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Medical devices major St. Jude Medical (STJ) posted better-than-expected fourth quarter fiscal 2010 results in a still challenging operating backdrop with adjusted earnings of 75 cents beating the Zacks Consensus Estimates by a penny while exceeding the year-ago earnings of 64 cents.

Fourth Quarter Revisited

Profit for the quarter climbed 8.9% year over year on the back of revenue growth across the board. Revenues leaped 12% to $1,350 million, beating the Zacks Consensus Estimates of $1,323 million. AGA Medical, which St. Jude acquired in November 2010, contributed $25 million to the top line.

Sales were buoyed by continued strong momentum at the company’s implantable cardioverter defibrillator (“ICD”) business with revenues surging 16% to $458 million. However, strong ICD sales were partly masked by a still soft pacemaker business.

St. Jude’s Atrial Fibrillation and Neuromodulation franchises posted double-digit growth in the quarter. Cardiovascular revenues, including AGA Medical’s contributions, surged 20% to $287 million.

Agreement – Estimate Revisions

St. Jude’s fourth quarter results have drawn mixed reactions from analysts. Estimates for first-quarter fiscal 2011 are evenly balanced with 1 analyst (out of 25) having raised his/her forecast over the last 7 days accompanied by a solitary reverse movement. A somewhat similar trend applies to the forecasts for fiscal 2011 with a couple of analysts (out of 28) hiking their estimates over the similar period with 1 making a negative revision.

The optimism among the analysts reflects a bullish outlook for fiscal 2011 with several fresh growth drivers (including seven in Cardiovascular unit alone) lined up to deliver sustainable double-digit revenue growth. On the flip side, AGA Medical related dilution coupled with higher R&D spending in 2011 has kept some analysts on the negative.

Magnitude – Consensus Estimate Trend

Given the relative lack of significant movements in either direction, the magnitude of revisions for both first quarter and fiscal 2011 has remained static over the last week. The current Zacks Consensus Estimate for 2011 is $3.28, representing an estimated 9.03% year over year growth.

St. Jude in “Neutral” Zone

We remain intrigued by St. Jude’s ability to deliver consistent revenue and earnings growth. Moving forward, revenue growth should be fueled by numerous product introductions and technological advancements. A number of growth initiatives should boost the top line in fiscal 2011.

St. Jude is well positioned to savor incremental opportunities in CRM (especially ICDs) on the back of a strong product pipeline. Launch of several products (including the quadripolar CRT systems) in the U.S. and Europe should boost the company’s CRM market share in 2011. St. Jude’s Fortify and Unify lines of ICDs are already gaining notable traction.

The company currently holds a 25% share in the global ICD market and is poised to expand its position through increased penetration with these new devices. Its strategic investment in cardiac devices maker CardioMEMS represents another significant opportunity to boost its technologies focused on improving heart-failure management.

Neuromodulation represents another promising prospect for St. Jude. Revenues from this business are growing at a double-digit rate, benefiting from new spinal cord and Parkinson's disease devices as well as sustained adoption of the Eon Mini implantable neurostimulator.

Moving forward, growth in Neuromodulation will be fostered by the adoption of the company’s deep brain stimulation (“DBS”) systems in Europe and sustained uptake of the Eon Mini system. St. Jude expects to receive the European approval for the DBS system in the migraine indication in 2011, representing another promising prospect.

Another area which is interestingly poised for growth is the company’s Cardiovascular franchise. The acquisition of medical technology firm LightLab Imaging has enabled St. Jude to enter the fast-growing intravascular imaging market. Moreover, the company is entering the $500 million market of pericardial stented tissue valves with its Trifecta line of valves scheduled for launch in the U.S. in mid-2011.

Also, the acquisition of AGA Medical Holdings has considerably strengthened St. Jude’s Cardiovascular business. The acquisition provides the company with the opportunity to expand into fast-growing new therapy areas beyond its legacy ICD and pacemaker markets. AGA Medical has a robust pipeline with a number of products currently under clinical trials. Should they be successful, St. Jude can look forward to blockbuster opportunities.

St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX) are increasingly in a tug-of-war to grab CRM share. The company expects the worldwide CRM market to remain soft, at least for now, and has backed its earlier forecast growth of 3% with no near-term expectation for material recovery.

This is based on the prevailing macroeconomic factors, pricing headwind, austerity measures and the impact of health care reform. All these factors are expected to continue to weigh on the CRM market through 2011. As such, a soft CRM market may prove to be challenging for St. Jude in the upcoming quarters.

While we are encouraged by St. Jude’s solid fundamentals, strong product mix, healthy growth trajectory and operating leverage, we remain wary about competition-driven pricing pressure and the dilutive impact of acquisitions and any unfavorable currency exchange fluctuations on the bottom line. This is reflected in our Neutral recommendation for the stock, backed by a Zacks #3 Rank (Hold).

Source: Earnings Scorecard: St. Jude Medical