St. Jude Medical, Inc.
Address:
One Lillehei Plaza
St. Paul, Minnesota 55117
U.S.A.
Telephone: (612) 483-2000
Fax: (612) 482-8318
Statistics:
Public Company
Incorporated: 1976
Employees: 725
Sales: $252.6 million
Stock Exchanges: NASDAQ
SICs: 3842 Surgical Appliances and Supplies; 3840 Medical Instruments and Supplies
Company History:
St. Jude Medical, Inc. (SJM) is the world's leading maker of mechanical heart valves and serves physicians worldwide with medical devices for cardiovascular applications. Based in St. Paul, Minnesota, the company maintains additional operations in Massachusetts, Canada, Puerto Rico, and Belgium. Approximately 1,500 medical centers in 75 countries actively use SJM products.
In 1972, the bileaflet mechanical heart valve was developed at the University of Minnesota. This new valve was made of pyrolytic carbon, a hard, shiny material that did not cause blood clots and could last for years in the human body. St. Jude Medical, Inc. was formed and incorporated in 1976 to further develop, market, and manufacture this valve. The company was founded by Manuel A. Villafana, a businessman who began his career at the helm of Cardiac Pacemakers, Inc., revolutionizing that industry with the innovation of long-lasting lithium batteries. Two years before selling his company to Eli Lilly for $127 million, Villafana formed SJM.
In February 1977, SJM made an initial stock offering at $3.50 per share. In October, the first human implant of the SJM mechanical heart valve took place. Dr. Demetre Nicoloff performed the operation on Helen Heikkinen, a 69-year-old heart patient, at the University of Minnesota Hospital.
A superb salesman, Villafana convinced so many heart surgeons to try the SJM heart valve that the company was criticized for the emphasis placed on sales in what was supposedly a clinical trial program. The Food and Drug Administration (FDA) became involved, prompting Villafana's departure from the company in 1981. Villafana would later establish Helix Biocore, a competitor company.
In 1982, SJM received approval from the FDA to market its mechanical heart valve in the United States. SJM's profits began to ascend rapidly, rising from $2.3 million in 1982 to $4.3 million in 1983. By 1984, SJM had achieved revenues of almost $35 million and profits of $5.3 million, solely from sales of its mechanical heart valve. Twenty-five percent of the 100,000 artificial valves implanted in diseased hearts that year were SJM valves. As a one-product company with a market value of $41 million, SJM could not afford any threat to the successful manufacturing of that vital product.
However, a threat did come in 1984. The distinctiveness of SJM's heart valve was found in the marriage of a bileaflet design, created by St. Jude engineers, and its anti-blood clotting carbon skin coating, produced and supplied to SJM by CarboMedics, a subsidiary of Intermedics, Inc., a cardiac-pacemaker company. In March 1984, the two companies were unable to reach an agreement on a long-term supply contract and filed countersuits.
The dispute had actually begun shortly after CarboMedics was purchased by Intermedics in 1979. Intermedics's reputation in the field was that of a tough player, and SJM executives began to quietly look for a second-source supplier of the valve's carbon coating. In addition, Villafana had launched a pacemaker-development project, in hopes of diversifying the company. G. Russell Chambers, Intermedics's director, threatened to raise the price of the carbon coating when he learned of the pacemaker project. Pacemaker sales accounted for the majority of Intermedics's profits. Chambers's threat worked; Villafana dropped the pacemaker project.
At the same time, a company called Hemex was formed in 1979, selling a heart valve that was similar to SJM's. Observing that Intermedics officers and directors owned stakes in Hemex and that Chambers's son, Rusty Chambers, was Hemex's chairperson, SJM inferred that Intermedics was behind this new competitor in the valve business.
Although Chambers denied any connection between the companies, SJM's new CEO, LaVerne Rees, was unconvinced. In 1981, Rees directed the company to take the necessary steps toward development of its own carbon coating. When this costly and ambitious project was announced in SJM's 1983 annual report, Chambers was outraged and demanded that SJM halt all research efforts. According to Business Week, an SJM consultant then attempted to purchase the carbon formula from an employee of CarboMedics. In 1983, Chambers directed his company to stop supplying SJM with carbon components. The dispute became heated, and court depositions alleged that CarboMedics hired detectives to search SJM garbage cans for stolen trade secrets.
