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St. Jude Medical Inc. (NYSE:STJ)

Q1 2010 Earnings Call

April 21, 2010 08:00 am ET

Executives

Dan Starks - Chairman, President and CEO

John Heinmiller, EVP and CFO

Analysts

Bob Hopkins - Banc of America/Merrill Lynch

Larry Biegelsen - Wells Fargo

Mike Weinstein - JPMorgan

Rick Wise - Leerink

Kristen Stewart - Credit Suisse

Derrick Sung - Sanford Bernstein

Neha Sahni

Imran - Deutsche Bank

Operator

Welcome to St. Jude Medical’s first quarter 2010 earnings conference call. Hosting the call today is Dan Starks, Chairman, President and Chief Executive Officer of St. Jude Medical. The remarks made during this conference call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such forward-looking statements include the expectations, plans, and prospects for the company including potential clinical successes, anticipated regulatory approvals and future product launches and projected revenues, margins, earnings and market shares. The statements made by the company are based upon management’s current expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include market conditions and other factors beyond the company’s controls and the risk factors and other cautionary statements described in the company’s filings with the SEC including those described in the risk factors and the cautionary statements sections of the company’s annul reports on Form 10-K for the fiscal year ended January 2, 2010. The company does not intend to update these statements and undertakes no duty to any person to provide any such update under any circumstance. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentations.

It is now my pleasure to turn the floor over to Dan Starks.

Dan Starks

Thank you, Regina. Welcome to the St. Jude Medical first quarter 2010 earnings conference call. With me on the call today are John Heinmiller, Executive Vice President and Chief Financial Officer; Mike Rousseau, Group President; Eric Fain, President of our Cardiac Rhythm Management Division, and Angie Craig, Vice President of Corporate Relations.

I want to first ask John Heinmiller to conduct his normal review of our first quarter results along with his typical update for the entire St. Jude Medical business. I will then address several topics and open it up to your questions. Go ahead, John.

John Heinmiller

Thank you, Dan. Sales for the quarter totaled $1.262 billion, up approximately 11% over the $1.134 billion reported in the first quarter of last year. Favorable foreign currency translations versus last year’s first quarter increased this quarter’s sales by about $43 million. We will update our currency assumptions in a moment, but the actual average exchange rates during the first quarter were within our previous guidance range. On a constant currency basis, first quarter sales increased approximately 8% versus last year.

At the end of 2009, the Federal Research and Development tax credit expired and then it has not yet been extended for 2010. In this circumstance, GAAP requires us to estimate and record our effective income tax rate assuming that the R&D credit is not extended. For purposes of this conference call and our calculation of adjusted net earnings however, we are assuming that the tax credit will be extended for 2010 as in past years.

As a result, comments referencing first quarter results and our guidance for 2010 including EPS amounts are presented based on an effective income tax rate that contemplates the extension of the tax credit retroactive to January 1, 2010. To the extent that the Federal Research and Development tax credit is not renewed. Our effective income tax rate for 2010 would be higher than what is being presented during this call.

Earnings per share were $0.75 for the first quarter of 2010, a 29% increase over EPS of $0.58 in the first quarter of 2009 and above our guidance range of $0.66 to $0.68 for the quarter. On a currency neutral basis, we estimate our earnings per share growth for the first quarter was approximately 20%. As you know three selling weeks prior to the end of the first quarter of 2010, a competitor announced the suspension of all sales of their ICD products in the United States.

We estimate that this dynamic benefited our first quarter US ICD sales by approximately $20 million to $25 million. In preparing our second quarter and full year 2010 guidance we have taken into account, the period in April that this competitive remained out of the US ICD market.

Before we discuss our first quarter 2010 sales results by product category with guidance for the second quarter and the remainder of 2010, let me comment on foreign currency. As discussed on prior calls, the two main currencies influencing St. Jude Medical’s operations are the Euro and the Yen.

In preparing our sales and earnings guidance for the first quarter and full year 2010, we had used exchange rates, which assumed that each euro would translate into about $1.40 to $1.45 and for the yen each 88 yen to 93 yen would translate into $1. For the first quarter the actual average exchange rates for the euro and the yen versus these assumptions did not result in a material difference in reported sales.

In preparing our sales and earnings guidance for the second quarter and the remainder of 2010, we’re assuming that each euro will translate into about $1.33 to $1.38 and that for the yen each 90 yen to 95 yen will translate into $1. This change in assumption regarding currency exchange rates has the impact of decreasing total forecasted sales for the remainder of 2010 by about $40 million to $50 million, which we estimate will reduce EPS by approximately $0.04 to $0.05 over the remainder of the year.

Now for the sales by product category discussion for the first quarter, total Cardiac Rhythm Management sales, which includes revenue from both our ICD and pacemaker product lines was $752 million, up11% from last year’s first quarter, including $24 million of favorable foreign currency translations. On a constant currency basis, first quarter CRM sales increased 8% versus a strong first quarter from last year.

