Flattening sales at St. Jude (NYSE: STJ ) is pressuring the company to reenergize its product portfolio ahead of reform-driven demand for cardiac care. That's led to recent acquisitions including a $170 million deal to acquire Endosense, an atrial fibrillation, or AF, catheter company that St. Jude hopes will give it a leg up against competitors Boston Scientific (NYSE: BSX) and Medtronic (NYSE: MDT).
Investing in catheter ablation
AF is the most common form of irregular heartbeat. It's a serious condition affecting 2.66 million people in the United States each year. Given that AF occurs more frequently as populations age, the Center for Disease Control estimates a longer living population will drive the number of Americans with AF to as many as 12 million annually by 2050. http://www.cdc.gov/dhdsp/data_statistics/fact_sheets/fs_atrial_fibrillation.htm
Drugs are most commonly used to treat AF. But catheter ablation, the use of catheters to deliver radio frequency energy or refrigerant to damaged heart tissue where faulty electrical circuits exist, is becoming the standard of care in tough-to-treat cases.
The rising adoption of catheter ablation gives St Jude high hopes for Endosense's TactiCath, a product measuring the force applied by doctors during catheter ablation. TactiCath has already won approval in Europe and St. Jude hopes it can win the FDA's blessing in the United States too.
The hopes for TactiCath are tied to the device's ability to provide doctors with real-time feedback on the pressure they're applying during catheter ablation. That data may reduce the need for additional future procedures tied to either incomplete lesions or damaged heart tissue. St. Jude believes TactiCath could become a go-to technology, significantly reducing readmission costs and doctors' exposure to lawsuits.
The deal leaves St. Jude better-positioned to compete against Boston Scientific in the rapidly growing electrophysiology, or EP, market. That $2.5 billion market, which includes diagnosing and treating a broad range of cardiac rhythm disorders, could grow a compounded 12% annually to $5.5 billion by 2019 as boomers become seniors, according to analysts.
Currently, Medtronic is the EP market share leader, but Boston Scientific recently bolstered its offering by acquiring C.R. Bard's EP business in a deal worth $275 million. That move doubled Boston Scientific's EP market share to roughly 10%, positioning it to better challenge Medtronic.
Competition is heating up
The growing ablation market has lifted St. Jude's AF sales 7% in the past nine months from a year ago. That's helped offset weaker sales and lower prices for products sold into the ICD market.
That growth has Medtronic focused on protecting its leadership position. The company announced it had completed enrollment in trials for its next generation ablation technology last month. Medtronic expects that its recent acquisitions of Ablation Frontiers, LLC, and CryoCath LP, which it used to form its AF Solutions division, will give it a broad enough product line to offset threats from Boston Scientific and St. Jude.
As a result, St. Jude is moving quickly to ramp manufacturing, inventory, and training in order to launch TactiCath in Europe during the first quarter of next year. While that launch isn't expected to drive net income higher during that quarter, St. Jude believes TactiCath will dramatically improve its EP results for the full year. The potential filing of TactiCath for approval in the U.S., offers additional opportunity to move the revenue needle higher.
Leveraging technology across products
The Endosense acquisition nets St. Jude a new product with a big opportunity to boost the company's EP sales, but it also provides a patent-protected platform to leverage across existing and future products.
St. Jude believes that TactiCath's force-sensing technology can readily be deployed as part of its Ensite Velocity Mapping System, a 3-D system used by doctors to improve cardiac procedures regardless of which manufacturer's catheter is being used.
During the third quarter, St. Jude reported that sales of its Ensite system were improving, and additional features like force-sensing technology could bolster revenue. The Ensite Mapping System already carries a five-year price tag of $495,000 -- $84,500 higher than the competing Biosense Webster's Carto 3.
A Foolishly rosier future
The global AF market is expected to grow 13.4% per year to $14.8 billion by 2019, and catheter ablation procedures represent 45% of AF procedures, according to analysts. The incorporation of force-sensing technology could drive procedure use even higher, given its ability to reduce the number of follow-up procedures. If St. Jude wins FDA approval for TactiCath, it will pay out another $165 million to Endosense -- money well spent, given St. Jude's opportunity to capture a greater share of the lucrative U.S. EP market.