The Zacks Analyst Blog Highlights: St. Jude, Medtronic, Boston Scientific, Raytheon and Lockheed Martin

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Dec 02, 2011, 09:30 ET

CHICAGO, Dec. 2, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include St. Jude (NYSE: STJ), Medtronic (NYSE: MDT), Boston Scientific (NYSE: BSX), Raytheon Company (NYSE: RTN) and Lockheed Martin Corporation (NYSE: LMT).

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Here are highlights from Thursday's Analyst Blog:

A Christmas Gift for the Ailing Heart

Wilson Greatbatch, the self-professed "humble tinkerer" and a trailblazer in medical technology, invented the first implantable cardiac pacemaker in 1958 which kept the rhythm of millions of heartbeats and preserved countless lives across the planet.

A couple of decades later, the first patient received an implantable defibrillator, the brainchild of Dr. Michel Mirowski, in 1980. But that took place decades ago and we have come a long way since then. Medical technology has advanced by leaps and bounds, revolutionizing the way medicine is practiced, in a hi-tech world.

And what is more quintessential in this Faustian quest for good, and even better health, than taking care of the heart? There is a Chinese proverb that goes: "If you keep a green bough in your heart, the singing bird will come."

Heart failure, in a nutshell, is the inability of the heart to pump enough blood. It is a leading cause of death in the U.S. and one leading medical device company, St. Jude (NYSE: STJ), is committed to revolutionize the treatment of patients, with this fatal condition with a ground-breaking device.

CRT – An Effective Treatment

As per data from the National Heart, Lung, and Blood Institute ("NHLBI"), roughly 5.7 million people are afflicted by heart failure in the U.S. alone. Around 60 million Americans are at high-risk to develop heart failure every year. Needless to say, it is among the leading causes of hospitalization in the nation with roughly 1 million hospitalizations annually. When it comes to economic burden, an estimated $38 billion is spent every year in direct and indirect costs for heart failure.

Cardiac resynchronization therapy ("CRT"), delivered through implantable cardioverter defibrillator ("ICD") or a pacemaker, resynchronizes the beating of the heart's lower chambers that often beat abnormally in patients with heart failure. CRT has been found to be effective in improving the quality of life in many patients with heart failure.

St. Jude's Gift

The U.S. Food and Drug Administration ("FDA") has finally cleared the industry's first quadripolar pacing system, representing one of the most significant landmarks in the MedTech firmament in recent times.

The regulator has given its green signal to St. Jude's much-awaited "Unify Quadra" cardiac resynchronization therapy defibrillator ("CRT-D"), representing a key milestone for the St. Paul, Minnesota-based medical devices major. The device was originally expected to reach the U.S. market in mid-2011, but was eventually delayed to year end due to technical reasons.

The news provided a much needed boost to St. Jude's shares, which jumped $2.75 (or 7.71%) to $38.44 on Wednesday, the highest spurt since March 2010. The company's shares have lost nearly 30% of its value since May 2011, given the current deceleration in the CRM market.

St. Jude said that it will start shipping the first-of-its-kind device shortly. Besides Unify Quadra, the FDA has also approved the company's "Quartet" left ventricular ("LV") pacing lead (flexible wire) which is used by the novel pacing device. The approval came at a time when St. Jude warned physicians that its controversial Riata defibrillator leads have a greater failure rate than reported earlier.

Unify Quadra: A Game Changer?

St. Jude debuted with the so-called quadripolar technology with the launch of "Promote Quadra" CRT-D in Europe in 2010. Promote Quadra coalesces multiple pacing configuration, features and programming options, allowing surgeons to optimize the system at implant to better manage common pacing complications such as phrenic nerve or diaphragmatic stimulation, which can occur in patients implanted with a CRT system.

Phrenic nerve or diaphragmatic stimulation takes place when an electrical output from a CRT device unintentionally activates the diaphragm muscle, resulting in major discomfort for patients. The complication generally occurs due to the location of the LV pacing lead electrode.

Unify Quadra is a small quadripolar pacing system which enables physicians to more effectively manage the pacing needs of patients with heart failure. The LV lead in Unify Quadra contains two additional electrodes (electrical conductor) vis-à-vis the legacy bipolar leads. Unify Quadra landed in Europe in September 2011 and has been well-received in the continent.

Unify Quadra represents an advancement over Promote Quadra, offering all the benefits of quadripolar technology in a device with the smallest footprint in the industry. The narrower shape allows surgeons to implant the device through a minute incision, leading to reduced time in closing the incision and a smaller scar for the patient.

Unify Quadra uses the "Quartet" LV pacing lead, the first lead to feature four pacing electrodes, which can be used in up to ten pacing configurations. This provides surgeons with a greater number of options to place the lead in the most stable position and manage implant complications, resulting in improved patient outcome. Since the surgeon can adjust pacing locations or configurations, the technology has the potential to reduce the need for multiple surgeries.

The Payoff

A still choppy CRM market remains an overhang on St. Jude and its compatriots Medtronic (NYSE: MDT) and Boston Scientific (NYSE: BSX). Prevailing macroeconomic conditions, pricing pressure, austerity measures, the impact of healthcare reform and Europe's sovereign debt plight are expected to weigh on the roughly $12 billion CRM market. Implant volume growth has been encumbered by a number of factors including the U.S. Department of Justice's investigation into hospitals' implant practices and concerns of overuse.

Raytheon Gets Nod for Missile Upgrade

Raytheon Company (NYSE: RTN) has received consent from the U.S. Congressional and State Department for upgrading the Patriot Air and Missile Defense System for the Kingdom of Saudi Arabia to the latest Configuration-3.

In June this year, the company had received a Direct Commercial Sales contract worth $1.7 billion that included ground-system hardware, a full training package, support equipment upgrades and an interoperability capability to support potential coalition operations.

Patriot is the affordable, low-risk and effective air and missile defense system of choice of 12 countries around the globe. It is a long-range, all-altitude, all-weather air defense system that counters tactical ballistic missiles, cruise missiles and advanced aircraft. It is co-manufactured by Raytheon and Lockheed Martin Missiles and Fire Control, a business unit of Lockheed Martin Corporation (NYSE: LMT).

Raytheon is one of the best-positioned companies among the large-cap defense players because of its non-platform-centric focus. Looking forward, the company enjoys strong order bookings and order backlog, an improving balance sheet, growing cash flow, and operational improvements. Future growth will be driven by its focus on ISR unmanned systems, training, cyber security, Standard Missile-6, Patriot, Zumwalt and THAAD.

The positives are, however, offset by apprehensions over future growth of the U.S. defense budget, the fate of high-cost programs, risks related to key project executions and order cancellations. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

In October this year, Raytheon Company reported third-quarter 2011 adjusted earnings of $1.39 per share, beating the Zacks Consensus Estimate of $1.33. Revenue reported by Raytheon in the quarter under review was $6.13 billion, down 2% from $6.27 billion in the year-ago period and also short of the Zacks Consensus Estimate of $6.39 billion.

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