For the first quarter, ICD sales were $452 million, up 15% from last year’s first quarter. On a constant currency basis, first quarter ICD sales increased to 12% versus last year. U.S. ICD sales were $281 million, up 9% from last year’s first quarter. International ICD sales were $171 million a 26%, increase over the first quarter of 2009, including $12 million of favorable foreign currency translations.

For low-voltage devices, sales for the first quarter totaled $300 million up 6%, from last year’s first quarter on a constant currency basis first quarter low-voltage device sales increased 2% versus last year.

In the United States pacemaker sales were $128 million flat with last year’s first quarter. In our international markets pacemaker sales were approximately $172 million up 12%, from the first quarter of 2009 including $12 million of favorable foreign currency translations.

For the second quarter of 2010, we expect total CRM product sales to be in the range of $745 million to $775 million and for the full year 2010 we now expect total CRM sales to be in the range of $2.965 billion to $3.40 billion.

Atrial Fibrillation or AF product sales for the first quarter totaled $170 million up 17%, over the first quarter of last year including $7 million of favorable foreign currency translations. On a constant currency basis first quarter AF product sales increased 12%, versus last year.

For the second quarter of 2010; we expect AF product sales to be in the range of $165 million to $180 million. We expect our full year 2010 AF product sales to be in the range of $695 million to $725 million. This 2010 outlook range is slightly less than the full year 2010 guidance range we provided last quarter, which primarily reflects the stronger U.S. dollar versus the euro.

Total sales of cardiovascular products for the first quarter of 2010 were $256 million, up 7% over the first quarter of 2009, including $10 million of favorable foreign currency translation. On a constant currency basis, first quarter cardiovascular products sales increased 3% versus last year. Within this category of products, sales of vascular closure products in the first quarter of 2010 were $98 million consistent with the first quarter of 2009.

Sales of heart valve products in the first quarter of 2010 were $86 million, a 6% increase over the first quarter of 2009. For the second quarter of 2010, we expect cardiovascular product sales to be in the range of $245 million to $260 million. We expect full year 2010 cardiovascular product sales to be in the range of $1.15 billion to $1.45 billion. This 2010 outlook range is slightly less than the full year 2010 guidance range we provided last quarter which primarily reflects the stronger U.S. dollar versus the euro.

Total sales of neuromodulation products in the first quarter of 2010 were $84 million, up 15% from the first quarter of 2009, including $2 million of favorable foreign currency translations. For the second quarter of 2010, we expect sales of neuromodulation products to be in the range of $90 million to $95 million and we continue to expect full year 2010 neuromodulation sales in the range of $375 million to $395 million.

Looking to revenue by geography, in total 51% of St. Jude Medical sales in the first quarter of 2010 came from the United States, while 49% came from international markets. As with prior quarters the specific geographic breakdown of St. Jude Medical sales for the first quarter of 2010 is available in our press release.

The gross profit margin this quarter was 74.5% representing a 50 basis point improvement over the first quarter of 2009 for the full year 2010 we expect gross profit margins to be in the range of 73.2% to 73.8%.

Our full year 2010 gross profit margin guidance continues to incorporate the impact of absorbing the cost associated with the remote monitoring and wireless telemetry capabilities in our pacemaker product line. We are providing for this impact to be slightly higher in the second half of this year. In addition our gross profit margin guidance also reflects the revised currency assumptions for the remainder of 2010.

Our first quarter SG&A expenses were 35.1% of net sales a 170 basis point improvement over the first quarter of 2009. For the full year 2010 we continue to forecast SG&A as a percentage of net sales in the range of 35.2% to 35.8%.

Research and development expenses in the first quarter of 2010, was 12% of net sales. For the full year 2010, we continue to expect R&D expense to stay in the range of 12.0% to 12.6% of net sales as we continue to balance delivering short-term results with the right investments in the long-term growth drivers.

Net other expense was $20 million in the first quarter and for the second quarter of 2010 we expect the other income and expense line item will be a net expense of approximately 16 million. For the full year 2010, we expect other expense of approximately $65 million to $70 million.

For the first quarter, the company’s effective income tax rate was 24.8% and for 2010 we continued to expect tax rate to be in the range of 24.5% to 25.0%. As a reminder these effective income tax rates contemplate the extension of the R&D credit in 2010 retroactive to the beginning of the year, to the extent it is not extended. Our overall effective income tax rate would increase. We have also assumed the extension of the federal research and development credit in the EPS guidance for 2010.

Moving on to the balance sheet, at the end of the first quarter 2010 we had $530 million in cash and cash equivalents and $1.936 billion in total debt, along with $1 billion available under a revolving credit facility with a group of banks. The debt on our balance sheet includes $1.641 billion of senior notes with maturities in 2013, 2014 and 2019.

In addition to the senior notes, the outstanding debt on our balance sheet includes $295 million of notes issued in Japan, which matured in May 2010 and December 2011. We are currently in the final stages of refinancing the $225 million portion of the Japan notes that mature in May 2010 with a new fixed rate yen based debt having maturities ranging from seven to 10 years.

