St. Jude Medical (STJ) Michael T. Rousseau on Q2 2016 Results - Earnings Call Transcript

| About: St. Jude (STJ)

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

Q2 2016 Earnings Call

July 20, 2016 8:00 am ET

Executives

Michael T. Rousseau - President, Chief Executive Officer & Director

Donald J. Zurbay - Vice President-Finance & Chief Financial Officer

Operator

Welcome to the St. Jude Medical Second Quarter 2016 Earnings Conference Call. Hosting the call today is Mike Rousseau, President and Chief Executive Officer of St. Jude Medical.

Before we begin, let me remind you that some of the statements made during this conference call may be considered forward-looking statements. The company's 10-K for fiscal year 2015 and 10-Q for the fiscal quarter ended April 2, 2016, identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K and 10-Q, as well as the company's other SEC filings are available through the company or online.

During this call, the company may use non-GAAP financial measures to provide information pertinent to ongoing business performance. Investors should consider non-GAAP measures in addition to and not as a substitute for financial performance measures prepared in accordance with GAAP. For reconciliation of our non-GAAP financial measures to our GAAP results, please visit the Investor Relations portion of our website, investors.sjm.com. At this time, all participants have been placed in a listen-only mode.

It is now my pleasure to turn the floor over to Mr. Mike Rousseau.

Michael T. Rousseau - President, Chief Executive Officer & Director

Thank you. Welcome to the St. Jude Medical Second Quarter 2016 Earnings Conference Call. Our plan this morning is for Don Zurbay, Chief Financial Officer, to provide a review of our financial results for the second quarter of 2016. And then, I will provide additional comments. Given the proposed merger agreement with Abbott announced on April 28, 2016, we have decided to withdraw our 2016 financial guidance and will not be taking questions following our prepared remarks.

Go ahead, Don.

Donald J. Zurbay - Vice President-Finance & Chief Financial Officer

Thank you, Mike. Earlier this morning, we issued a press release containing our second quarter 2016 financial results, as well as a schedule detailing reported and comparable constant currency sales results by business area. This press release is available on the St. Jude Medical website. For participants on today's call, please note that all references to sales growth rates, unless otherwise noted, are on a comparable, constant currency basis, which includes Thoratec sales in both comparable years and are adjusted for the impact of currency. Sales for the quarter totaled $1.562 billion, up 2% from the second quarter of last year. Unfavorable foreign currency translations decreased this quarter's sales by approximately $6 million.

During the second quarter, we recognized $67 million or $0.23 per share in net after tax special charges, acquisition-related costs, and amortization expense. For further information regarding these items, please refer to details provided in our press release. Comments during this call referencing second quarter results will be exclusive of these items. Adjusted earnings per share were $1.06 for the second quarter of 2016, compared to adjusted EPS of $1.03 in the second quarter of 2015. We estimate that on a constant currency basis, second quarter adjusted earnings per share increased 7%.

Before we discuss our second quarter 2016 sales results by product category, let me provide a few comments about currency exchange rates. As discussed on prior calls, the two most significant currencies influencing St. Jude Medical's operations are the euro and the yen. In preparing our sales and earnings guidance for the second quarter 2016, we used exchange rates which assumed that each euro would translate into about $1.11 to $1.16, and for the yen each ¥106 to ¥111 would translate into $1. For the second quarter, the actual average exchange rates for the euro and the yen were consistent with these ranges.

I will now walk through second quarter results in our new product categories: heart failure, atrial fibrillation, neuromodulation, cardiovascular, and traditional cardiac rhythm management. For the second quarter, total heart failure sales were $384 million, down 1% from last year's second quarter. Sales results reflect strong global growth in LVAD sales, offset by the impact of U.S. CRM sales weakness in our CRT product segment. Atrial fibrillation or AF product sales for the second quarter totaled $324 million, up 13%. Our worldwide AF business again demonstrated strong growth with the continued adoption of our ablation catheter portfolio and our initial launch of EnSite Precision in European markets.

