St. Jude Medical, Inc. (STJ)

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St. Jude Medical, Inc. (STJ)

February 03, 2012 8:00 am ET

Executives

Daniel J. Starks - Chairman of the Board, Chief Executive Officer and President

Frank J. Callaghan - President of the Cardiovascular Division

Joseph James Devito - Chief Executive Officer, President, Chief Operating Officer, Director, Co-Chairman of Strategic Planning Committee, President of Protective Insurance Company, Director of Protective Insurance Company and Director of Sagamore Insurance Company

Eric Fain - President of Cardiac Rhythm Management Division

Raffaele Corbisiero -

Jane J. Song - President of Atrial Fibrillation Division

Larry Chinitz -

Denis M. Gestin - President of the International Division

Michael T. Rousseau - Group President and President of U S division

Analysts

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Brooks E. West - Piper Jaffray Companies, Research Division

David R. Lewis - Morgan Stanley, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Michael Matson - Mizuho Securities USA Inc., Research Division

Adam T. Feinstein - Barclays Capital, Research Division

Bruce M. Nudell - Crédit Suisse AG, Research Division

Unknown Analyst

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Unknwon Analyst

David H. Roman - Goldman Sachs Group Inc., Research Division

Miroslava Minkova - Leerink Swann LLC, Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

Steven M. Lichtman - Oppenheimer & Co. Inc., Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Tao Levy - Collins Stewart LLC, Research Division

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

Presentation

Daniel J. Starks

Okay. So it is the top of the hour. I'd like to welcome everyone to the St. Jude Medical 2012 Investor Conference. And I would like to say happy Go Red Day to everyone as we mark today to increase awareness of women's heart health.

For those who are participating by Internet, my name is Dan Starks. For everyone, my comments, the comments of all of the other presenters, all of our answers to questions are subject to the typical forward-looking statement disclaimer.

So our agenda today is, first, to give you the highlights of our growth program and, secondly, to do so in a concise fashion. So we will get you out of here by 1:45, and our aspiration is to overachieve that goal and get you out of here sooner. Our presentations will be tight. We will be liberal on Q&A, but our goal is to get you out of here this year significantly earlier than last year. This is in response to your feedback from last year.

So I will start with a bit of an overview then turn the podium over to my colleague, Frank Callaghan. We've indicated as a third agenda item, new growth drivers in neuromodulation, as part of our effort to stay focused on what's most impactful to our growth story in 2012. We're not going to present prepared remarks on neuromodulation, but that is not to deviate from our continued focus, our continued investment in neuromodulation. In our first Q&A panel, the President of our Neuromodulation business, Rohan Hoare, will participate and be happy to answer any questions you have about neuromodulation. After that, we'll take a 20-minute break, then we'll come right back to dig in to the cardiac rhythm management, follow it with atrial fibrillation. At about 11:45 today, we will have ready for you a buffet lunch for any of you who care to help yourselves and bring plates back in here. We'll take a very short break to facilitate gathering lunch, but really we're focused on getting you out of here earlier this year, and we're not going to take a dedicated lunch break.

So with that, let me jump into our growth program. And our starting point each year is to do a little bit of a review of our scorecard, our report card and how we did this last year. So we're never running from our history. We're always holding ourselves accountable to our history, holding ourselves accountable to our track record. So how did we do in 2011? In the first half of 2011, the year started off just great. In the second half of 2011, there were -- we were hit by significant negative developments in the greater MedTech market and also specifically in the ICD market. All of this resulted in our self-assessment being that our results in 2011 were mixed. Now for those of you who are as compulsive and detailed as we are, you already know everything on this slide. For those who may be a little more casual about following our business, the left-hand column shows you the numbers we started out with, with our guidance and our fourth quarter earnings result, our earnings conference call in 2011. The right-hand column shows where we ended up. What will jump out is the difference between our sales expectations in the cardiac rhythm management space and versus our actual results in the sales in the cardiac rhythm management space. One might recall that at this time last year, we thought the CRM market itself would grow at a low-single-digit rate. We expressed that as 2% to 4%. That didn't happen particularly in the second half of the year, there was significant deterioration in the global CRM market. We need to see the final participants' year end numbers to finalize our market model, but we estimate that the market shrank about 3% here. So that was about a 6- or 7-point difference in growth of the market at our participation in the market. Each point of change in market growth rate is worth about $30 million, so you can see that, that delta alone cost us about $200 million in our expected sales results. What also would jump out from this would be that -- but for that, there was -- we still delivered EPS within our original guidance range. And we were able to offset about half of that CRM sales shortfall. We also were able -- you could see that in the way we set our guidance a year ago, we left the opportunity for accelerated share gain from our quadripolar CRT-D program as upside to our guidance. And so you can see there were a number of conservative measures in the original guidance. We still hit the original guidance. If we had -- if we had -- if the market growth itself had been more along the lines of our expectations, you can see that we would have significantly overachieved the original guidance.