Next I want to offer comments regarding our EPS outlook for the second quarter and full year 2010. In preparing our EPS guidance, we have assumed that in the second quarter of 2010, the share count used in our fully diluted EPS calculation will be about 330 million to 332 million shares with the weighted average outstanding shares for the full-year 2010 at 331 million to 333 million.

The company expects consolidated earnings per share for the second quarter to be in the range of $0.73 to $0.75, and for the full-year 2010, we now expect consolidated earnings per share to be in the range of $2.80 to $2.85, a $0.09 increase from the full-year 2010 guidance we gave during our fourth quarter 2009 earnings conference call. This updated expectation represents EPS growth of approximately 15% to 17% over the 2009 adjusted EPS of $2.43.

To provide some insight into the basis for the increase in our annual EPS guidance, we start out with the results for the first quarter and note that we exceeded the midpoint of our prior guidance for the first quarter by approximately $0.08. As previously discussed, we estimate that the change in our assumptions regarding currency exchange rates will reduce our EPS for the remainder of the year by approximately $0.04 to $0.05, and we are factoring this negative change into our updated full-year guidance. However, we expect the strength of our business to continue and we believe that we will more than offset this negative currency impact during the remainder of the year.

I would now like to turn it back to Dan.

Dan Starks

Thank you, John. I realized many of you have questions about events involving one of our competitors, but our focus on this call is to make sure everyone has good insight into the successive momentum of St. Jude Medical’s own growth program on an independent basis. Yes, we did benefit during the last three months of our first quarter from problems another company was having, but we just delivered a 29% increase in earnings per share and beat the high end of our guidance by $0.07 pre share. These results were driven primarily by the strength and success of our own growth program. The problems one of our competitors had the last three weeks of our quarter had only a small impact. With this in mind, the first topic I want to emphasize is the benefit our restructuring had on our first quarter results.

Our operating profit margin improved to 27.4% for this quarter. This is a full 250 basis point improvement over Q1 2009, and a 160 basis point improvement over the fourth quarter of 2009. Our operating profit margin during the first quarter of 2010 did benefit from ICD sales that were higher than expected the last three weeks of our quarter, but even without this benefit St. Jude Medical would have delivered an operating profit margin gain for the quarter that exceeded the expectations that were incorporated into our prior guidance for earnings per share.

The second topic I want to emphasize is the strength of our Cardiac Rhythm Management or CRM sales results during the first quarter. Prior to the announcement on March 15, that one competitor was suspending sales of its ICDs in the United States. We already were on track to deliver global CRM sales that were at the upper end of our guidance. This confirmed to us that we made the right changes in our U.S. sales organization during the second half of 2009. This also put us in good shape to provide seamless and timely ICD coverage to customers who turned the St. Jude Medical as a result of competitor issues.

We now expect a gain CRM market share for full-year 2010 both in the United States and on a total global basis. We expect to launch over 10 new CRM products during the second quarter alone. I will refer you to the information we presented last quarter at our annual investor conference for the features and benefits of these new products, but on this mornings call, I at least want to remind you how strong our pipeline of new products is.

In the United States during the second quarter we expect to launch our new Fortify and Unify lines of high voltage devices. We also are launching our 4 French QuickFlex [µ lead] and new [µ lead] delivery system in a cell phone enabled option for our Merlin@Home remote monitoring system. Keep in mind that this is in addition to our 7 French high-voltage leads, our SJ4 connecter system in our accent and anthem lines of low-voltage devices with RF telemetry and remote monitoring capability.

In Europe during the second quarter we are offering all of the same technologies I just listed for the United States, but in addition we also are launching our Fortify ST line of high-voltage devices. Our core view pulmonary edema monitoring technology in our Promote Quadra ICD systems with the Quartet, Quadripolar left ventricular pacing lead to facilitate both electronically positioning in multi-side left ventricular pacing.

In Japan, we already have received regulatory approval for our analyst line of ICDs. We are in the process of obtained reimbursement and expect to launch this product line before the end of the second quarter. Our analyst line of ICDs will introduce ST segment monitoring technology into the Japanese market for the first time; in addition we have received regulatory approval in Japan for our Current Plus ICDs and Remote Plus CRT-D devices along with our Durata 7 French high-voltage lead all with the four connectors the first devices in the world labeled as compliant with the newly published ISO connector standard.

If I were asked to summarize the competitive advantage of St. Jude Medical’s CRM program for the reminder of 2010, I would say this. We have a clear competitive advantage in our product line. We have a strong inventory position and significant additional manufacturing capacity. We have a stable trained and experienced field organization in place to provide complete coverage to customers in all major global markets.

The dynamics of the replacement markets are changing from a headwind that has slowed our growth to a tailwind that we expect to accelerate our growth. We believe we are ahead of all of our competitors in establishing a strong Atrial Fibrillation program and as a result we have also strengthened our ability to gain share and pacemakers and ICDs.