CarboMedics charged SJM with patent infringement, while SJM responded with breach of contract, antitrust, and restraint-of-trade claims. Essentially, SJM alleged that Intermedics sought to achieve a monopoly and to restrain trade in the heart valve business. Each company accused the other of theft of trade secrets and contract violation. In the fall of 1984, SJM's board let Rees go, leaving Chairperson William Hendrickson in command, with Thomas M. Garrett III--the attorney who drafted SJM's articles of incorporation&mdash+aying a greater role in advising the company.
The legal battle continued for two years and involved court cases in the United States as well as in Europe. Because CarboMedics refused to supply SJM during this period, SJM ran out of completed valves to sell, forcing doctors and patients to look elsewhere for supplies, and eroding the sales and stock market earnings of both companies. According to Business Week, in 1985 SJM produced only about one-third of the 25,000 heart valves it had produced in 1984. Intermedics lost approximately $20 million on an annual basis, and SJM sank from record revenues of $35 million in 1984 to $26 million in 1985. SJM's stock, which had previously been a high-rated investment, plummeted, as did that of CarboMedics. Meanwhile, competitors in the heart valve industry had a field day, as their sales--and their share of the market--increased.
In February 1985, SJM named Lawrence A. Lehmkuhl as its new president and CEO. Lehmkuhl, who had previously served as divisional president at American Hospital Supply Corp., made it his first priority to end the supplier boycott of SJM, which threatened to destroy the company's ability to produce and market its only product. Lehmkuhl was selected not only on the basis of his potential to resolve the dispute, but also as a leader who might broaden the company's product line, eliminating the vulnerability associated with being a one-product company. In September 1985, an agreement was signed by the two companies, allowing SJM to continue its carbon manufacturing research and development efforts and to produce limited quantities of pyrolytic carbon.
In 1986, the first SJM mechanical heart valve produced with the company's own pyrolytic carbon-coated components was implanted in a patient in Germany. SJM augmented its mechanical heart valve business in 1986 when it acquired BioImplant, expanding into tissue heart valves. However, the company only sold the tissue valves outside of the United States for several years. SJM implemented a 2-for-1 stock split, tripling its authorized common shares to 30 million. 1986 revenues rose to $60.5 million.
Once again, the company demonstrated consistent growth and stock market value. By 1988, SJM was again a favorite pick for investment specialists. Fiscal year 1987 had closed with a net profit of $17 million and $1.55 a share, with net income rising 44 percent over the prior year to $71.8 million and sales climbing 19 percent. Furthermore, the company had no debt. In fact, SJM's cash balance was an astonishing $65 million. In an article in Barron's, investment specialist Bing Carlin selected SJM as his favorite investment, citing competitor Baxter Travenol's suspension of its heart valves (due to possible malfunction) and the FDA's approval of SJM's new low-cost plant in Puerto Rico as optimistic factors for SJM. Another competitor, Pfizer, also experienced failure with its heart valve. In addition, SJM's decision to sell directly to hospitals, rather than working through distributors, meant that the company would retain more profits. The company achieved revenues of $114 million and $148 million in 1988 and 1989, respectively.
In 1990, SJM established its International Division, headquartered in Brussels, Belgium. SJM was still a top-rated pick for investors, and the company's stock was selling at 20 times its earnings. Other than the decline in profits in 1985, SJM had demonstrated revenue growth of 30 percent or more each year, with revenues of $175.2 million in 1990, and the company possessed over $150 million in cash. Over 300,000 SJM mechanical heart valves had been put to use.
One reason for SJM's success was that the average age of heart valve recipients had declined. Older patients favored non-mechanical heart valves, which were made of pig tissue and did not require anti-clotting medication. Such tissue valves had an average age of five years, and as the age of heart patients declined, the life expectancy after implant increased. This increased life expectancy created a greater demand for mechanical valves, since tissue valves would have to be replaced through open heart surgery after five years.
In addition, SJM had reached an agreement with CarboMedics, giving SJM the right to make increasing quantities of components until 1998 and to make all parts in-house beginning in 1998. The pricing structure contained within the agreement significantly reduced SJM's costs, in exchange for SJM's commitment to purchase decreasing percentages of carbon components over the next five years. Since Baxter Travenol's design flaw, SJM had faced virtually no serious competition. The heart valve market was not large enough to attract major pharmaceutical companies as competitors.