Then moving on. So that was a quick reference to EPS as delivered and sales as delivered in 2011. But what was more important from a growth story perspective is the progress we've made continued to advance our growth drivers. Because whether we -- sales came in at the expected level last year or not, the pieces and what we were focused on as a leadership team and what we were encouraging investors to focus on was the pipeline of new growth drivers. And there, we rate ourselves highly. We are making good progress toward accelerating sales growth. Our guidance in 2012 reflects an expectation of accelerated organic constant-currency sales growth. And we expect to continue to improve total sales growth rate after 2012.

So in -- this slide sets up the rest of the day. And what we'll work to do is we'll work to give you some additional confidence, some additional insights, some additional information to help you firm up your own assessment of the credibility of our sales guidance for 2012. But more importantly than that, we will work to make visible what is highly likely to improve during 2012 to give us a realistic opportunity to deliver a higher rate of sales growth in 2013 and beyond. And the 3 points here, we're assuming in our guidance this year, as we mentioned in our call last week, we're assuming continued shrinkage in the global CRM market this year. As soon as the global CRM market just stabilizes, we don't need any growth from it. As soon as it just stabilizes, that's a significant benefit to our sales growth profile. Each of the new growth drivers that already are in the market are small but growing. Their impact on our growth rate naturally accelerates here year-over-year. And then the part that's probably the most fun to talk about is the major new products that are coming into the market partly this year and partly next year that will add to the momentum that you already can see gathering.

Behind this is the topic that investors generally give us high credibility for which is our continued reduction of costs, improvements of productivity. So we don't talk about this every conference call. We don't talk about this in each of our meetings. But this continues to be an intense focus of ours. It continues to be an area where we're executing very nicely and smoothly, seamlessly. The topic of our consolidated platform in CRM is one that we used to talk about quite a little bit. And I thought it was worth resurrecting briefly this morning to just to point out that what you see in the productivity of our research and development pipeline in CRM, what you see in the innovation that we're putting into the market, for example, the quadripolar CRT-D. And then, Eric Fain will talk more about continued downsizing. He'll talk more about what we do with this quadripolar platform as it evolves in the multipoint pacing, not just quadripolar but then using the quadripolar platform for multipoint pacing and the advantages of multipoint pacing. All of this comes out of the hundreds of millions of dollars and the 8 years of development that we put into our consolidated platform. And so we have significant improvements in quality with this consolidated platform. We have significant improvement in the efficiency of our R&D. And we have significant improvements in the manufacturability of our entire high and low-voltage product line. All of which is reflected in continued strength of gross margin and opportunity to get to the second point here, which is to begin to manufacture more of our devices and cost advantage areas -- cost advantage locations. We couldn't do that with more complicated manufacturing requirements. We now can do that with the simpler manufacturing requirements of our consolidated platform. So you can see, we really have a virtuous cycle going as a result of the advances with our consolidated platform. We have a virtuous cycle going as a result of our expansion in manufacturing in cost advantage locations. And in the past, we've talked to you about our ASP implementation. Now we don't talk about ASP implementation. Now we're just leveraging the value of that infrastructure to centralize more of our operations where it makes sense and to get more synergy from the different parts of our business. All of this will get -- sets us up. So that as we start to think about 2013, we have in-hand cost reduction totaling more than $150 million. It will be reflected in various parts of our income statement. And then on the second point here of R&D as a percent of sales, keep in mind that at the beginning of 2011, we told you that we were increasing R&D as a percent of sales to support the breadth of our product development pipeline. As more of these growth drivers that we are invested in that our non-revenue generating in 2011 and will continue to be either non-revenue or minimal revenue-generating in 2012, as these new growth drivers start to contribute to sales growth, one could see that as we continue to expand investment in R&D, in future years, it will be with a reduction in R&D as a percent of sales. And so here's more leverage to the income statement without any sacrifice to investment and continued long-term growth. So we're setting ourselves up for not only maintenance of investment and product pipeline, but we're also setting ourselves up, so that in future periods, we can expect good EPS leverage.