Last but not least, we have good continuity of leadership and program strategy, especially in these times the value of this continuity, the impact it has on product and program quality and the overall competitive advantage of discontinuity should not be underestimated. We fully expect to gain additional CRM market share in 2010.

Before I open it up for questions, I would like to touch briefly on each of our other major growth platforms. Within our cardiovascular business I am pleased to confirm that a limited launch of our Trifecta pericardial stented tissue valve already is underway in Europe. As a reminder the pericardial segment of the tissue valve market is approximately $500 million on a global basis. Our entry into this market in Europe is a significant milestone in our program to continue to reinvigorate the long-term growth of our cardiovascular business. With respect to the business of our Atrial Fibrillation or AF division, we now have CE Mark for four new families of ablation catheters, including catheters with our contact technology and catheters with our CoolFlex technology.

We recently received approval in Japan for our NavX technology on our EnSite advanced mapping systems platform. We continue to make good progress integrating our EP-WorkMate and our MediGuide technology with our EnSite Velocity platform. All of this reinforces our optimism that we are on track to sustain the long term growth of our AF business. With respect to our neuromodulation business, although first quarter sales came in at $84 million versus our guidance range of $85 million to $90 million, we attribute this minor variance to timing. We expect a rebound of neuromodulation sales during the second quarter.

In conclusion, our first quarter was highly successful by every major measure. We exceeded the high end of our sales guidance. We improved our operating margin on a year-over-year basis by 250 basis points. We delivered a 29% increase in earnings per share. We entered the second quarter with good momentum and with major new product launches scheduled for the remainder of the year.

With that, I’d like to open it up for questions and turn it back to you to moderate, Regina.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Bob Hopkins with Banc of America/Merrill Lynch.

Bob Hopkins - Banc of America/Merrill Lynch

Hi, thank you and good morning. Can you hear me okay?

Dan Starks

Yes, good morning.

Bob Hopkins - Banc of America/Merrill Lynch

Great. Good morning. First just a quick question on the first quarter results, you guys broke out your best estimate as to the contribution from to recall on the top line. I’m assuming roughly to that contribution would equate to roughly $0.02 to $0.03 on the bottom line. Is that directionally correct?

Dan Starks

Yes, it’s directionally correct.

Bob Hopkins - Bank of America/Merrill Lynch

Then in the new guidance that you’re assuming, what are you assuming kind of beyond the April timeframe? Are you assuming any incremental share gains above and beyond which you’re assuming pre-recall?

Dan Starks

The way I would answer that Bob is to say that our general assumption for full-year are, that the global CRM markets will continue to grow in the range of 46% first, that’s the first major component. So that was due to the market growth assumption that we had at the beginning of the year and nothing that happened during the first quarter changed our assessment of total global market growth, point one.

Point two, if you look at the range of our full-year CRM sales guidance, you can see that although there is some range in there we’re estimating approximately one full point of global CRM share gains for full-year of 2010, so that would be the best way for me to answer your question rather than offer more specificity quarter-by-quarter.

Generally, as you ask about the impact of the circumstances that at Boston Scientific, it’s really too soon for us to know what that impact is going to be. We think about it in several buckets, we think about it first in terms of what’s the impact on the CRM markets in its entity and our assessment is that the palms at Boston Scientific long term are not going to have any material impact on the health and growth of the global CRM market, that’s the first point.

On the topic of impact on market share shifts, it really is too soon for us to assess that will have a better idea after we’ve finish the second quarter, but for now, we’re kind of holding back, or we’re going to wait and see, we don’t really know how to model that, we haven’t been through exactly these circumstances before. So, if we’re going to air, we’re going air on the side of being conservative for purposes of our guidance this morning.

Bob Hopkins - Bank of America/Merrill Lynch

Just real quickly last question from me, on this situation, obviously, they’ve only been back in the market for a short period of time. Do you see any evidence of them using price to try to get back into accounts and do you worry about that more broadly as we go forward to the rest of the year?

Dan Starks

We have seen evidence of them using price to try to get back into accounts and so, we do worry about that for the rest of the year, but ultimately, our experience has been that when a competitor engages on a low price strategy that’s generally an admission of competitive weakness.

I think that customers generally see as the same way and if you kind of imagine a company that has a product line with the little with new in it you, imagine that same company having a product line that has had numerous advisory here in the recent past as well as in the multiyear past, but even in the recent past multiple advisories, we kind of referred to the whole set of circumstances internally here we refer to the circumstances that the competitive company as the Boston Debacle, and so if you think about a company going through all of the circumstances of the Boston Debacle coming out of that, they’ve indicated that they’re going to change their traditional level of investments to develop the market.