Under the leadership of Lehmkuhl, SJM had begun to make cautious acquisitions. Those acquisitions included a Canadian company that manufactured porcine valves that were sold internationally (while awaiting U.S. FDA approval), a company that made intra-aortic balloon pumps, and a centrifugal pump system. In addition, SJM had expanded its research department, funding vascular graft research. However, the core of SJM's operations remained its heart valve business. In 1991, SJM received FDA approval for two internally developed products: the BiFlex annuloplasty ring and the sterile aortic valved graft. SJM became the only heart valve manufacturer with two sources for pyrolytic carbon-coated components. Revenues rose again, to $209.8 million in 1991.
After five years with annual earnings growth of 59 percent and an 84 percent rise in shares in 1991, SJM's stock suddenly took another downturn in summer of 1992. The catalyst was the company's disclosure, on July 1, that second quarter sales and earnings had fallen short of analysts' projections. On July 2, investors pulled $285 million out of SJM, 16 percent of the company's market capitalization.
Lehmkuhl attributed the shortfall to aggressive promotion of tissue valves by two competitors, Medtronic and Baxter International. Barron's magazine also cited a decline in open heart surgeries in Los Angeles, one of SJM's largest markets, as a negative factor, along with an "inventory adjustment" by a Japanese customer and decreased sales in Poland. The shortfall was estimated to be only two percent of the domestic market (SJM controlled over 45 percent of the international market and 60 percent of the U.S. market). However, since 95 percent of the company's sales continued to be generated by the heart valve, even that small setback was enough to scare off investors who were wary of the risks of a one-product company.
The result was that SJM's shares, which had been priced at 55 and one-half cents in January of 1992, dropped dangerously to 27 and one-half cents. Ironically, sales climbed 3.5 percent over the previous year's second quarter to $57 million, and earnings per share rose from 45 cents to 52 cents. Moreover, the company would close 1992 with another dramatic increase, achieving $239.5 million in revenues.
Seeing competition from tissue valve companies as a major challenge, SJM began to work toward sales of tissue valves in the United States. The company already sold both tissue and mechanical valves in Europe, and it formed a partnership with Hancock Jaffe Laboratories to design and market a new bioprosthetic tissue valve in the United States. Also during this time, SJM began construction of a new 65,000 square foot facility for manufacturing pyrolytic carbon-coated components. The facility would undergo FDA qualifications in 1994 and 1995.
Taking a long-anticipated step toward long-term stability, Lehmkuhl made his first aggressive maneuver toward an acquisition strategy when he hired John Alexander as vice-president for corporate development in July 1992. Alexander had previously spearheaded business development and strategy for Baxter International's diagnostics division. SJM had been criticized for being too conservative with its $300 million cash supply by observers who could not understand why the company did not diversify through acquisitions earlier. Lehmkuhl had been cautious, in part, because any acquisition would initially dilute SJM's tremendous earning power. Health-care company prices had dropped significantly since the beginning of 1992, and the time was seen as ripe for the beginning of an acquisition strategy.
Ronald Matricaria, formerly an executive with Eli Lilly & Co., replaced Lawrence Lehmkuhl as president and CEO in 1993, while Lehmkuhl remained as company chairperson. Matricaria was known as an aggressive competitor, having built Lilly's cardiac pacemakers unit from a failing business to a world leader. Matricaria breathed new life into the acquisition hunt, giving it the code name "Project Runner," and involving the company's top management in a process of self-examination and assessment. This process involved the identification of SJM's business strengths--the manufacture of implant devices and an intricate knowledge of blood flow and clotting--and the application of those strengths to potential areas of acquisition. The company studied 16 medical specialties fields in order to make its decision.
In the spring of 1993, the company signed an exclusive license and supply agreement with Telios Pharmaceuticals, Inc. to utilize Telios' proprietary cell adhesion technology. In August, SJM bought a large minority stake in InControl Inc., a company developing an implantable machine to stop atrial fibrillation (rapid pulsing of the heart's upper chambers). In December, SJM acquired Electromedics, a Colorado maker of blood management and blood conservation equipment and related disposable devices, in a $90 million deal. The company's stock fell 87.5 cents to 27 and three-quarters the day before the acquisition was announced. According to the Wall Street Journal, the industry was "on the rocks."
