St. Jude Medical Earnings Call Insights: The Warning Letter, Sylmar Facility Inspection

On Wednesday, St Jude Medical, Inc. (NYSE:STJ) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

The Warning Letter

Robert Hopkins – Bank of America Merrill Lynch: Dan I appreciate the comments. Obviously, I want to ask about your comments on the warning letter. I don’t think I have ever heard a company proactively tell Wall Street they thing they are going to get a warning letter before actually receiving a warning letter or even a 483. So, I think the improvement question is, why did you make that comment, has the FDA uncovered something in Sylmar and told you about it or have you guys uncovered something in Sylmar, that you want to be proactive about and have notified FDA about, can you give us a little more detail that drove you to make that comment about the warning letter and 483.

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Daniel J. Starks – Chairman, President and CEO: Sure Bob, well first the overriding motive for us is the appreciation that investors do not like surprises. So, one of the goals that we have in our quarterly conference calls is to reduce the opportunity to investors to receive surprises within appropriate limits and we think that everybody should be realistic about the role warning letters play in today’s regulatory environment and we want people to – so we have two goals, we want people to understand that St. Jude Medical is realistic about the role warning letters play in today’s regulatory environment and we want investors similarly to be realistic about it. Another reason that we made our comment is that if we do receive a warning letter between now and the time of our next earnings call, we want investors to know in advance that we’re already planning for it in our 2013 operating plan and that it will not change the expectations we set for 2013 on our earnings call next quarter. Another reason we made the comment is that in the long run, we think it’s good for our markets if the public knows FDA is exercising its regulatory oversight of medical device companies in a very rigorous and robust way and it’s clear to us that FDA is doing that. So, I can’t comment on the practice of other companies but we’ve made our comments on this call in the spirit of being transparent and the spirit of being realistic about the regulatory environment, the challenge of the regulatory environment, the role warning letters play in today’s regulatory environment and we thought that investors would appreciate the information.

Robert Hopkins – Bank of America Merrill Lynch: But, Dan, what’s wrong with Sylmar that made you made those comments? Have you uncovered something or has FDA uncovered something? I think the main concern is that there’s a reason you made those comments is – have you identified any problems there that need to be communicated?

Daniel J. Starks – Chairman, President and CEO: It’s a fair question, Bob, but the right process here is to have FDA finish its inspection and have it or have a close out to the inspection and go from there. What I’ll say is that when you say what’s wrong with Sylmar in the sense that you are asking it’s there’s nothing. What I mean by that is that the reliability data, the level of transparency what you see in the way, our products perform on the market, I want to – you’ll see it across the board with the pacemaker product line, with the ICD product line, with the Durata and the Riata ST Optim product line that the reliability data and the evidence that that implies for the robustness of our quality systems is all very good. None of that changes the fact that a lot of public attention has come to the challenges of externalized conductors in the Riata and Riata ST silicone leads and that the amount of public attention it has and patient attention, and physician attention has naturally drawn significant attention from FDA. And in today’s regulatory environment with this level of attention and this level of appropriate concern everyone should be realistic about just what the likely outcomes are. So, there is not more to it than that, and I don’t want to downplay it and I certainly don’t want to overplay it. And the right way – I think the best thing – I appreciate that this is a challenge for investors to digest, but take the comments that we’ve made in our prepared remarks in the context of everything else that we’ve said here this morning and we’ll continue to reinforce. And that is that we think that with taking everything into account, that we are on track to accelerate growth in 2013. Taking everything into account, we think we are well positioned to continue to gain share in the U.S. ICD market. And so those comments would help put into perspective the comments that we’ve made this morning regarding the very vigorous oversight that FDA is exercising of medical devices companies and generally including of St. Jude Medical.

Robert Hopkins – Bank of America Merrill Lynch: Just real quickly, what percentage of your CRM products are manufactured out of Sylmar? And then lastly, do you have any color on what you expect this warning letter 43 to be about?

Daniel J. Starks – Chairman, President and CEO: Well, a percentage of devices; first, I actually don’t know the number, Bob, so I won’t offer a number since I don’t actually know it. I would tell you though that I believe that most of our manufacturing is in Puerto Rico and in Malaysia. But I’m virtually certain that that’s the case, but I’m not 100% certain, and I’m sorry that I can’t do better than that. what was the other part of your question Bob.

