Earnings Roundup: St. Jude's 1 Bright Spot

St. Jude's (NYSE: STJ  ) tepid first-quarter results mask a quickening in sales for the company's atrial fibrillation products that shouldn't be ignored by investors.

St. Jude has been boosting its atrial fibrillation, or AF, offering in anticipation of doctors embracing procedures like ablation as a first-line option for patients with persistent AF. Those investments are paying off as catheter ablation becomes more common.

Since sales of AF products grew the fastest at St. Jude in the first quarter, let's take a closer look at that business and how it may impact St. Jude in the future.

STJ Chart

STJ data. Source: YCharts.

Big businesses struggle
St. Jude's largest business is cardiac rhythm management, or CRM. That business includes its lineup of implantable defibrillators and pacemakers. During the first quarter, revenue from its CRM business grew just 1% to $687 million. Sales of ICD's grew 2% to $436 million, while sales of pacemakers were flat at a hair above $250 million.

The company's second-largest business, cardiovascular, didn't fare much better.

Total cardiovascular sales, which include vascular and structural heart products, fell 1% to $326 million. Heart product sales were unchanged at $154 million, while vascular sales improved an anemic 1% to $172 million.

Those two businesses, which represent 75% of St. Jude's sales, captured the bulk of investors' attention given their out-sized impact weighed down solid growth in the company's atrial fibrillation business, which grew 8% to $251 million. 

An expanding opportunity
One in four people will suffer from AF -- an irregular heart rhythm -- during their lifetime, making the condition the most common heart related reason for hospital admissions.

Anticoagulant drugs like Johnson & Johnson's (NYSE: JNJ  ) Xarelto and warfarin are commonly used as part of first-line treatment for AF. However, correcting faulty electrical circuits using catheters to deliver radio frequency energy or refrigerant to damaged heart tissue has been elevated to a first-line treatment option for paroxysmal and persistent AF patients, according to the 2014 AHA/ACC/HRS Guideline for the Management of Patients With Atrial Fibrillation.

The change in those guidelines may boost sales of St. Jude's AF products even more this year, particularly given St. Jude is rolling out TactiCath, a product it acquired when it bought Endosense last year. TactiCath, which measures the force applied by doctors during catheter ablation, is likely to enjoy solid demand given its potential to reduce repeat procedures.

TactiCath won EU approval last year, and St. Jude hopes to win the FDA's blessing later this year. If so, TactiCath's sales could move the profit needle into year-end. During its first-quarter conference call, St. Jude reported that sales of TactiCath in the EU were a major reason behind the company's 13% year-over-year growth in AF sales overseas during the first quarter. For comparison, AF sales grew 5% in the U.S.

Competition heats up
Given the market growth in AF, it's not surprising that St. Jude isn't alone in pursuing the opportunity. The company competes with Boston Scientific (NYSE: BSX  ) , Medtronic (NYSE: MDT  ) , and Johnson & Johnon's Biosense-Webster unit.

Last year, Boston Scientific essentially doubled its electrophysiology market share by acquiring C.R. Bard's EP business for $275 million. That gave Boston Scientific nearly a 10% share of the market, bolstering Boston's struggling EP business, which saw its sales sink 5% in the fourth quarter, ex-acquisitions.

Medtronic has strengthened its market position through a series of acquisitions, including deals to buy Ablation Frontiers, LLC, and CryoCath LP. As a result, Medtronic reported that its AF sales jumped more than 20% in its fiscal third quarter, which ended in January, thanks to sales of its Arctic Front cryoablation system growing over 30%.

And Johnson & Johnson's Biosense Webster is also a big player in AF. For example, Johnson's Carto 3 mapping device, which helps visualize and navigate ablation catheters, is the most widely deployed mapping system in the field. Thanks to 15% growth at Biosense Webster, Johnson reported that its cardiovascular device sales grew 7% to $540 million in the first quarter. 

Foolworthy final thoughts
AF is a serious condition affecting more than 2.5 million people in the U.S. every year. As a result, the global AF market is expected to climb over 13% a year to $14.8 billion by 2019.  Since AF occurs more frequently in older people, the CDC estimates a longer living population will drive the number of Americans with AF to as many as 12 million annually by 2050. 

Those projections have St. Jude estimating that sales of EP products for the AF market will grow in the high-single to low double digits for the "foreseeable future." Given that prediction, investors can expect AF to remain a significant driver behind the company's growth over the coming years.

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