SJM's stock market decline was attributed to two primary factors: cost cutting by corporations and insurance companies and an uncertainty about the future nature of medical care created by President Clinton's health care plan. SJM faced other problems as well. The company's tax rate went up by almost five percentage points through the loss of tax benefits from manufacturing in Puerto Rico. And in September 1993, CarboMedics received approval to sell heart valves in the United States. SJM was not yet ready to promote the improved tissue valve being developed. Instead, the company continued its acquisition strategy, hoping to renew growth through diversification. Revenues continued to rise, with sales of $252.6 million at the end of 1993.
In June 1994, SJM announced that it was prepared to make a major acquisition. Project Runner had arrived at its conclusion--SJM would enter the expanding market for cardiac rhythm management. SJM would purchase the cardiac pacing device businesses of Siemens AG--the world's number two maker of pacemakers for slow heartbeats--for over $500 million. The acquisition would launch SJM as a top-tier company in the realm of pacing device manufacturers. Further, SJM would more than double its sales and triple its work force. In 1993, Siemens's cardiac rhythm management business demonstrated over $350 million in sales and retained 1,300 employees.
That year brought new developments in existing products as well. SJM announced the first U.S. implants of its stentless tissue heart valve, previously marketed internationally. The FDA granted SJM approval to market its new collagen-impregnated aortic valved graft in the United States. The company launched an alliance with Advanced Tissue Sciences to pursue the joint development of tissue engineered heart valves. And The Heart Valve Company (the joint venture between SJM and Hancock Jaffe Laboratories) made its first implant of the new bioprosthetic heart valve at Glenfield Hospital in Leicester, England. Finally, the company made a $12 million equity investment in Endo Vascular Technologies, Inc., a leading company in the development of products to less invasively repair damaged or diseased blood vessels. In mid-1994, SJM remained dependent largely on its mechanical heart valve, over 500,000 of which had been implanted. Nevertheless, the first steps toward diversification were underway and would undoubtedly change the nature both of SJM as a company and the cardiac business itself.
Principal Subsidiaries: St. Jude Medical, Inc., Cardiac Assist Division; St. Jude Medical Puerto Rico, Inc.; St. Jude Medical Sales Corp.; St. Jude Medical S.C., Inc; 151703 Canada Inc.; St. Jude Medical Ltd.; St. Jude Medical International, Inc.; St. Jude Medical U.K. LTD; St. Jude Medical France SA; St. Jude Medical GmbH; St. Jude Medical Espana SA; St. Jude Medical Europe, Inc.; S.A. St. Jude Medical Belgium NV; St. Jude Medical AG; St. Jude Medical Nederland BV; St. Jude Medical Medizintechnik GESMBH; St. Jude Medical Acquisition Corp.
Further Reading:
Barker, Robert, "All Heart: Examining a Bitter Corporate Feud," Barron's, February 11, 1985, pp. 14--30.
Burton, Thomas M., "St. Jude to Buy Siemens Cardiac Pacemaker Lines," The Wall Street Journal, June 28, 1994, pp. A3, A8.
Cochran, Thomas N., "Heartening Prospects," Barron's, June 6, 1988, p. 60.
Dorfman, John R., "St. Jude Medical Shares Will Reap Rewards for Long Term Investors, Some Managers Say," The Wall Street Journal, January 17, 1994, p. C2.
Forsyth, Randall W., "Too Good to Last?," Barron's, January 6, 1992, p. 35.
Gianturco, Michael, "Go with the Greats," Forbes, July 19, 1993.
Netzer, Baie, "These Health-Care Stocks Can Prosper Even in the Face of Cost-Cutting," Money, July 1990, pp. 55, 58.
Pitzer, Mary J., "The Bad Blood Over a Heart Valve," Business Week, May 13, 1985, pp. 141, 144.
"St. Jude Agrees to Buy Electromedics in $90 Million Deal," The Wall Street Journal, December 8, 1993, p. C14.
"St. Jude Medical Picks Lawrence Lehmkuhl as President and Chief," The Wall Street Journal, February 12, 1985, p. 47.
Wyatt, Edward A., "The Mugging of St. Jude," Barron's, August 31, 1992, pp. 17, 25.
Zipser, Andy, "Heart's Content," Barron's, September 3, 1990, p. 34.
Zipser, Andy, "Twelve Winning Months," Barron's, January 6, 1992, p. 34.
Source: International Directory of Company Histories, Vol. 11. St. James Press, 1995.