Robert Hopkins – Bank of America Merrill Lynch: Just what do you expect the letter to be about?

Daniel J. Starks – Chairman, President and CEO: We’ll have to wait and see, don’t read more into it than what we said, we’ve been very collaborative and we’ve been very correct and precise in exactly what we said. We said that we would be in today’s regulatory environment would not be surprised to receive a warning letter. That we expect of 483 observations. Well that’s as much as I could tell you this morning and as additional disclosure becomes appropriate we’ll certainly make it.

Sylmar Facility Inspection

Michael Weinstein – JPMorgan: So Dan is the Sylmar facility inspection, is that a routine inspection or is this specifically related to the FDA’s interest in Riata?

Eric S. Fain, M.D. – President, Implantable Electronic Systems Division: There’s regular inspections that occur we were due for an inspection in Sylmar and that’s not surprising that there’s a focus when FDA comes to do an audit. They’ll pick their spots of where to focus and certainly high-voltage leads area was one of those areas.

Michael Weinstein – JPMorgan: Is this the assumption on 43 is that what I would characterize as the documentation issue.

Eric S. Fain, M.D. – President, Implantable Electronic Systems Division: Well as Dan said we foresee to get the official letter but the FDA inspections are really focused on quality so some elements.

Michael Weinstein – JPMorgan: Let me just ask on this kind of broader interest of the FDAs in Riata, are you expecting them to go down to Puerto Rico or to in the other facilities?

Daniel J. Starks – Chairman, President and CEO: We’ve had FDA inspection as you would expect at the facilities that FDA typically does, so Puerto Rico, Malaysia as well.

Michael Weinstein – JPMorgan: You have had and there have been whether 43 is issued or obviously if there was a warning letter you would have told us?

Daniel J. Starks – Chairman, President and CEO: Correct. I mean we haven’t had warning letter.

Michael Weinstein – JPMorgan: Let me just turn the page on that for just a minute. The drop-off in performance in Europe that you cited that showed up certainly in your cardiovascular business, any particular countries you can point to and more broadly anything you think that drives a turn in the overall cardiovascular business or the neuromodulation business?

