An Exciting New Technology That Could Take Pressure Off St. Jude Medical

| About: St. Jude (STJ)
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Renal denervation. This is something I had never heard about until St. Jude Medical (NYSE:STJ) mentioned it at their February analyst day after first disclosing it in late 2011 (press release). As I include STJ in my Top 20 Model Portfolio, it caught my attention a few days after the press release when on the 3rd quarter conference call (link to transcript), CEO Dan Starks (one of the $100mm men I profiled recently) said:

Another major new growth driver we are implementing is renal denervation for treatment-resistant hypertensive patients. Our first in human series for our renal denervation system already is underway. We expect to receive CE Mark and begin launching our renal denervation technology in Europe before the end of 2012. To clarify the significance of this new technology for St. Jude Medical's growth program, we estimate that as many as 1 in every 3 adults in the developed world suffers from hypertension. Approximately 25% of patients treated for hypertension do not respond to medical therapy. We estimate that if we are able to treat only 1% of adult hypertensive patients who do not respond to medical therapy, we will have a new $1 billion growth driver.

Keep in mind that today hypertension generates a direct annual cost of global medical budgets of approximately $500 billion. As with each of our other major investments, St. Jude Medical's goal is to create a new $1 billion growth franchise for the benefit of our investors. At the same time, we help make quality global healthcare more affordable.

There was only one question on the call regarding the topic, and, it seemed like I had some time to get up to speed given his description of the trial just having started.

It really caught my attention at their analyst day. There's a lot more that you can read in the transcript, but here are some key points:

So here's the way we think about the opportunity. A billion patients worldwide, 25% of those with uncontrolled hypertension. If you assume only a 4% penetration into that population, you very quickly get to a large numbers, $25 billion to $30 billion in opportunity.


So when we think about our program, it is highly differentiated. We are going to keep some of the details close to us for now. But I think I would try to put it to you this way, and maybe the easiest way to get at it is to talk about the way that it's currently done today. So when you look at other technologies and devices that are out there, you put an ablation electrode -- we'll talk now about RF ablation, you put a single electrode ablation catheter into a renal artery. You try to position it. You're looking at the fluoro, you position it. You put a curve on it. You ablate. So you ablate for a certain amount of time. And it's like, "Okay, now I've got to move it." So then you're diddling with the catheter, you've got to try to rotate it. You want to rotate it enough to make a continuous lesion. You want to be careful about creating a continuous circle of lesions, because if you create a continuous circle, you can end up with the renal artery stenosis, which is undesirable. So when you think about trying to get this done with a single electrode, it's very tedious. It's very subject to mistake catheter positioning and things of that nature.

So we're getting at it in a different way. We're getting at it with a multi-electrode catheter, the details of which we're not going to talk about today. But the concept behind this is to have a multi-electrode catheter, so there is no diddling with electrode placement. The electrodes are precisely positioned in such a way to get -- as to ablate the renal nerves all the way around the artery without creating a situation where you get renal artery stenosis. So I'm going to leave you with that thought and I'm not just going to go into more detail than that. But one of the advantages of this, is you get to a really short and simple procedure.

On 5/15, I was very surprised to see that the company received the CE Mark in Europe and is now launching the product (press release), using the name "EnligHTN". I reviewed my notes, and it's important to remember that this won't produce a big short-term financial opportunity, as the company has detailed a rather long ramp. Rather, this is a long-term driver that will likely allow investors to view STJ as more diversified.

In case you aren't familiar with the company, about 1/2 their business is related to cardiac rhythm management, which includes old-school pace-makers and new-school implantable cardioverter defibrillators (ICDs). The business has been under pressure due to concerns over doctors implanting unnecessarily, but STJ in particular has had a cloud over it due to a quality issue with its Riata leads (no longer being sold).

Other parts of the STJ business are very exciting, including its neuromodulation unit and atrial fibrillation unit, which have been growing strongly, and even its cardiovascular unit which will participate in the new minimally-invasive heart transcatheter valves and is seeing impressive growth with its OCT and FFR technologies used to help evaluate the need for stents and to help place them.

In my view, STJ is very cheap, but the Riata overhang has been weighing on the company. They just got through a big industry society meeting relatively unscathed, which led to upgrades by Morgan, Stanley and Goldman, Sachs. So, a big new driver added to what I view as many other advances in their pipeline hitting the market in the next two years could help get the stock out of its recent funk.

Now, STJ isn't the first to market, and they won't own this market, but reducing hypertension for those resistant to drug therapy seems like a massive opportunity. Medtronic (NYSE:MDT) is first out with Symplicity, which they picked up when they acquired Ardian in 2011. The product, which is single-catheter based, has been on the market in Europe since 2008 and in a Phase 3 FDA trial approved last July. More recently, Covidien (COV) just bought Maya Medical for $230mm in order to gain its OneShot system, which already has its CE Mark. It appears to be an improvement of Medtronic's first-generation product too, and I am looking forward to learning more details after their presentation at the EuroPCR meeting today. There are several privately-held companies too, including Vessix Vascular and ReCor Medical.

I think that STJ historically has done a great job of being a fast-follower, taking a new idea and coming up with great enhancements. In this case, the company has tremendous ablation technology (A-Fib), and it appears to have extended beyond the single-electrode technology of MDT. I look forward to learning more about this new technology from STJ and from others in the field. I find STJ stock to be extremely cheap at about 11PE, and this could prove to be one of several catalysts that could get it back towards its historically higher valuation (21 median PE last decade). I believe the stock can get to 16PE over the next year, which would suggest 50% upside to the current price.

Disclosure: Long STJ in one or more models at