we go into 2014.

Matthew Taylor - Barclays Capital, Research Division

You talked about kind of a ramp through the year. Maybe since you do have so many opportunities, can you highlight for folks what are the most significant ones in 2013? It certainly seems to me like the pacers may be one that's underestimated because it's not as sexy of a product line. But you have a lot of shots on goal there. You got a leadless pacer, which is kind of a new category. And so is that one of the bigger opportunities for you? And what are some of the others that we'll see more near term?

John C. Heinmiller

Yes. I think that really the strength of our portfolio is the balanced nature of the products that we are managing and as you point out, opportunities in more established markets where we're bringing some new technologies. We have some existing higher growth areas with the PressureWire or FFR business where that is growing at a significant double-digit rate and is still relatively low in the penetration in the PCI procedures and has strong evidence of clinical benefit, as well as cost benefits. So it really checks the box on those strategic points that we are looking for. And then we have some early stage products that we're managing and growth that we're getting from opportunities like renal denervation or for us, transcatheter valves. And then we have a real platform opportunity with MediGuide, where we're going to be very disciplined in how that rolls out, but we already have some centers in the United States that have purchased the system. And I think you'll see more and more evidence of when the ablation tools are approved, they can be used with that system, how complex procedures that typically would use significant number of minutes of x-ray exposure can be -- the radiation exposure can be reduced significantly and the procedure is accomplished in that kind of a format. So I think it really is the overall balance. The pacemaker part of it, as you mentioned, is certainly a key in that overall formula.

Matthew Taylor - Barclays Capital, Research Division

And how do you view the pipeline now with all those different programs that you have? Is it something where you think the value is pretty full? And you're going to just develop the current opportunities that you have? Or are there other areas that you're actively looking at to try and expand the pipeline opportunities that you can address?

John C. Heinmiller

Well, we're always looking at opportunities that are really not necessarily outside of our focus but really adjacent to what we're doing or very synergistic with customer call points that we have. And we've got a strong pipeline of research that produces ideas for us and that we get an opportunity to work on. But we've really taken the opportunity with our Analyst Day day-long presentation that we just completed in February of really highlighting everything that we think is coming into 2013 to help influence the business, and so everyone has a good update on that. And then we have what we haven't disclosed are things that aren't really ready for us to talk about yet but are still in the works.

Matthew Taylor - Barclays Capital, Research Division

And maybe one more before we go to the breakout. But can you frame 2013 for us? Because you've been very forthright in that you are conservative to guidance this year. You have some flexibility with the restructuring and the buyback. And so you said you're going to at least meet earnings or you're hoping. And then also potentially being a little bit conservative on the revenue side given the uncertainties that we've seen in some of these markets. So how do you approach that this year? And how should we think about guidance throughout the year?

John C. Heinmiller

Well, I would -- I think that we -- I would think about it in 2 ways. One, I would encourage you to look at each one of the product categories that we've given guidance for, for the full year and think through how that compares to our actual performance in 2012. And I think what you'll find is that the guidance for 2013 is very comparable to what we experienced in 2012 or there are good reasons where some anomaly like the fact that we no longer have -- we anniversaried the loss of a third party distribution arrangement that we had in Japan, for example, in our cardiovascular business. So when you look at each one of those revenue categories, you see that it's -- it compares favorably to the actual performance that we delivered in 2012. And then you layer on top of it some of the new products that we have coming that can provide the little bit of upside that might show up in some of those product categories. And then the counterbalance would be the markets are still challenging. And so where we saw markets different than what we originally predicted in 2012, the markets that we participate in are still challenging and still create a bit of a counterbalance to that. And then when you look at the earnings per share, I think we've expressed that we have good confidence that our guidance is clearly achievable. And to the extent that we can get into the upper end of our revenue guidance range, we have a good shot at, either investing more in the market development and product development activities or overachieving on the earnings per share line.

Matthew Taylor - Barclays Capital, Research Division

Great. Thanks a lot. Thanks for your time. We're going to do the breakout in Poinciana at 4, I believe.

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