St. Jude foresees FDA warning letter

St. Jude Medical Inc. said Wednesday that third-quarter profit sank 22 percent from a year ago and also announced that it could get a regulatory warning letter targeting the facility that manufactured its recalled Riata heart leads.

The U.S. Food and Drug Administration is inspecting St. Jude's cardiac rhythm management plant in Sylmar, Calif., which makes defibrillators. CEO Daniel Starks said the probe could end with a warning letter, but he did not give details about what it would address.

Such a letter can prevent a company from getting additional products approved by the FDA until deficiencies are corrected.

Starks said on a conference call with analysts that the company disclosed the possibility of the letter to be transparent to investors. "The overriding motive for us is the appreciation that investors do not like surprises," he said.

St. Jude shares tumbled in the wake of the news. The stock closed Wednesday at $40.85, down $2.09, or 4.87 percent.

The Sylmar facility is where St. Jude manufactured many of its Riata and Riata ST silicone leads -- wires that connect defibrillators to a patient's heart. Those leads have been under scrutiny since late 2010, when St. Jude sent a letter to doctors detailing that inner wires were penetrating the lead's outer insulation and pulled Riata from the market. In December 2011, the FDA recalled the device.

John Heinmiller, St. Jude executive vice president, said Wednesday that a warning letter could come 60 to 90 days after an inspection of the Sylmar plant is complete.

Problems with Riata, however, have already hit St. Jude's cardiac rhythm business, where Starks acknowledged that St. Jude has lost market share.

For the third quarter of 2012, St. Jude reported cardiac rhythm management sales of $691 million, an 8 percent drop compared with the third quarter of last year. Of that, implanted cardioverter defibrillator (ICD) sales were $412 million in the third quarter, a 7 percent decrease compared with the third quarter of 2011. St. Jude officials said that much of the decline in ICD sales was related to problems with the company's Riata leads.

Overall, the Little Canada-based company reported earnings of $176 million, or 56 cents per share, compared to $227 million, or 69 cents per share, in the same quarter a year ago. The results included after-tax charges of $80 million, or 25 cents per share, related to St. Jude's organizational realignment, which it announced earlier. Officials said the reorganization is expected to save St. Jude $50 million to $60 million, pretax.

St. Jude reported net sales of $1.3 billion, down 4 percent compared with the third quarter of 2011. Revenue for the third quarter increased less than 1 percent after adjusting for the effect of foreign currency.

In the call with analysts, Starks said he is optimistic about the prospects for new products and growing markets in 2013.

One continuing bright spot for St. Jude was its third-quarter sales of atrial fibrillation products, totalling $220 million. That was a 9 percent increase over the third quarter of 2011 -- and a jump of 13 percent when considering the impact of foreign currency.

The company expects its adjusted net earnings for the fourth quarter of 2012 to be in the range of 86 cents to 88 cents per share and its full-year 2012 adjusted net earnings to now be in the range of $3.42 to $3.44.

In a letter to investors Wednesday morning, Danielle Antalffy of Leerink Swann Research wrote that St. Jude's shares "could come under pressure" on the heels of the lower guidance and the possibility of a warning letter.

St. Jude also announced plans to buy back $300 million of company stock.