So this is all I'm going to say about 2011, except to answer questions that you might have later on the topic. We're glad to see 2011 over. We -- during 2011 with tough conditions, we continued to focus on making sure that our long-term health was robust, and that we were positioned to win. And as a result of all of that, now we're happy to spend the rest of the day talking to you about what we've done to make ourselves well positioned to win in 2012.

So with -- I'll just touch very briefly on demographics. This is kind of a motivator to us to say that, yes, there are ASP pressures. We expect continued ASP pressures. The lemonade in that lemon is pressures are -- ASPs are as big a concern as they are because the demographics are so favorable.

So in developed markets, populations are getting older. In emerging markets, populations are getting richer. The demand side of the equation is not an issue for us. The demand is growing, and will continue to grow for years to come. In -- and the second point here, when people will ask us what's our position with international markets, what's our position with emerging markets. And we see competitors following along in the footprints that we put down quite some time ago. We already are best-in-class in our immediate peer group, in the most relevant peer group with percent of business coming from global markets outside the United States. So if 55% of our revenue comes from global markets outside the United States, we have a great outlet and great leverage of our matured technologies in emerging markets and in less developed markets as point 1. As point 2, we hear some companies as they work to sort through what does one do with the difficult healthcare reform dynamics with difficult macroeconomic pressures, what does one do with respect to developed markets. Our answer to that is developed markets are the right place to bring disruptive technology. We have disruptive technology in all 4 of our business platforms, either already starting to come into the market or coming into the market this year or coming into the market in 2013. And it's a flow of multiple disruptive technologies coming into the market, all of which we'll talk about more during the remainder of our presentations today.

That segues into what sets us apart most of all from other companies in the MedTech space is the strategic value of our portfolio, of our business mix, of the impact and likely impact of the new growth drivers that we're invested in. So we haven't done what everyone else has done. We have stayed away from spaces that some of the other companies in the space have chosen to invest in. We've made sure to focus on getting synergy across all of the parts of our business franchises. Number one, we've made sure to have a good mix of fast following on the one hand; and on the other hand, pioneering. We've made sure to have a good mix of timing with -- which parts of our growth drivers will start to bear with the sweet spot of their growth coming in 2012 and in 2013, which additional growth drivers just start to get into the market in 2012 and 2013, and really will begin to be more reflected in sales results in future period. So all of that is among the distinctions of our product portfolio versus some others in the space. And then, additionally, we've stayed away, we intended to stay away from heavy capital equipment. It's a small percent of our business. It does have a place in our business, but we have minimal exposure to capital budget restrictions. We have minimal exposure to elective procedure, variability. And we -- when we make a decision to invest, we have been very disciplined in selecting investment opportunities where we think we have a credible opportunity to become a leader in this space with all of the cost advantages of that leadership position. We've made a point to invest in technologies where we're part of the solution to the dilemma of -- with demographics as they are, how can we possibly afford to pay for healthcare for all of these people. So we'll talk more about the value of our technology as compared with the cost of technology and how it is that we're saving money to healthcare budgets, and that we have been again very focused on investing in technology that wins on the comparative effectiveness standard.

