OCTOBER 20, 2010, 2:02 P.M. ET.

St. Jude Profit Rises 25% Amid Questions on Future Growth

By JON KAMP

St. Jude Medical Inc.'s third-quarter earnings rose 25% as the company contained costs and posted a double-digit sales gain for implantable defibrillators, but the company raised questions about future growth by saying the market for heart-rhythm devices isn't expanding as fast as hoped.

St. Jude officials said they don't expect weakened growth in that $12 billion market—which includes pacemakers and defibrillators and accounts for nearly 60% of company revenue—to affect the company's growth plans. By taking market share and benefiting from prior share gains, St. Jude expects to grow faster than its competitors.

The company also highlighted several developments, from acquisitions to products in its pipeline, that could benefit sales.

But the market takes a "we'll believe it when we see it approach," said Phil Nalbone, an analyst with Wedbush Securities. And in the meantime, "their largest business, the most important business for the company, has a slower growth outlook," added Aaron Vaughn, an Edward Jones analyst.

St. Jude reported a profit of $208.4 million, or 63 cents a share, up from $166.9 million, or 48 cents a share, a year earlier. Excluding acquisition and restructuring impacts, profit rose to 72 cents from 59 cents a share.

In July, the company predicted 67 cents to 69 cents a share, while analysts surveyed by Thomson Reuters had most recently forecast earnings of 68 cents a share. Earnings were helped by tight control of selling, general and administrative expenses.

Sales grew 6.9% to $1.24 billion, slightly below analysts' forecasts.

Implantable defibrillators were the big sales driver, rising 13% to $439 million. This offset flat growth in pacemakers to push overall heart-rhythm sales up 7% to $738 million.

St. Jude has benefited from some new defibrillator products that have helped it capture market share and dodge weakening product prices, which are an ongoing concern throughout the medical-devices sector. Older products are more vulnerable to price reductions if companies offer discounts to keep selling them, while new products can fetch premiums. The devices in question provide shocks to stop potentially deadly rhythm disruptions.

While the new products are helping St. Jude for now, analysts said the company raised concerns by downgrading its overall outlook for a market it shares with Medtronic Inc. and Boston Scientific Corp. Specifically, St. Jude now expects about 3% yearly growth in the heart-rhythm market, excluding the impact of currency rates, down from a forecast of 4% to 6% growth the company backed just three months ago. Economic pressures as people lose health coverage or can't cover copayments are a factor, Chief Financial Officer John Heinmiller said in an interview.

The defibrillator business "may not be a growth driver for our competitors as they lose market share, but we expect it to continue to be a growth driver for St. Jude Medical," said Daniel Starks, St. Jude's chairman and chief executive, during the conference call.

Elsewhere at St. Jude, sales in the company's business for devices used to treat the rhythm issue atrial fibrillation rose 8%, while neuromodulation sales increased 11% and cardiovascular sales grew 4%.

The company boosted its 2010 profit target for the third time, raising it to $2.98 to $3 a share from $2.86 to $2.91.

The company also forecasted fourth-quarter earnings of 72 cents to 74 cents a share; analysts had forecasted 70 cents. The sales forecast for the quarter of $1.23 billion to $1.3 billion fell short of Wall Street's $1.31 billion forecast, however.

On Monday, St. Jude said it will acquire AGA Medical Holdings Inc. for roughly $1.08 billion in cash and stock to add products used to treat heart defects and blood-vessel issues.

—Nathan Becker and Kevin Kingsbury contributed to this article.
Write to Jon Kamp at jon.kamp@dowjones.com

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