Total sales of neuromodulation products in the second quarter of 2016 were $140 million, up approximately 20%, as we continue to take share on a global basis with the most comprehensive neuromodulation portfolio in the market. Total traditional CRM sales for the second quarter of 2016 were $395 million, down 7%. Sales results were largely driven by weakness in the U.S., which declined primarily due to MRI product gaps in both our low voltage and ICD product segments. Total sales of cardiovascular products for the second quarter of 2016 were $319 million, up 2%.

Turning to the income statement, the gross profit margin during the second quarter was 69.3%, down 100 basis points from the second quarter of 2015, primarily due to a decline of 90 basis points related to the negative impact of currency. Additionally, there was a 60 basis point decline related to the continued weakness in our higher-margin U.S. CRM business. These negative factors were partially offset by the year-over-year benefit of the repeal of the medical device excise tax, which improved our gross profit margin in the quarter by 60 basis points.

Our second quarter SG&A expenses were 31.2% of net sales, a 130 basis point improvement from the second quarter of 2015. Research and development expenses in the second quarter were 12.3% of net sales. Other expense was $43 million in the second quarter, primarily driven by interest expense on our outstanding debt. And our effective income tax rate for the second quarter was 15.3%.

I will now turn it back to Mike.

Michael T. Rousseau - President, Chief Executive Officer & Director

Thank you, Don. I appreciate everyone joining us this morning. As you heard, second quarter results were in line with previously issued guidance. Our momentum continues to build across our business, with numerous product approvals and launches.

In international markets, where we generally have more products available for sale, we grew 7% on a comparable, constant currency basis. The strong performance of our international business gives us confidence that where we have a full portfolio of emerging technologies, including MRI-safe devices, HeartMate 3, EnSite Precision, and our proprietary Burst technology, we can deliver the top tier of growth that we expect.

As an organization, we remain focused on our strategic plan of surrounding disease states and delivering the results we committed to earlier this year. Our results this quarter, particularly in our international business, continue to give us confidence that our strategy will bring us back to top tier growth. Starting with our heart failure portfolio, through our strategic acquisitions and organic growth, we have created the broadest and most innovative heart failure medical device portfolio in the world. Our investment in this space illustrates our commitment to work with governments, hospitals and physicians on solutions for this global, expensive, epidemic disease.

In the second quarter, we launched MultiPoint Pacing or MPP in the U.S., and are executing on our contracting strategy for this breakthrough treatment option for CRT patients who are not responsive to other pacing options. The clinical evidence for MPP is growing, with data showing more improved acute and chronic hemodynamic response, which includes increased injection fraction rates and improved reverse modeling.

We also have evidence demonstrating improved clinical heart failure response rates. MPP adoption increased throughout the quarter. And initial feedback in the U.S. has been positive, with electrophysiologist understanding the need for this technology to help reduce non-responder rates. Non-responder rates account for about one-third of the total population of patients receiving CRT therapy.

We are also excited about recent and upcoming launches in the U.S., Europe, and Japan for our SyncAV CRT software algorithm, which automatically adjusts pacing based on real-time changes in a patient's cardiac condition. This technology provides yet another option for patients who are not responsive to traditional pacing solutions and also helps physicians further improve treatment of patients who have responded positively to traditional CRT. We view this expanded portfolio as establishing a new standard of care in CRT.

Our CardioMEMS Heart Failure System is the cornerstone of our heart failure portfolio, and we are committed to ensuring there is established reimbursement and clear guidelines for this important technology. Recently, the European Society of Cardiology included CardioMEMS in its issued guidelines as directed therapy management and as a monitoring tool for heart failure patients. We view this recognition of the clinical importance of CardioMEMS by a leading medical society as a sign of the growing support for this technology. As previously mentioned, we have also filed for a national coverage determination with CMS and are awaiting formal acceptance of our submission from the agency.

In the LVAD space, we have completed the integration of Thoratec and are pleased with the results and strong adoption of HeartMate 3 by the clinical community. Since the launch of HeartMate 3 last October, feedback from customers continues to reflect the positive clinical outcomes experienced in the CE Mark trial. We continue to capture share in international markets and are pleased with the approximately 50% comparable constant currency growth of our international LVAD business.

