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There aren't too many medical device companies out there with legitimately exciting pipelines, but St. Jude Medical (STJ) is one of them. With intriguing products in development across almost all of its operational groups, St. Jude could be looking at a significant revenue growth opportunity in the next three to five years. That said, ongoing noise and worry around the company's problematic Riata leads raises the prospect of share erosion in ICDs. For investors who can live with the risk of being wrong, St. Jude Medical looks like a pretty interesting stock today.

Good First Quarter Results

St. Jude started the year on a good note, with a small beat-and-raise quarter. Revenue rose 2% in constant currency terms, with cardiac rhythm management (CRM) down 3%, but atrial fibrilation up 14% and neuromodulation up 12%. Cardiology sales rose 3%.

Margins were also okay. Gross margin improved a bit due to new product introductions, with operating income rise 3% for the quarter.

CRM - How Bad Will The Riata Fallout Be?

St. Jude shares have been batted about recently in large part because of an ongoing controversy about the quality (the safety, really) of their ICD leads. These are the parts of the device that connect the battery-powered sensor and generator to the heart, and St. Jude's Riata have proven problematic. Some have basically come apart in the body, while others have created internal electrical shorts that have led to patient deaths.

Now the issue is stretching into whether or not St. Jude's new Durata leads (which share at least some key design features with Riata) will experience similar problems. This has a very real potential impact on sales, as it could really undermine what would have otherwise been potential share gains (largely from Boston Scientific (BSX)) on the basis of a new (and so far exclusive) quadripolar ICD system.

Unfortunately, St. Jude hasn't handled this the best. While pointing out differences in designs and clean data so far from Durata studies, the company has also publicly criticized those addressing the Riata issues and claimed that Medtronic (MDT) leads have had more problems than reported.

At this point, I'm cautiously optimistic that this will blow over. So far it seems that many referring docs are worried about the issue, but relatively willing to accept the explanation that the Durata is different and has a clean (or at least substantially cleaner) safety profile so far. With only a 2% decline in ICD sales this quarter, it looks like St. Jude is still gaining share, though we'll know more when Boston Scientific reports later this week.

Multiple Exciting Developments On The Way

I don't want to seem to wave away the risk of the Riata/Durata issue, but the fact remains that St. Jude has some pretty interesting projects in its pipeline and these are more likely to be the dominant story in the coming years.

For starters, data continues to build on the value of FFR in cardiac therapy (evaluating intravascular lesions and guiding treatment decisions). St. Jude will share the upside with Volcano (VOLC), but St. Jude is the leader today and could reap solid incremental revenue from greater FFR and optical coherence tomography usage in the cath lab.

St. Jude is also making progress with its cardio portfolio. The Portico transcatheter aortic valve is due to roll out in Europe later this year and offers a lot of compelling features relative to Medtronic's CoreValve and Edwards Lifescience's (EW) Sapien. It's re-sheathable, re-positionable, and offers a cuff design that should reduce leakage. While St. Jude will be third to market, I wouldn't write them off as a serious contender.

St. Jude is also moving ahead with a percutaneous mitral valve product that may see the market late in 2013 or in 2014, though there is minimal information on it today.

Like most other companies with businesses in cardiology, St. Jude is moving ahead with a renal denervation product. St. Jude's, (called EnligHTN) is a different approach, using a multi-electrode catheter. This is likely to be a crowded market, with Medtronic probably out first and Boston Scientific and Johnson & Johnson (JNJ) working on approaches as well (with more likely to come). With potential revenue in the billions of dollars, though, a winning device could be a definite growth-booster to St. Jude.

Last and not least are products for the stroke (PFO) and atrial fibrilation markets. While there is a risk that new anti-coagulants (including JNJ's Xarelto, Boehringer's Pradaxa, and Pfizer's (PFE) Eliquis) will reduce the number of patients seeking advanced intervention, this remains a potentially lucrative market for the right device.

The Bottom Line

At this point, I'm quite tempted to take advantage of the Riata worries and buy St. Jude shares. True, there is a risk that this issue gets even worse, and bad data on Durata would push the shares even lower, but I'm confident that St. Jude can move past this issue.

With relatively modest forward growth assumptions (about 7% free cash flow growth), St. Jude shares look cheap below $50. Often under-estimated against larger rivals like Medtronic, St. Jude has proven that it can more than hold its own and the relative value in these shares looks interesting today.

Sources:

investors.sjm.com/phoenix.zhtml?c=73836&...

blogs.theheart.org/trials-and-fibrillati...

m.startribune.com/news/?id=146888795&c=y

Source: St. Jude Offers Undervalued Growth And Overstated Risk