Daniel J. Starks – Chairman, President and CEO: Michael, our experience in Europe I am sure is very consistent with the experience of other companies where markets in Southern European countries are particularly sluggish, but the austerity measures certainly are European-wide and we see the European market generally just to be sluggish in the same way that other companies have reported. So, that’s kind of – I don’t think there is anything impacting St. Jude Medical business any differently. The exception is that the AF market continues to be as strong as it has been. We were encouraged to see another company report very good numbers yesterday, so that’s a bright spot and that’s where we are exposed to the AF market as a percent of our business. So, pointed that as being a notable exception. With respect to catalysts in the other parts of our business, we are in very good shape coming into 2013, with catalysts to help accelerate sales growth, give us a good opportunity to help accelerate sales growth in the cardiovascular business and in the neuromodulation business both. To me it’s really an abundance of opportunities in cardiovascular and we have made a point to talk about several of them, the ones that are most visible and have the opportunity to make the most impact and so, both as a person digest the information we offered on the FFR and OCT business, and of how large that business already has become and what the growth rate of that business is at its current size and that there are – it’s solid market development that we’ve been working on for a number of years. More (indiscernible) cost effectiveness data will be presented next week at the TCT Congress. So, a person would take that whole franchise where we have significant technology advantage, we have been developing the market as intentionally as we have dating back a number of years now and you can see the traction of it. So, think about that in modeling the cardiovascular business. Then add to it the – I hope that our prepared remarks were adequate to signal that our (particular) 23-millimeter CE Mark application is on track and that we are prepared to launch that – to begin launching that product line in Europe and we continue to see that as a fourth quarter event. Again on the market development side and on providing as much information to customers about what they can expect from the value of that new growth driver it’s important to us that additional data will be presented in peer-reviewed forms here in the next few weeks. So, that is something that deserves significant focus thinking about implications for 2013. And then added to that, everything starts a little slower than one might hope but that’s the nature of market development and launching new technology. On the renal denervation side, we received CE Mark, obviously, in May as I recall – record will correct me if I have that wrong just a little bit, but I believe it was May. So, now we said that in the second half of 2012 we were going to pre-payer to make this a good revenue contribution in 2013. So, in our prepared remarks again our goal was to offer reinforcement to that and to indicate that that’s on track that we – and that so much happens during the summer but even so our goal was to provide all the organizational training to get a good core of key opinion leaders and good reference centers to get – to create the conditions where it could be a ground flow of growth in our renal denervation business, particularly as the clinical data continues to extend and as we initiate the – and get going in an energetic way, the EnligHTN II clinical trial, all of that will be in place here coming into 2013, that would be followed by our – during 2013 by the launch of our second generation renal denervation product. So you could see again now that’s another very meaningful new growth driver that we look to as a catalyst for our cardiovascular business in Europe that’s again very visible. Then the next thing, all of these are big – some of them are big as they stand and some of them are big potential opportunities, add to that then the presentation of the respect of clinical trial data at the Late Breaking Clinical Trials session next week at the TCT. People would appreciate that the PFO closure market is one where St. Jude Medical has a very strong franchise and a very strong current market share that challenges entirely one of market development and everyone will have to wait for appropriate disclosure of the clinical results in the peer-reviewed form next week but we are optimistic that once these results are disclosed, that they will be a catalyst to market development and to our PFO closure growth driver in Europe next week or next year during 2013. So there’s a lot there and that’s only pointing to the major highlights. There is plenty more in the left atrial appendage occlusion technology and our vascular plug and our tissue valve, our conventional surgical tissue valve technology that will go along to supplement those major catalysts that we are pointing to. On the neural modulation side again, 2012 has been a very challenging year for us across many of our franchises but we’re on track to enter into 2013 with a lot of energy, with a lot of enthusiasm, with a lot of confidence that even taking continued risks into account, no matter what risks a person might have on a short list, we are very optimistic that we are on track to accelerate growth in a meaningful way in 2013. We’re not giving our guidance for 2013 yet, we’ll give it one quarter from now, but that’s our view from inside the business taking everything into account, but the last thing I want to say before asking you for a follow-up question or moving on to the next question is the things that we’ve done in restructuring our business are very fundamental and will pay a lot of dividends and so it, isn’t the kind of thing that one talks about as a new growth driver in itself, but we’ve got our cost structure. We are on track to make significant improvements. We’ve already made some, we’re going to continue to make significant improvements as we complete this restructuring to get our cost structure in very good shape coming into 2013 and so that implies continued robust funding of our new growth drivers, and it implies a good positioning to capture meaningful EPS leverage. So you put all that stuff together, and yes, there are things that a person appropriately looks at as risks and challenges, but taking all of that into account, we like our position. We’re very confident, very optimistic about our growth opportunity coming into 2013.

Michael Weinstein – JPMorgan: Dan, I am still here. I do want to just ask one quick follow-up. I appreciate all your optimism on ’13. On the neuromodulation piece, are you any closer to resolving your warning letter with the FDA, which obviously has delayed your entry into the U.S. DBS market and your conversations with the FDA on migraine?

Daniel J. Starks – Chairman, President and CEO: I’ll start out with a standard qualification, which is that we’re very sensitive to exactly what we say and don’t say with respect to any FDA process. And so as Bob was asking questions, I’m sure that Bob and others are frustrated more than anything as we’re not more precise. So we’re always working to strike a balance in the sense that we — our experience is that, on the one hand, the details of communications with FDA are generally confidential. We don’t want to characterize the communications in a way that might create offense anywhere. We don’t want to take anything for granted, and so I appreciate that our caution in the level of detail is — can be frustrating, and I’m sorry that it is. It’s not our goal to create frustration. It’s our goal to make disclosures and be transparent. Having said that, when you ask if we’re closer to resolving our warning letter on the neuromodulation side, absolutely. We’ve made good progress. We don’t want to characterize the details of that, but we absolutely have made good progress and we expect stronger growth here in 2013.

A Closer Look: St.Jude Medical Earnings Cheat Sheet>>