In addition to our strong results, the clinical evidence surrounding HeartMate 3 continues to grow. The international society for heart and lung transplant [International Society for Heart and Lung Transplantation] held its annual meeting in April, featuring very positive data on both HeartMate 2 and 3, including the HeartMate 3 CE Mark 12-month data and real world experience in the Kazakhstan study. The road map study also showed that 48% of patients at two years improved at least one New York Heart Association class compared to only 13% in the optimal medical management group. Additionally, 30-day mortality within the LVAD group was only 1%, which is equivalent to optimal medical management. Looking ahead, we expect to present the HeartMate 3 U.S. IDE short-term data before the end of this year.

Moving to our global AF business, it grew by 13%, driven by continued success of our ablation catheter business and a limited European launch of our new EnSite Precision cardiac mapping system. Our comprehensive AF product portfolio is a key differentiator for St. Jude Medical. It demonstrates our core strength in surrounding a disease state with the most innovative and complete solution across multiple product segments, such as access, guidance, diagnostics, visualization, recording, mapping, navigation, and advanced ablation.

AF remains one of the most attractive med tech markets, and we believe we are well positioned for future growth with EnSite Precision. We are encouraged by the results to-date of our launch in Europe, with over 3,000 cases already performed and continued positive feedback. Our advanced mapping portfolio grew approximately 20% constant currency in Europe with EnSite Precision, as compared to essentially flat growth in the U.S., where we await approval. We continue to expect U.S. approval and launch of EnSite Precision in the second half of 2016.

I will now turn to our neuromodulation business. We continue to capture share in our neuromodulation business and grow at above market rates, as illustrated by second quarter global constant currency growth of 20%. This is the seventh consecutive quarter in which we have taken share. Since the U.S. launch of our DRG system, we have received positive feedback from our customers, with the field experiencing exceptional outcomes and trialing success during our targeted rollout phase.

DRG is designed for focal pain conditions often characterized by nerve injury, and it can be debilitating to patients. Our early, real world experience confirm our findings in the ACCURATE IDE study, which demonstrated sustained and superior pain relief over tonic stimulation. We view DRG as a market expansion story and part of our larger strategy to surround chronic pain.

Another bright spot in our neuromodulation portfolio is Burst technology. We continue to see strong enthusiasm in international markets and still expect the FDA approval in the second half of 2016. We are also encouraged by the broader adoption of our advanced SCS therapies, and have seen a shift to our non-rechargeable Prodigy platform, which now makes up approximately 50% of our U.S. mix.

Although still early, we are hearing very positive feedback on the launch of our new Infinity Deep Brain Stimulation or DBS System and directional lead in Europe. This system is available in maintenance-free and long-lasting, recharge-free systems. Similar to our SCS systems, the Infinity platform is upgradeable, which provides patients the potential to access new therapy advances as they are approved. The U.S. market makes up more than half of the $500 million global DBS market with only one competitor. We are very excited about our innovation here and remain on track for U.S. approval in the second half of 2016. With the most comprehensive neuromodulation technology, we expect to remain share takers for the foreseeable future.

In our cardiovascular portfolio, we had several important regulatory and sales milestones that support our ability to execute on our innovation strategy, bringing to market new technologies to take share while supporting market growth in our more traditional business segments. We were pleased by the positive outcome of the FDA PFO panel in May. The advisory panel responded favorably to the technology and clinical results, voting that the safety, effectiveness, and benefits of the AMPLATZER PFO Occluder outweigh potential risk.

This device presents an important treatment option for patients with a PFO who have suffered a stroke of unknown cause and live at risk and in fear of suffering additional strokes. The discussion during the meeting and resulting vote is an important step toward approval of the technology in the U.S. We look forward to additional discussions with the FDA in the coming months and expect approval in the second half of this year.

Our Portico sales during the quarter were strong, which supports our belief that we can take share in the TAVR market in Europe. In the U.S., we continue to accelerate enrollment in our IDE study and recently received approval to add global sites. Implanting physicians tell us that our TAVR device is the easiest to use and they are impressed with our device retrievability and low pacemaker rate. Our success during the quarter gives us confidence that our TAVR program will drive growth in the future.

Building on our foundation of leadership in heart valve technology, we launched our next-generation Trifecta with Glide Technology in Europe and the U.S. during the quarter and are executing on our launch plan. We are in the middle of a successful product launch in Europe and expect to see similar results in the U.S. as we expand the rollout. While surgical valves as a segment is declining, we view it as an important part of our comprehensive strategy of surrounding disease states in general and valvular heart disease more specifically.

