St. Jude Medical (STJ) Michael Rousseau on Q3 2016 Results - Earnings Call Transcript

| About: St. Jude (STJ)

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

Q3 2016 Earnings Conference Call

October 19, 2016, 08:00 AM ET

Executives

Michael Rousseau - President and Chief Executive Officer

Donald Zurbay - Vice President, Finance and Chief Financial Officer

Analysts

Operator

Welcome to the St. Jude Medical third 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 the 10-Q for fiscal quarter ended July 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 the 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 a 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 Mike Rousseau.

Michael Rousseau

Thank you. Welcome to the St. Jude Medical third 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 third quarter of 2016 and then I’ll provide additional comments.

As a reminder, given the proposed merger agreement with Abbott announced on April 28, 2016, we withdrew our 2016 financial guidance, and we will not be taking questions following our prepared remarks.

Go ahead, Don.

Thank you, Mike. Earlier this morning, we issued a press release containing our third quarter 2016 financial results as well as a schedule detailing reported and comparable constant currency sales results by product category. 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 $1.499 billion, up 2% from the third quarter of last year. Favorable foreign currency translations increased this quarter’s sales by approximately $5 million. During the third quarter, we recognized $74 million or $0.26 per share in net after-tax charges, primarily related to amortization of intangible assets, product field action costs, and litigation costs, and acquisition-related costs.

For further information regarding these items, please refer to details provided in our press release. Comments during this call referencing third quarter results will be exclusive of these items.

Adjusted earnings per share were $0.99 for the third quarter of 2016 compared to adjusted EPS of $0.97 in the third quarter of 2015. We estimate that on a constant currency basis, third quarter adjusted earnings per share increased 5%.

For the third quarter, total heart failure sales were $351 million, down 3% from last year's third quarter. Sales results reflect the impact of US CRM sales weakness on our CRT product segment, partially offset by strong growth in LVAD sales.

Atrial fibrillation, or AF, product sales for the third quarter totaled $316 million, up 12%. Our worldwide AF business again demonstrated strong growth, driven by continued global adoption of our new ablation catheter portfolio and initial launch of Ensite Precision in European markets.

Total sales of neuromodulation products in the third quarter of 2016 were $141 million, up approximately 17% as we continue to see the benefits of our comprehensive product portfolio to treat chronic pain through BurstDR, dorsal root ganglion or DRG, and radiofrequency ablation or RFA.

Total traditional CRM sales for the third quarter of 2016 were $378 million, down 7%. Sales results were largely driven by weakness in the US, which declined primarily due to MRI product gaps in both our low-voltage and ICD product segments.

Total sales of cardiovascular products for the third quarter of 2016 were $313 million, up 7%, driven by continued strong growth of our Portico Transcatheter valves in Europe as well as over 30% growth in our optical coherence tomography or OCT platform.

Turning to the income statement, the gross profit margin during the third quarter was 68.7%, down 80 basis points from the third quarter of 2015, primarily due to a decline of 100 basis points related to the negative impact of currency. Additionally, there was a 50 basis point decline related to the continued weakness in our higher-margin US 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 third quarter SG&A expenses were 31% of net sales, a 40 basis point improvement from third quarter of 2015. Research and development expenses in the third quarter were 12.2% of net sales. Other expense was $41 million in the third quarter, primarily driven by interest expense on our outstanding debt, and our effective income tax rate for the third quarter was 16.1%.

I will now turn it back to Mike.

Michael Rousseau

Thank you, Don, and thank you all for joining us this morning. As you heard from Don, we delivered 2% topline growth in the third quarter, which was in line with Wall Street estimates. It’s important to understand the while in line, 2% doesn't capture all of the areas where our business excelled this quarter. We view our 8% comparable constant currency growth in international markets during the quarter as a positive signal that where we have a complete portfolio of approved innovative products, we can deliver top-tier growth. We also continue to face challenges, particularly in US CRM growth where we're waiting on key MRI product approvals.

Our strategy of surrounding disease states with innovation continues to demonstrate strong results as evidenced by our performance in atrial fibrillation and neuromodulation, in particular. In recent months, we have secured a number of important product approvals across our portfolio that will help us generate future growth. The approval of our exclusive BurstDR stimulation in the US will help us continue to offer the industry's broadest range of therapies for patients with chronic pain.