So now we'll jump right into -- that was all just kind of set up. Now I'm going to give a quick overview of what we'll spend a lot more time talking about the rest of the day. So I'm not going to belabor any one of these points. I'm going to defer to division presidents, who will belabor points in their presentations as well as the physician speakers, who have been kind enough to come and enrich the discussion today.

So here, all I'm going to tell you, this is my only slide. But on the topic of transcatheter valves and renal denervation, Frank Callaghan and others will talk quite a little bit more about this. But the main takeaway is that we're already preparing our product launch plans. So this is 2012, transcatheter valves and renal denervation. Next year, we expect to begin preparing product launch plans at about this time or a little bit later in the year for our percutaneous mitral valve repair program. Now we're still going to keep some of the details of this program confidential, but Frank Callaghan will tell you more, tell you quite a little bit more about our TMVR technology program in his prepared remarks, so that this can start to live a little bit in your thinking as compared with just the buzzwords and the acronym.

Our PressureWire technology is nearing, coming into prime time in our view with the credibility and value of this technology demonstrated to the extent it has been not only by the FAME trial, but now the FAME II trial. So anytime that you can come to customers, anytime you can come to hospital administrators, anytime you can come to national payers and prove to them that if you pay us for our PressureWire technology, we can save you 14% net of that price you're paying us. And we can help you reduce death and heart attack by 34%. What's not to like? So that's a winner under the competitive effectiveness standard. We now have thousands of patients proving the truth of what I've just told you, and now it's a question of making this technology widely available, making the clinical data widely available, going through the additional processes required to develop the markets and bring FFR technology from about an 8% penetration of PCI procedures up to where it deserves to be, which would be a standard of care in a PCI procedure. So this technology is -- our PressureWire technology is set to become a strong contributor to our growth profile, and it works right with our OCT technology. And so putting all of these together into an integrated platform and making it always there, always on technology to assess lesions, to optimize stent placement, to verify the optimal stent placement before closing the procedure. All of that is what we're now starting to put into the market here in 2012. We just received FDA clearance to begin, offering this consolidated platform in the fourth quarter of 2011. You didn't see the benefit of it in our 2011 results. You'll start to see the benefit of it in our 2012 results and in 2013. And to give you a sense, we don't break the numbers out separately, but we can tell you that we have over a 60% share of the global market in FFR in the FFR space. And we can also tell you that we're on track to exceed a 20% share of the intravascular imaging market later this year. So these are starting to come into their own. And we -- as we -- as they become bigger contributors to our growth profile, we'll continue to give you more information about them. But now, it's on the short list of things to watch for 2012 that are working for us here and now.

The -- on PFO, whenever I think of PFO closure here in the last 6 weeks or so, it always reminds me of CardioMEM. It always makes me think, okay, we've got a lot of bet that we are invested in. We never thought they were all going to work. We -- and some -- and it would be completely realistic, and I don't know which ones in the future will surprise us on the negative side, which ones in the future will surprise on the positive side. But we'll go after all of them with the confidence that enough of them will work, that we will deliver the accelerated sales growth that we're committed to.

CardioMEMS has dropped off in the short term. PFO closure has come on in the short term. So the clinical data are still being analyzed. The clinical data are still confidential. But whereas a year ago, we said -- and we're invested in PFO closure for stroke indication, but we put it on the periphery with the -- it was a major milestone for us to complete enrollment in the RESPECT trial. There was a speculation that the trial might be terminated for futility, and clearly now that has not been the case. We've completed enrollment, and we're very much looking forward to completing the analysis of all the clinical data and presenting the clinical data as a landmark clinical trial at a major cardiology meeting later this year. The first opportunity would be the EuroPCR. We or may not be able to have the data completely developed and ready for presentation at EuroPCR. And if not at EuroPCR, then at a later similar major meeting this year.

The -- talking about stroke. We have 2 device approaches to the stroke space: the PFO closure and LAA closure. So -- and you can see again, we've got -- it's the balance of our portfolio that I'm happiest about. So on the PFO closure side, we have a major landmark, clinical trial but -- product not yet on the market. On the LAA closure side, we don’t have the landmark clinical trial yet. We've got product on the market, strong leading market share in Europe. And we still have the clinical piece to supply to have this growth driver come into its prime time. But you can see different details of where we are in different growth drivers, but good progress in all of them and a good mix of characteristics for the diversity of the market that we're going after. So LAA closure is something that is not in its prime but is still percolating.

Moving on to the pericardial stented tissue valve program. This is a growth driver that is in its prime. So again, we've got a good mix of what's working for us today, what is getting set up to work for us tomorrow, the Trifecta pericardial stented tissue valve product line is working for us today. You can see that in the correlation between our exceeding guidance and our cardiovascular franchise here. And you can see it in competitive reports of their surgical valve business losing steam. So yes, that is a correlation. But it's more than that, it's also a cause and effect.

This is a smaller part of our business moving on to the genetic defect, the structural heart repair that we purchased with our acquisition of AGA. Here, although it's a developed -- it's a mature technology, it's a very slow growth and develop markets. But this is exactly the kind of technology that's been vetted. It's best-in-class. It has above a 70% global market share. And now it's our challenge to take this to emerging markets where the populations to getting richer, and it's very much within their capability to afford this kind of technology for their pediatric population. So we expect some reasonable growth out of our ASD, VSD closure technology. And here, we're again percolating a new class of technology that is beginning to replace surgical clips and embolic coils available only from St. Jude Medical.

This has -- but still we're growing at a nice double-digit rate in the vascular plug business. But we had expected to get the AFP (sic) [AVP] 4 into the market towards the beginning of 2011. It's a very -- in the United States, it's a very tough regulatory environment. It hasn't happened yet, but we have visibility to lead us to believe that we'll get AVP 4, which will be the highest volume component of this vascular plug line, we expect to get it into the market here now in 2012. And even if things -- even though a number of these technologies get delayed, they all come eventually. And when they come, we get good growth of them. So we didn't get it in 2011. We do think we'll get it in 2012.

Speaking of delayed gratification, quadripolar CRT-D. So we -- it was a big frustration that we did not get this in the middle of 2011. On the other hand, we've got it now. And as I see, the impact of a motion in some of the investor comments is an interesting characteristic of just the way people approach these things. I see comments about the -- boy, this won't have the impact that it was going to have 2 quarters ago, and I just kind of shake my head and say, "So why not?" This is a technology that with over 30 clinical papers already presented in Europe with the European experience of the clinical value of the quadripolar CRT-D system. This is a technology, which according to the clinical data published in Europe, has demonstrated a 55% reduction in radiation. It has demonstrated a 28% reduction in implant time. It has been shown to result in a 70% decrease in surgical revision of a left heart lead. So why wouldn't that have an impact now that it's available today versus 2 quarters ago if -- so it's -- we're tremendously excited about this. This is a big deal to patients. It's a big deal to physicians. Yes, it takes time for people to get their minds wrapped around the clinical value of this kind of innovation. They do need to see it for themselves. We have a very tough scientific crowd that we sell to. They're going to use it. But as soon as a physician uses this device in a difficult anatomy, and -- so anecdotal feedback, as soon as a physician uses this in a patient where they said, "I was going to have to send this patient to surgery. And because of the quadripolar lead, I didn't." Just one of those, and then why wouldn't you give yourself the opportunity to provide that advantage to your next patient, your next patient, your next patient. This is going to become standard of care. Eventually, everybody will have it. This is a question now of the being first-to-market and how much share we can gain in our entire CRM portfolio, because we're first to market with something this disruptive. Add to that then, that if as one comes to see this as a truly disruptive technology and you say, "Okay, I think, I'll use your quadripolar lead." That means you're also choosing our ICD. You can't attach that lead to an ICD unless that ICD has the circuitry to interact with those 4 electrodes that's only a St. Jude Medical ICD. And that's a function of our hundreds of millions of dollars and 8 years investment in a consolidated platform. The competition can't follow us without putting up entirely new hardware platform. So we are years ahead with a disruptive technology in the biggest cardiovascular device market that I know of.

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