Our game-changing OCT technology was a bright spot in the quarter, growing nearly 20% on a constant currency basis. These results were driven by our new OPTIS Mobile System with angiographic co-registration and enhanced stent optimization software. OPTIS Mobile offers physicians an efficient way to optimize catheter-based procedures for the treatment of vascular disease by combining diagnostic tools designed to improve patient outcomes into one portable device. The imaging advancements offered with the OPTIS Mobile System allow physicians to clearly visualize complex cardiac anatomy and evaluate how to best proceed during percutaneous coronary interventions, or PCI.

In addition, we have received positive physician feedback on our OPTIS Metallic Stent Optimization Software, which is available in some international markets and delivers tools to further improve stent sizing and placement while providing deployment and placement assessment for drug-eluting and bare-metal stents. Our PCI Optimization business grew approximately 9% constant currency during the quarter, which gives us confidence that we are focused on the right markets with the right technology to generate strong growth for the foreseeable future.

While we continue to see pressure in our more mature cardiovascular businesses, we remain confident that we are focused on outcomes-based technologies in the appropriate growth areas, such as PCI Optimization, TAVR, and percutaneous heart pumps, to help drive growth back to the mid-single digits on an annual basis.

Moving to our traditional CRM business, similar to the past several quarters, our U.S. CRM business was challenged, primarily due to the MRI-safe product gap in both low- and high-voltage devices. We remain confident that this issue is transient and will resolve itself once we receive FDA approval of our MRI-safe pacemakers and ICDs, which we continue to expect in the second half of 2016 and the first half of 2017, respectively.

As we have said in the past, our experience in international markets shows that once we receive approval for these devices, our share returns in short order. The most recent example of this was in Japan, where we received approval early this year for our MRI-safe ICD, which led to Japan ICD growth revenue of over 30% constant currency in the second quarter. It is this experience and our continued ability to gain share in Europe that give us confidence our share will return once we receive approval of MRI-safe devices in the U.S.

In the evolving healthcare landscape, it is more important than ever to be able to work with our customers to contract along the cardiovascular service line. We believe we are unrivalled in the depth and breadth of our AF, heart failure, and CRM portfolio, particularly once we receive MRI-safe labeling. We are already able to offer contracting solutions to our customers with important innovation in markets where we are improved, including MPP, SyncAV, EnSite Precision, LAA closure, Nanostim, ablation catheters, and, once approved, we look forward to including the next-generation, disruptive Confirm, an insertable cardiac monitor technology.

In fact, I think we are better positioned now than ever before to work with the electrophysiologist in every case. We look forward to bringing this technology to the U.S. in the near future to drive growth similar to what we have seen in our international markets.

Before we conclude, I would like to give a brief update on our pending transaction with Abbott. It has been about 80 days since we announced the transaction, and I've spent a lot of time with Miles White, Abbott's Chairman and CEO. I am confident that we will bring together two industry leaders with a shared passion for patients, innovation, and a strong team culture. We have established an integration team with functional area leaders from our respective organizations, working to prepare for a seamless integration after the deal closes, which we currently expect to occur by the end of 2016.

While we are still early in the process, I can share that employees are extremely excited about the opportunity for our combined organization to be even more competitive in the market. Together, we will hold number 1 or number 2 market positions across a broad range of cardiovascular diseases, as well as in diabetes, chronic pain, movement disorders, and vision care.

I thought it would be worth mentioning that since the announcement, I've had many opportunities to hear from our customers, patients, investors, and other external stakeholders that I've been extremely encouraged that the vast majority of people I've spoken with share our enthusiasm for this transaction. The strategic rationale is clear, as is our shared vision to create the world's premier medical device company. I am confident in the power of our combined organization and the significant impact we can have on helping physicians and patients around the world.

Thank you for joining us today. And with that, we will conclude the call and turn it back over to the moderator for replay information.

Operator

Today's call is being recorded and will be available for replay beginning at approximately 12 PM Eastern Time. The dial-in numbers are, for the United States, 855-859-2056, and internationally, 404-537-3406, and enter PIN number 41472560. This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!