Approvals in the US and Europe for Infinity Deep Brain Stimulation system will help us bring a new option to physicians managing patients with movement disorders.

We expect additional product approvals during the fourth quarter to drive further sales growth in 2017. These include FDA approval for our MRI-safe pacemakers and our Ensite Precision Mapping system. And, in Europe, we expect to receive approval for our next-generation Confirm Rx Implantable Cardiac Monitor technology before the end of the year.

Our results this quarter, particularly our international sales performance, coupled with our recent and upcoming product launches reinforce our confidence that we are well-positioned to accelerate sales on a global basis.

Starting with our heart failure business, we continue to view ourselves as having a clear competitive advantage in heart failure with the most comprehensive portfolio of medical device solutions in the world.

According to the American Heart Association, there will be 870,000 new cases annually of heart failure in the US alone. This is a large market and our investment in this space illustrates our commitment to finding medical device solutions to help manage this global epidemic disease.

In the third quarter, LVAD sales grew approximately 10% on a global basis with strong double-digit growth in international markets due to the continued clinical acceptance of HeartMate III. We are pleased that we have been able to continue capturing significant share in international markets and expect the HeartMate 3 US IDE short-term data presentation at the American Heart Association meeting in November.

Our CardioMEMS heart failure system remains the only FDA-approved pulmonary artery pressure monitor proven to significantly reduce heart failure, hospital admissions, and improve quality of life in New York Heart Association Class III patients. As we have previously discussed, we have filed for national coverage determination with CMS and are waiting formal acceptance of our submission. The clinical and economic evidence supporting CardioMEMS continues to grow and we are committed to working with payers, agencies, and medical societies to establish reimbursement and clear guidelines for this important technology.

Moving to our global AF business, we continue to see double-digit growth in a strong market driven by ongoing solid global growth in TactiCath and FlexAbility ablation catheters and the Ensite Precision Mapping system in Europe.

Our comprehensive portfolio remains a key differentiator for St. Jude Medical and demonstrates our core strength in surrounding the disease state. We have the most innovative and complete solutions across multiple product segments in AF, and the success of our ablation catheter business and our new Ensite Precision Cardiac Mapping system continues to capture market share.

Similar to previous quarters, our advanced mapping portfolio grew approximately 20% in international markets as compared to the US sales declining low-single digits where we continue to wait FDA approval. As we announced earlier this month, after a successful limited launch in Europe of our Ensite Precision Mapping system, we are now in a full launch across Europe and continue to expect FDA approval in the US this year.

We also started our Amulet US IDE trial for patients in need of left atrial appendage closure to reduce their risk of stroke with our next-generation AMPLATZER Amulet device. This device is the market leader in Europe and was developed to provide physicians additional treatment options to improve patient care. The trial will take us one step closer to bringing this important technology to patients in the US and is off to a good start as we initiate clinical sites and begin enrolling patients.

We also expect to announce results from the Amulet observational clinical study in a late-breaking clinical trial session in the Main Arena at the Transcatheter Cardiovascular Therapeutics or TCT conference on November 2. This study enrolled more than 800 patients and will be a good proxy for our experience in Europe to date.

Finally, we continue to expect CE Mark approval of our Confirm Rx insertable cardiac monitor in Europe this quarter and also expect to file for FDA approval this quarter.

I’d like to now turn to our neuromodulation business, which has never been stronger, giving us an unprecedented opportunity to bring leading innovation to chronic pain patients as well as those suffering from movement disorders. As illustrated by third quarter global constant currency growth of 17%, we have now clearly established ourselves as the industry technology leader in this space with the broadest portfolio of solutions and latest innovation in deep brain stimulation or DBS, spinal cord stimulation or SCS, and DRG therapies.

This marks the eighth consecutive quarter in which we have taken share with our leading portfolio of new products in new markets. With our portfolio, our goal is to become the market share leader in this space.

The launch of our Axium DRG system, which is designed for focal pain conditions, often characterized by nerve injury that can be debilitating to patients, continues to receive positive physician feedback with successful training, patient trialing, and strong clinical outcomes. We believe DRG will become the standard of care for difficult-to-treat chronic pain in specific areas of the lower body such as the foot, knee, hip, or groin. Further, we remain confident that DRG is a market expansion story.

