Xmas Gift for the Ailing Heart - Analyst Blog

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Wilson Greatbatch, the self-professed "humble tinkerer" and a trailblazer in medical technology, invented the first implantable cardiac pacemaker in 1958 which kept the rhythm of millions of heartbeats and preserved countless lives across the planet.

A couple of decades later, the first patient received an implantable defibrillator, the brainchild of Dr. Michel Mirowski, in 1980. But that took place decades ago and we have come a long way since then. Medical technology has advanced by leaps and bounds, revolutionizing the way medicine is practiced, in a hi-tech world.

And what is more quintessential in this Faustian quest for good, and even better health, than taking care of the heart? There is a Chinese proverb that goes: "If you keep a green bough in your heart, the singing bird will come."

Heart failure, in a nutshell, is the inability of the heart to pump enough blood. It is a leading cause of death in the U.S. and one leading medical device company, St. Jude ( STJ ), is committed to revolutionize the treatment of patients, with this fatal condition with a ground-breaking device.

CRT - An Effective Treatment

As per data from the National Heart, Lung, and Blood Institute ("NHLBI"), roughly 5.7 million people are afflicted by heart failure in the U.S. alone. Around 60 million Americans are at high-risk to develop heart failure every year. Needless to say, it is among the leading causes of hospitalization in the nation with roughly 1 million hospitalizations annually. When it comes to economic burden, an estimated $38 billion is spent every year in direct and indirect costs for heart failure.

Cardiac resynchronization therapy ("CRT"), delivered through implantable cardioverter defibrillator ("ICD") or a pacemaker, resynchronizes the beating of the heart's lower chambers that often beat abnormally in patients with heart failure. CRT has been found to be effective in improving the quality of life in many patients with heart failure.

St. Jude's Gift

The U.S. Food and Drug Administration ("FDA") has finally cleared the industry's first quadripolar pacing system, representing one of the most significant landmarks in the MedTech firmament in recent times.

The regulator has given its green signal to St. Jude's much-awaited "Unify Quadra" cardiac resynchronization therapy defibrillator ("CRT-D"), representing a key milestone for the St. Paul, Minnesota-based medical devices major. The device was originally expected to reach the U.S. market in mid-2011, but was eventually delayed to year end due to technical reasons.

The news provided a much needed boost to St. Jude's shares, which jumped $2.75 (or 7.71%) to $38.44 on Wednesday, the highest spurt since March 2010. The company's shares have lost nearly 30% of its value since May 2011, given the current deceleration in the CRM market.

St. Jude said that it will start shipping the first-of-its-kind device shortly. Besides Unify Quadra, the FDA has also approved the company's "Quartet" left ventricular ("LV") pacing lead (flexible wire) which is used by the novel pacing device. The approval came at a time when St. Jude warned physicians that its controversial Riata defibrillator leads have a greater failure rate than reported earlier.

Unify Quadra: A Game Changer?

St. Jude debuted with the so-called quadripolar technology with the launch of "Promote Quadra" CRT-D in Europe in 2010. Promote Quadra coalesces multiple pacing configuration, features and programming options, allowing surgeons to optimize the system at implant to better manage common pacing complications such as phrenic nerve or diaphragmatic stimulation, which can occur in patients implanted with a CRT system.

Phrenic nerve or diaphragmatic stimulation takes place when an electrical output from a CRT device unintentionally activates the diaphragm muscle, resulting in major discomfort for patients. The complication generally occurs due to the location of the LV pacing lead electrode.

Unify Quadra is a small quadripolar pacing system which enables physicians to more effectively manage the pacing needs of patients with heart failure. The LV lead in Unify Quadra contains two additional electrodes (electrical conductor) vis-à-vis the legacy bipolar leads. Unify Quadra landed in Europe in September 2011 and has been well-received in the continent.

Unify Quadra represents an advancement over Promote Quadra, offering all the benefits of quadripolar technology in a device with the smallest footprint in the industry. The narrower shape allows surgeons to implant the device through a minute incision, leading to reduced time in closing the incision and a smaller scar for the patient.

Unify Quadra uses the "Quartet" LV pacing lead, the first lead to feature four pacing electrodes, which can be used in up to ten pacing configurations. This provides surgeons with a greater number of options to place the lead in the most stable position and manage implant complications, resulting in improved patient outcome. Since the surgeon can adjust pacing locations or configurations, the technology has the potential to reduce the need for multiple surgeries.

The Payoff

A still choppy CRM market remains an overhang on St. Jude and its compatriots Medtronic ( MDT ) and Boston Scientific ( BSX ). Prevailing macroeconomic conditions, pricing pressure, austerity measures, the impact of healthcare reform and Europe's sovereign debt plight are expected to weigh on the roughly $12 billion CRM market. Implant volume growth has been encumbered by a number of factors including the U.S. Department of Justice's investigation into hospitals' implant practices and concerns of overuse.

The core CRM business remains St. Jude's Achilles' heel with revenues growing at a sluggish clip, impacted by the beleaguered U.S. defibrillator market. On the contrary, its smaller segments such as Atrial Fibrillation, Neuromodulation and Cardiovascular continue to grow at a torrid pace and remain the bastions of the company's growth story.

Nevertheless, with Unify Quadra to hit the U.S. market shortly, we envisage that St. Jude is now strongly placed to savor incremental opportunities in CRM having the distinction of being the only company to offer quadripolar pacing technology globally. This avant-garde pacing technology is expected to set a new standard of care in cardiac treatment.

Such sophisticated treatment would also come at a premium price tag helping St. Jude to win ground in the roughly $6.5 billion U.S. defibrillator space. However, the company should also brace itself for reignited competition in a soft ICD market.

We stay tuned to see the response of the other big Kahunas of the MedTech world, Medtronic and Boston Scientific, as they look to level the playing field. While both these entities have quadrapolar leads in their pipeline, it will take a while (at least a year) before they hit the U.S. market, giving St. Jude a clear lead.

Our long-term Neutral recommendation on St. Jude is in agreement with a Zacks #3 Rank (Hold) retained by the stock. We are also Neutral on Medtronic and Boston Scientific, both of which carry short-term Zacks #3 ranks.

BOSTON SCIENTIF ( BSX ): Free Stock Analysis Report

MEDTRONIC ( MDT ): Free Stock Analysis Report

ST JUDE MEDICAL ( STJ ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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