Analysts: Recall of St. Jude Medical’s Durata not likely, despite problems

St. Jude Medical's Durata pacemaker lead

St. Jude Medical (NYSE:STJ) isn’t likely to recall its next-generation Durata pacemaker leads despite a warning from the FDA, but the situation with the medical device company’s flagship product could change any day, according to Wall Street analysts.

Although investors have already baked the downside from the warning into the share price, meaning some potential upside for STJ shares once the problems flagged in the watchdog agency’s Form 483 warning are fixed, analysts from Leerink Swann and Jefferies & Co. told today that the Durata situation is still fluid.

"The likelihood of a recall, based on what we know today, is fairly small," Leerink Swann’s Danielle Antalffy told us. "Until the device actually starts failing in a real way, like what we saw with Riata, Durata is not going get pulled."

"If one’s being intellectually honest, the probability is still quite low, given what we know," agreed Jefferies analyst Raj Denhoy. "There are a lot of reasons to believe we could see something, some problem, down the road, but clinically the product is still performing quite well. The question is, will the FDA do something despite the clinical data being quite good?"

At least 1 other analyst thinks a recall is more likely, if not downright probable. Last month, analysts at Citigroup built the potential for a recall into their model, leading to a downgrade for St. Jude and upgrades for rivals Boston Scientific (NYSE:BSX) and Medtronic (NYSE:MDT).

St. Paul-based St. Jude could see its earnings per share lose $1.27 if it’s compelled to yank the beleaguered Durata leads, the medical device company’s next-generation series of wires that are threaded through blood vessels and into the heart.

Also in November, the FDA released a report slamming St. Jude for multiple problems at its Durata plant in Sylmar, Calif., driving STJ shares to a 52-week low of $30.25 before closing at $31.76, down 7.1%.

Antalffy and Denhoy also agreed that St. Jude faces other headwinds, including the general cardiac rhythm management slump that’s affected the entire sector and a diminished confidence in its pipeline of future products. Both analysts cited the failure of a clinical trial for STJ’s Amplatzer heart implant as a factor in The Street’s perception of the pipeline.

"The bigger issue is that their reputation for a robust pipeline has suffered," Denhoy said. "It has become a story that’s been tethered to this Riata/Durata issue."

"I still believe in the pipeline story, but obviously with the Respect trial not living up to expectations, that’s a potentially a pipeline product that goes away. I still tend to think it might get approved, but even with approval adoption is an issue," Antalffy noted.

Another red flag is the deteriorating relationship between CEO Daniel Starks and the investment community, she said.

"Management’s communication with The Street has been poor the last 2 quarters," Antalffy said. "We’ll get a lot of answers at the Feb. 1 analysts’ meeting. I’m not sure what to expect."

On the positive side for investors, she added, is a $1 billion stock buyback that’s already under way and a promising outlook for St. Jude’s fractional flow reserve technology, called PressureWire.

"FFR is definitely viewed favorably, as a potentially sustainable double-digit growth market with Fame 2 results now in hand and the increasing need to document and justify procedures," Antalffy told us.

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