So you’ve got an increasingly uncompetitive product line, one that already has been the target of multiple advisories from a company that has announced that as a growth strategy they’re going to lower the traditional amount of investment they’ve made in developing the CRM market, they’ve got quite a bit of instability in their field organization, and we can only imagine all of the circumstances of that and all of the impact that has on ability to service customer requirements in a high quality way and on top of all of that the company says, yes, but we’ll lower our price. I think the perception customers will get on averages that you get what you pay for and we would see that as a strategy that is a concern, but not a strategy that would have a long term success for that competitive program.

Operator

Your next question comes from Larry Biegelsen - Wells Fargo.

Larry Biegelsen - Wells Fargo

So Dan basically, what I hear you saying is, so far you don’t see any impact from the recall on the U.S. ICD market is that fair?

Dan Starks

That’s fair Larry, with the qualification that I’m talking about long term impact it won’t surprise us, if when everyone has reported their Q1 numbers, it won’t surprise us, if the numbers are anomalies for reported sales and the appearance that gives for CRM growth in the first quarter. I think the first quarter sales results will be a poster child for the importance of not taking the results in any one quarter and extrapolating from them.

I think it will be important for us all to wait for second quarter results to get reported and then kind of when we looking at market growth, combine the results of the first quarter and the results of the second quarter. I think that will really be the first indicators to all of us from the reported sales on the continued growth of the global CRM market. On a kind of anecdotal basis and what’s the feedback we have from our field organizations we really don’t see any impact.

Larry Biegelsen - Wells Fargo

Dan, your international ICD sales were strong this quarter, have you seen any spillover to international markets from the recall?

Dan Starks

Very little, my understanding is that there are some smaller markets where U.S. approval is kind of the mechanism for approval in the international markets and so I’m not going to tell you that there is no spillover impact. I suspect that there has been some small spillover impact, but nothing that would be material.

Larry Biegelsen - Wells Fargo

Dan, lastly the Neuromodulation migraine and Parkinson’s data, could you give us an update on the status of that? I think you said you have the data in the second quarter at your Analyst Meeting. When do you think, we’ll see the data? Thank you.

Dan Starks

I can’t give you an exact time yet Larry, but in the second half of this year, I would expect to be able to make that data visible, to make those data visible and that kind of set expectations, what we are expecting is we’re expecting the data from the Parkinson’s study to be positive and there’s nothing that would lead us to expect anything else. On the migraine side, the results really I’d say, I am blinded to the data, I don’t know if we’re still entirely blinded to the data, but that’s a speculative. The outcome I’d say is speculative in our own modeling. We do model that we will continue to get benefits from the Parkinson’s indication in our Neuromodulation program.

As everyone in the call knows, we are in still early phases of launching that technology for that indication in Europe. In future years we remain confident and optimistic that we’ll launch our deep brain stimulation technology work for a Parkinson’s indication in the United States as well.

On the migraine side, we model absolutely nothing for the possibility of upside on migraine, and we would think it’s prudent for everyone to have very low expectations and not model any contribution from migraine. If we have positive outcome to the clinical data that will only mark another milestone in what we’ll still be very lengthy multiyear process of adding to the clinical data working to get reimbursement, working to establish creditability in the referral string and so a person are to think about that as a very long term growth opportunity and model nothing in the next few years.

Operator

Your next question comes from Mike Weinstein with JPMorgan.

Mike Weinstein - JPMorgan

Let me start on the AF side of the business. You had a really tough comp this quarter, but you had a strong performance about how the industry was affected particularly internationally. J&J yesterday reported an acceleration in their business. Can you just talk about your view to help the market and then what would appear to be the reacceleration in the first quarter?

Dan Starks

Yes, our view of the market is, my comments won’t be as precise as you are dissecting of the numbers Michael, but my view of the market is that it’s really steady-state growth, that’s my view. So we are thinking of it in terms of acceleration in the first quarter although I am sure that to the extent your numbers reflect that your numbers are accurate, but we kind of step back and think about this as a 10% to 15% growth market on a sustainable basis over an additional multi-year period and so, when not that we’ve got another quarter behind us our takeaway is, yes this continues to be a good 10% to 15% growth market. We have what we consider to be the leading program in the space, our sales results of 17% growth in a market growing in the range of 10% to 15% indicates that we’re at least holding share and we may be gaining share, other companies don’t report their numbers with enough granularity for us to know for sure. But everything is on track, there were no surprises to us either on the upside or on the downside in the AF market development or market opportunity in the first quarter and we continue to look at this as one of the best growth opportunities in all of medical device technology. We think it’s a winner on cost-effectiveness, we think that the accumulation of clinical trial data will show it’s a winner on clinical effectiveness we’ve got and we see consensus continuing to build in the global cardiology community on the clinical and cost-effectiveness of catheter-based curative approach to Atrial Fibrillation. So, then this just saves a lot of money for a healthcare system as well as alleviates a significant human misery. So that articulates from the first quarter.

Mike Weinstein - JPMorgan

Dan, let me just touch again on the international side of your ICD business, if we look to the last two quarters looks like that business has seen a notable pick up. Could you help us identify whether that’s coming from Europe or Japan or other geographies and since we often see Europe lead on the new technology front, could you just help us identify, what products may be driving that and as we think about the U.S?

