St. Jude Medical: Insiders Profit By Their Own Rules

Mr. Stefan K. Widensohler is a director of medical device maker St. Jude Medical (STJ), and the beneficial owner of approximately 45% of the common stock of, Invatec, an Italian company that makes interventional vascular products, including cardiology catheters, an embolic protection system designed for carotid angioplasty, and a line of interventional peripheral vascular products.

Invatec is an OEM to St. Jude’s Japanese distribution subsidiary. Sales by Invatec to St. Jude during 2006 were $9,435,744.

As if being a director on St. Jude’s board were not sufficient in of itself to safeguard this recurring revenue stream (for his own company), Messer. Widensohler finds it necessary to collect $133,000 in annual directorship fees from St Jude, too.

In December 2005, St. Jude entered into a preferred investment agreement with an unnamed, development stage medical device company. George Fazio, the President of St. Jude’s Cardiovascular Division had made an equity investment of $25,000 in the Device Company in November 2004 and had made a loan of $50,000 to the Device Company in April 2005.

Under the Investment Agreement, St. Jude has an option to acquire the Device Company at any time through January 2008 for an upfront purchase price and potential milestone payments. If the Company acquires the Device Company, Mr. Fazio could receive payment of up to approximately $322,000 at the closing, and up to an additional $245,000 if certain milestones are achieved by the Device Company following its closing.

In April 2005, St. Jude acquired Velocimed, LLC, a privately owned company that makes specialty interventional cardiology devices, for $74 million.

Paul Buckman, who served as President of St. Jude’s Cardiology Division until August 2006, was a founder and shareholder of Velocimed. At the time St. Jude purchased Velocimed, Mr. Buckman was the beneficial owner of 436,159 shares of its stock, which constituted about 1.6% of Velocimed’s total number of shares outstanding.

At the closing of the acquisition, Mr. Buckman received approximately $714,000 in consideration for his interest in Velocimed. In addition, Mr. Buckman has the potential to receive additional consideration of up to approximately $2.9 million if certain milestones are achieved.

The share price of St. Jude’s has flat-lined in the last sixteen months, as investors fled medical device makers with implantable cardiac devices (product recalls & sluggish sales) and drug-coated stents (safety issues) in their portfolios.

In the last two months, three Research Firms have upgraded their opinion of St. Jude, citing early signs of a recovery in the implantable cardiac device markets (62.2% of the Company’s $3.3 billion in sales during fiscal ’06), combined with the possibility of accelerated sales growth during the 2H:07 (new product introductions).

Year-end calendar 2007 price targets for St. Jude range from $43 per share to $50 per share, or a multiple between 24.8 times and 28.9 times Reuter’s estimates of $1.73 per share.

In our view, the catalysts for P/E multiple expansion are an ICD market recovery and St. Jude’s ability to expand its market share (about 20 percent).

A look at St. Jude’s recently filed Proxy Statement also shows that top executives seem to be making out well during these cloudy days for the Company’s common stockholders. For example, Chairman & CEO Daniel J. Starks and CFO John C. Heinmiller took home $5.8 million and $2.7 million, respectively, in salary and other incentives.

“I don't have to play by these rules or do these things...I can actually have my own kind of version.” – The Smashing Pumpkins’ lead guitarist and vocalist, Billy Corgan

Looks like insiders at St. Jude Medical must be admirers of the music of The Smashing Pumpkins.

Author David J. Phillips does not hold a financial interest in any of the companies mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

STJ 1-yr chart: