Analysts at Citigroup built the potential for a recall of St. Jude Medical‘s (NYSE:STJ) Durata defibrillator leads, 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.
Last week the FDA released a report slamming St. Jude for multiple problems at its Durata plant in Sylmar, Calif. That drove STJ shares to a 52-week low of $30.25 before Friday’s close at $31.76, down 7.1% on the day.
Today Citigroup said new models for St. Jude and its chief rivals in the defibrillator market, Medtronic and Boston Scientific, show STJ taking an $821 million hit from a Durata recall. Citigroup’s analysts lowered their price target from $32 to $30 and reiterated their "sell" rating on the stock.
"We have made several assumptions on what the loss of Durata would mean for St. Jude in terms of [implantable cardiac defibrillator] lead sales, initial implant generator sales, replacement implant generator sales, and a spillover impact into pacemakers," the analysts wrote. "The primary assumptions in terms of impact center around generator share loss and we assume a 40% loss for single/dual chamber ICDs, a 40% loss for [cardiac rhythm therapy defibrillator] replacements, and a 25% loss for initial CRT-D implants. Overall, we estimate the annual run rate hit would be $821MM, and with a detrimental [operating margin] of 61%, we arrive at a potential EPS hit of $1.27."
Conversely, Medtronic could gain a 29% share of St. Jude’s lost CRM sales, for a $238 million gain, Citigroup said, reinforcing its "buy" rating on MDT and raising its price target from $47 to $50.
"We estimate that MDT would garner a 29% share of STJ’s CRM sales on an annual basis if Durata is withdrawn from the market, or $238MM. Assuming minimal incremental expenses, we believe these sales would generate a nearly 70% incremental margin or $0.13 in EPS," the analysts wrote.
Citigroup said Boston Scientific would stand to gain even more on a Durata pullback, prompting it to raise its rating on BSX shares from "neutral" to "buy" and boosting its price target from $5.30 to $7.30.
"While difficult comparisons for BSX were expected to moderate starting in 2Q13, organic growth still looked modest through 2014 until the company’s pipeline efforts begin to start making a difference. Hence, we don’t believe the recent move in BSX’s stock is accurately reflecting the potential benefit from a Durata withdrawal and our new target price now represents 31% upside," according to the analysts. "We have MDT garnering a lower share benefit than BSX on the assumption that customers would be more inclined to reduce their risk of having too much share controlled by 1 vendor."
STJ shares were trading at $31.90 as of about 10:00 this morning, down 0.4%. MDT shares were trading at $42.94, down 0.8%, and BSX shares were up 4.3% to $5.83.