Dan Starks

Yes, we clearly have significant strength in our European ICD program. Now, what I’m going to do is since you’ve got the benefit of Eric Fain here on the call although I intended to just kind of jump in and start to talk about what is so strong about our product line in Europe and customer response to it. Let me defer to Eric Fain and ask him to talk a little bit about the all the technologies that really are absolutely unique and have a very meaningful clinical benefit that are strong part of the success of our ICD business in Europe. Eric, go ahead?

Eric Fain

Mike, as I talked about in our Investor conference and I think you’re exactly right we can really look at Europe as sort of being with our weather, getting the products significantly earlier than the U.S. In the first quarter I think, what you’re saying is just a base strength of our current product line, but also we had our limited launch of our new Unify and Fortify and Fortify ST products that really have been met with a very, very high degree of enthusiasm that’s allowed us to really get focus on the organization and our customers’ thinking about us as being truly innovators in the space, it’s also allowed us to get into competitive accounts where we haven’t seen before. We’re just starting off now in the beginning of this month with our full launch for Unify and Fortify and people are really appreciating the full package of those devices with not only the small size, but the 40 joules output, the past charge times, no compromise in longevity, and all the additional features like CoreView, like the ST in the Fortify ST line.

On the CRT side, we really think about ourselves as really getting to the next level with the Quadripolar system with Promote Quadra and the Quartet lead that we think that’s going to become the next real standard of care for CRT and the customer response for that has been that they agree with us that they really think that, that is the next true evolution in CRT therapy and really addresses a number of important clinical concerns that they have and allows them to have much more efficient not only implants, but also on the follow-up side. And then in Japan, we are also seeing the results of the strength of our new products and I think that raises up well for Q2 start as we’re going to be launching as Dan mentioned our analyst device there we have a symposium on ST segment monitoring in Japan that’s taking place this weekend. The initial response to the concept has been very strong and then also the DF-4 connector provides for the Japanese market not only all the benefits of that, but it also provides a way for downsizing the device and that’s obviously important in that market.

Operator

Our next question comes from the line of Rick Wise with Leerink.

Rick Wise - Leerink

Hi, good morning Dan.

Dan Starks

Good morning.

Rick Wise - Leerink

A couple things, first back to the ICDs, would you fought your way, so steadily with new products and sales force into new accounts I’d just be curious whether the recent issues that Boston have enabled you to open any doors possibly in a more sustained way into accounts that have been maybe resistant to that dialogue, that most subtle shift?

Dan Starks

Yes, the way that you said it Rick could be a way that I would agree exactly. I think that’s possible, but that comes, then the next thing I would say is that our assessment as we deliberated on what’s the right level of communication for this call and think about the timing here and think about the fact that the competitor has only been back on the market for three days in a meaningful way here percentage say its really been more two business days probably, yesterday, Monday and Tuesday really. It’s really too soon for us to characterize the impact on market share shift and so rather then do it in a highly subjective way. We think that it’s prudent for us to say that it’s too soon to tell.

The second quarter will give us quite a bit of additional information, so that we can provide really evidenced based commentary more than kind of an educated guess and I think that’s a good way to lead it. There maybe some upside here and if there is upside, I can assure you that Mike Rousseau and his organization are fully poised to capture that upside, but it’s just too soon to tell, we’re going to need another quarter to better characterize the opportunity.

Rick Wise - Leerink

Two other follow-ups, I’ve been jumping between calls. The MRI pacer program, any update on the timing there. And John for you, just remind us again why other was whatever $3 million, $4 million, $5 million ahead this quarter and why it settles down, what was going on and what gets back to normal later in the year? Thank you.

Dan Starks

On the MRI side, let me refer your question to Eric Fain and ask Eric to confirm the status of our MRI comparable pacer submission in Europe in particular and any additional comments about the U.S.

Eric Fain

So Rick we are on track. We’re actually a little bit ahead of schedule and so we’re on track, we’ll submit both the design dossier for CE marking here in Q2 and then do the same for our IDE submission in the U.S, so everything is on track.

Rick Wise - Leerink

Then Eric, for approval would come then roughly?

Eric Fain

For CE marking?

Rick Wise - Leerink

No, for both.

Eric Fain

For CE Marking as we talked about before we expect to have that in the later part of this year and then for the U.S. we can’t really speculate just on the timing for that.

Dan Starks

Then the question to John Heinmiller.

John Heinmiller

On the other income line, during the quarter we were successful in refinancing a term loan with a public debt that we issued and there was an unamortized issuance cost associated with that term loan that we wrote off then as a result of that refinancing, and so we absorbed about a $3 million charge in that other expense line.

Operator

Your next question comes from Kristen Stewart - Credit Suisse.

Kristen Stewart - Credit Suisse

I was just wondering if you can go back to the pricing commentary. I know you said you have seen evidence at Boston Scientific using price. I was just wondering if you could maybe just talk kind of outside of that, kind of what you were seeing in the general pricing dynamics for the market and to the extent that you are expecting any acceleration of price declines as you progress through the year.