The fourth quarter is expected to be a significant quarter for our neuromodulation franchise as we launched the industry's first BurstDR stimulator in the US, a new superior SCS option for patients suffering from chronic pain, as well as the industry's first directional lead for DBS. Earlier this month, we received approval and a notable superiority claim from FDA for our unique BurstDR therapy for chronic pain. We’re pleased to offer patients a variety of device options with our BurstDR stimulation mode, including our recharge-free Proclaim device and our rechargeable Prodigy device. The option of our Proclaim recharge-free device is resonating well with patients as our US mix of these devices was above 60% in the third quarter. The approval of BurstDR also enables us to upgrade devices in patients previously receiving rechargeable Protégé and recharge-free Proclaim devices, giving additional patients access to this important innovative therapy.

Another technology worth mentioning is our Invisible Trial System with the industry's first Bluetooth-enabled system and first on-body trial system. During the third quarter, in the US, over 90% of our trial systems utilized the Invisible Trial System. Similar to other markets where BurstDR has been approved, including Europe and Australia, we expect BurstDR-enabled devices to take share in the approximate $1.2 billion chronic pain market in the US.

We also received FDA approval for Infinity DBS system with directional lead. The $300 million US DBS market, which makes up more than half of the $500 million global DBS market, is dominated by only one competitor with outdated technology. Our innovative Infinity system features a number of firsts, including an Apple iPad mini programming system, Bluetooth wireless communication, and a directional lead to steer therapy to avoid stimulating undesirable areas, which is an industry first in the US market. We hear from our customers that directional leads should quickly become the standard of care for DBS implants. This new Infinity system represents a major step forward in our DBS product portfolio as it provides patients the best possible experience with their therapy, while also helping physicians manage their patients more efficiently and effectively.

Turning to our cardiovascular business, we were pleased to return above mid-single-digit growth. Our game-changing OCT technology and TAVR program were bright spots this quarter, with OCT growing over 30% on a global basis and TAVR taking share in Europe as we continue to penetrate new accounts with our Portico valve.

Specifically, on OCT, we expect this technology to be a significant contributor to growth in the fourth quarter in 2017 as clinical evidence continues to build. New physician reimbursement in the US begins on January 1, 2017 and physicians increase utilization.

In addition, our recently launched stent optimization software provides actionable information that allows physicians to better plan stent placement and evaluate procedural outcomes. We believe the clinical community will increasingly transition away from IVus to OCT. In fact, the first late-breaking clinical trial presentation at TCT is the data from our ILUMIEN III trial, which evaluated image-guided stent placement with OCT versus IVus versus angiography. We believe this will be an important presentation for interventional cardiologist. We also expect that the emergence of a bio-absorbable stent in the market, which is best visualized with OCT technology, will be another driver of growth for OCT.

Earlier this month, we received FDA approval of our latest FFR wire, PressureWire X, with excellent durability and wireless connectivity. The OCT and FFR market make up an approximate $450 million global market with St. Jude Medical being the clear market leader. We plan to continue to drive PCI optimization with technology development and a legacy of robust clinical data, providing strong clinical and economic outcomes.

With a positive FDA panel behind us, we still expect FDA approval of the AMPLATZER PFO occluder before year-end. Upon approval, this will be the first FDA-approved PFO occluder on the market in the US and 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.

At TCT, final long-term outcomes from the RESPECT trial will be presented in the Main Arena on November 1. This data will provide new insight on the longest-term follow-up in the most comprehensive PFO stroke trial to date. We expect it to provide important new information regarding the clinical effectiveness of PFO closure and it’s important as a compelling treatment option for patients with a history of stroke and a PFO.

Before I discuss our traditional CRM sales results, I’d like to address our global medical device advisory announced last week concerning a subset of St. Jude Medical’s ICD and CRT-D devices. This advisory is based on the potential for the impacted devices to experience premature battery depletion as a result of short circuits associated with the formation of lithium deposits.

While the risk of premature battery depletion is low, 0.21%, we have partnered with regulatory agencies, leading experts and our medical advisory board to ensure physicians have the information they need to best care for their patients.

Our highest priority is the safety of patients depending on our life-sustaining technology. We build safeguards such as vibratory alerts into our devices and have focused on remote monitoring because of its proven capability as an early warning indicator for physicians of their patients’ health overall as well as their device health.

All of our ICD and CRT-D devices are designed to deliver a vibratory alert when the battery is nearing its end of life. This means that our patients will experience several vibrating sensations in their chest directly from the device as an indicator for them to contact their physicians immediately to be evaluated for potential device replacement.

Situations like this advisory significantly underscores yet another important safety benefit of remote monitoring. There is already long-term data, which was presented at HRS 2015 as a late-breaking clinical trial that found patients with cardiac devices use remote monitoring have significantly fewer hospitalizations than patients who do not use or adhere with the technology. The findings were a result of a five-year study, one of the largest to date, on remote monitoring technologies.

Turning back to our results, similar to previous quarters, our traditional CRM franchise remains challenged in the US, primarily due to the fact that we do not have an MRI safe device approved. We believe that our challenges in this area will resolve once we receive FDA approval of our MRI safe peacemakers, which we continue to expect in the fourth quarter of 2016. We also expect to file our submission seeking FDA approval for a high-voltage MRI in the fourth quarter, keeping us on track for an approval in the first half of 2017.

Global traditional CRM sales declined 7% on a comparable constant currency basis, with the US declining approximately 17%. As we said last quarter, our experience in international markets shows that once we receive approval for these devices, our share returns quickly.

International sales grew approximately 2% constant currency on the strength of ICD market share capture in Japan due to the recent launch of our MRI-safe ICD. With Japan traditional ICDs growing over 40% constant currency year-over-year in the quarter, it is this experience, in addition to others, that give us confidence our share will return once we receive approval of MRI-safe devices in the US.

We continue to view ourselves as best positioned to serve the EP with our diverse product portfolio across CRM and AF. This position will only strengthen with the approval of MRI devices in the US as well as with the approval of our next generation Confirm Rx insertable cardiac monitor and Ensite Precision Mapping system.

Next, I’d like to note that we continue to move forward as planned with the Abbott transaction and remain on track to close by the end of the year. To facilitate regulatory approvals of the transaction globally, we announced earlier this week that we will be divesting our Angio-Seal and FemoSeal vascular closure devices. We would expect these transactions to close in conjunction with the broader Abbott acquisition. Till that time, St. Jude Medical continues to manufacture and sell these devices.

Additionally, our shareholder vote is scheduled for October 26. We consider these both key milestones in the process and are pleased with the overall progress we're making as we prepare for a seamless integration.

We have identified the senior leadership team that will lead the newly combined organization and I’m honored to continue leading such an exceptional team and business. We believe our pending transaction represents the right path forward for our company and shareholders and I'm excited about our collective vision to create the world's premier medical device company.

Before concluding today's call, I’ll briefly address recent speculation about commentary from Muddy Waters and MedSec in the marketplace. We continue to believe that their allegations against St. Jude Medical products are without merit and are motivated to drive down our company stock at the expense of shareholders for their own financial gain. They are engaged in, and we expect them to continue to engage in, tactics to sensationalize, confuse and misrepresent, all towards achieving their own personal financial goals. Importantly, their self-interested attempts to mislead doctors and patients demonstrates a total disregard for the patients whose lives depend on our devices. Patients, physicians and caregivers deserve better and certainly our shareholders deserve better.

To be clear, we take the cybersecurity of our devices very seriously. We have spent years working with third-party experts and researchers in the space, so that we can assess potential vulnerabilities, prioritize real-world threat levels, and then develop appropriate safeguards as part of our product development process and lifecycle.

For example, we have released seven different security Merlin@home since 2013. We have also worked with regulatory and government agencies to help develop and implement standards to improve cybersecurity. This has been our commitment long before Muddy Waters and MedSec showed up and will be our commitment long after they have moved on.

So while we are being falsely portrayed as an organization that does not take this seriously, the facts are to the contrary. As always, the safety and security of patients will continue to be our first priority.

In conclusion, as an organization, we are committed to accelerating growth through innovation that improves outcomes and reduces costs along the patient care continuum. Our results this quarter, particularly across all categories internationally and in our US neuromodulation, atrial fibrillation, and cardiovascular product categories, reflect our ability to execute on our strategic plan. It is our goal to continue to lead with innovation and return St. Jude Medical to a top-tier growth company.

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 US 855-859-2056; and international, 404-537-3406; and enter PIN number 93466366.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time.

Question-and-Answer Session

Q -

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