Dan Starks

It’s a good question not just particularly to make sure that my prior comment doesn’t get mistaken. Average selling prices during the first quarter were stable. So that was nothing in that so the prior question wasn’t about actual prices it was about are we see a competitor offer, lower prices not a question of is business being transacted at the lower price.

Business in the first quarter was transacted within normal average selling price ranges and so we saw very stable average selling prices on the total global basis in our ICD business and then our pacing business. We did see one competitor offer low prices and it was particularly striking with low prices were offered at a point where they didn’t have an approved product offer, but I digress and so, but the actual success of the business was at within normal prices.

We don’t expect to see a change in average selling prices in a way that would change our estimate that the global CRM market will then continue to grow at the range of 4% to 6%. So everything that we expect with respect to competitive price tactics number one, but also with respect to new technology and other impact of new technology on product mix everything that we see with respect to geographic mix of the strengthening of our business in Japan for example, all of those things are baked into our assessment that the global CRM market will continue to grow at about the 4% to 6%. So no change to that and we see nothing from a competitive customer behavior that we would expect to have changed that.

Kristen Stewart - Credit Suisse

Just to clarify the state stability was 1Q versus your 4Q not necessarily on a year-to-year basis?

Dan Starks

No year-to-year,

Kristen Stewart - Credit Suisse

Prices are flat?

Dan Starks

I am sorry.

Kristen Stewart - Credit Suisse

Year-to-year your average selling prices were flat?

Dan Starks

Yeah they were and I am going to say that their pricing was stable and what I mean by that is I as it happens I think that the average selling prices may very well have been flat or there about but generally I am not going to I don’t want to set the President of that level of specificity what I want to stick with is we generally expect average selling prices to decrease on a year-over-year basis, historically its been somewhere 2% to 3% something like that and we continue to expect average selling prices on a total global basis in our CRM business to decrease something in the range of about 2% to 3%.

So when I say stable, I mean as anticipated but you like, Kristen actually prices were little bit better than historical in the first quarter.

Kristen Stewart - Credit Suisse

And then just real quickly on the inventory levels that increased again from year-end balances, that just simply you guys building up some inventory and obviously would fascinate at the market or is that just still higher inventory because of all the new products that you guys have coming down the pipe?

Dan Starks

Little bit of both but I would also hasten the add that although the dollar value of our inventory increased on a sequential quarter basis, days inventory on hand dropped by four days on a sequential quarter basis.

Operator

Our next question comes form the line of Derrick Sung with Sanford Bernstein.

Derrick Sung - Sanford Bernstein

Hi, thanks for taking my call and just with a quick follow up on the last comment on pricing, do you expect that the Unify, Fortify platform will be up the drive substantial mix your way, when you launch that in the U.S.

Dan Starks

Yes.

Derrick Sung - Sanford Bernstein

And would you care to speculate on bit of a level of mix that it might be able to drive?

Dan Starks

But I tell you just generally when you put out a new product line with you know the idea is that there every next generation of product has multiple new capabilities that we think are going to be attracted to customers and so the newest product line if we have a successful product launch over the period of 4 to 8 quarters that new product line will become most of our business in the markets where its been introduced so that’s historically always the case I can’t think of an exception I suppose if we researched it someone could point out an exception, but that’s almost always the case and of the Fortify and Unify product lines are really, we think we would expect a pretty quick shift because, they are just all such compelling products, I mean it’s a smaller package, it’s got more output, more output means opportunity to have a higher degree of safety for patients you’ve got additional opportunity to defibrillate them if the patient’s condition is at the point of an event require more output, there is just far more new technology there than I have just expressed all of which is meaningful to physicians and we think is going to have a good impact on patients and patients comfort too. So we do expect a pretty quick shift over the Fortify and Unify.

Derrick Sung - Sanford Bernstein

Going back to your U.S. ICD sales, so if I back out that $20 million to $25 million benefit from the Boston recall, I think that would have put your U.S. growth just about flat, maybe couple of million down from the prior year and I was wondering is that in line with, kind of what you are expecting in terms of kind of your organic growth, recall aside and also you were seeing some de-stocking at the end of last year, is that contributing to still this sort of lower growth or has that de-stocking worked its place through the system?

Dan Starks

Yes, for the first part of your question, the U.S. ICD sales results on an adjusted basis around the pro forma basis to exclude the additional unexpected sales in the last three weeks were as expected and actually were at the upper end of what we expected. So, on a sequential quarter basis, you saw our guidance for our CRM business increase on a sequential quarter basis and I mentioned earlier that although we’re going to break the number and I mentioned earlier that as of the day that we learned that our competitor was going to take it’s ICDs off the market in the United States, we already were on track to deliver global CRM sales, so that means successful U.S. ICD sales that were up towards the upper end of our guidance.

I think our guidance was probably ahead of where most people found credible, but we were right on track to offer very strong results independently if all of our competitors business stated in a steady state. So yes it was as expected it was actually on the strong side of what we expected and with respect to customer de-stocking of inventory we didn’t see anything unusual or unexpected. So in the third quarter of last year we were surprised by changes in customer inventory and quarter end purchases, but we’ve adjusted our expectations and now we’re I would say were back to a steady state there was nothing unusual or expected in customer inventory practices.

Going forward we expect customers to continue to maintain a tight focus on inventory levels and so we aren’t expecting a rebound in kind of customers talking and we’re expecting continued tight customer inventory management.

Operator

Your next question comes from David Lewis - Morgan Stanley.

Neha Sahni

This is Neha Sahni stepping in for David Lewis. Looking at the first quarter results the quarter clearly shows impact of restructuring on operating requirements, given the core business trends are improving and issues at Boston are you comfortable at the current level investment as appropriate?

Dan Starks

Yes, I am glad you raised the topic of restructuring because it maybe an under appreciated aspect of our growth program. So, what is hard to know from outside the business, it’s hard to know how hard our global organization worked during the third and fourth quarters of 2009 to restructure, and how profound the restructuring was and how spot on it turned out to be. So to remind people, we eliminated approximately 700 physicians that was approximately 5% of our global workforce that was the result of a total global review. The job reductions were throughout the global organization that involved all of our divisions in our corporate group.

The restructuring included revisiting our global structure, we flattened the organization we realigned the organization what made sense. We’ve reviewed product lines, we made changes to rationalize the product lines were it made sense that result in some of the inventory write-offs related to product line reviews. We revisited some of our business processes here inside the business on a very intensive basis to challenge ourselves what have we gotten used to doing that isn’t as good as we wanted to be and where should we make changes in our business processes we had a special focus on some of the processes surrounding our sales and marketing effectiveness and so there was a lot of work done that was really off the rate our screen.

You saw some special charge from it, but no one could really appreciate the level of work and the level of judgment and the level of change. So, what you see now in our first quarter results is the benefit of six months of work that was largely off the radar screen. As far as investment goes, the level of investment has been uncompromised. So you saw our R&D spending continue to increase on a dollar basis, sequential quarter and year-over-year.

So our restructuring was not sacrifice of future at all. Our restructuring was a growth oriented restructuring and the sales success as well as the productivity gains all just position us for to increase. We increased our sales guidance for the full year. We absorbed full year $50 million reduction in sales due to foreign currency translation changes.

We overcame that and increased our guidance. Originally, we had guidance of 7% to 11%. Sales growths for the year a quarter go, now we’ve increased the top end slightly and the range is 8% to 11% after absorbing $40 million to $50 million reduction due to foreign currency changes. So all of that would really confirm to anyone that our restructuring was a growth oriented restructuring, not a sacrifice of future growth or sacrifice of the appropriate investment.

Neha Sahni - Morgan Stanley

Would you consider reinvestment later in the year?

John Heinmiller

We will continue to invest later this year and next year and ongoing.

Operator

Our final question comes from the line of Tao Levy with Deutsche Bank.

Imran - Deutsche Bank

Actually Imran in for Tao, I had a couple of quick Boston Scientific related questions. First, can you comment on sales force dynamics within CRM in other words have you seen movement from Boston to St. Jude on the sales force side?

Dan Starks

I don’t really want to comment, I think the question is a good one obviously, but if you ask about sales force dynamics, I think that the question is best directed to that company next week when they do their call, we really have no interest in taking Boston when they’re down.

Imran - Deutsche Bank

Okay, was there any collateral pacemaker benefit to your business do you think some from the Boston recall?

Dan Starks

We don’t think so, we weren’t sure what to expect having completed the quarter and done our typical analysis we really don’t think there was any impact on pacing.

Imran - Deutsche Bank

Okay, and then another one last quick question on ICD mix I guess in two contexts, first are you seeing any benefit yet from made at CRT in terms CRT-D mix?

Dan Starks

Well, I’ll answer that’s going to put it over to Eric, but let me just go ahead and answer you that, but we continue to see CRT-D has a present of our global ICD business increase and we think that on a total market basis, CRT-D as a present is increasing. So we think the market moving that direction our business definitely is moving that direction and the net of CRT kind of trail undoubtedly is effective behind that.

Imran - Deutsche Bank

Okay and then in terms of implant trends to know low versus replacements any changes there in the last quarter or two?

Dan Starks

Nothing notable. You welcome, and with that we reach the end of our hour and like that, thank you everybody for joining us and turning the call back to our moderator for concluding comments.

Operator

Today’s call is being recorded and will be available for replay beginning at 12 o’clock p.m. Eastern Standard Time. The dial-in numbers are for U.S. 800-642-1687 and for international callers 706-645-9291 and enter pin number 66843056. Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time.

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Source: St. Jude Medical Inc. Q1 2010 Earnings Call Transcript
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