It wasn't just St. Jude Medical's profit warning that spooked Wall Street Tuesday. The company's cryptic explanation about why third-quarter sales were softer than expected was also a big factor for investors to dump the stock.
The Little Canada-based maker of pacemakers and implantable cardioverter defibrillators (ICDs) cut its profit forecast for the third quarter, blaming weak sales on hospitals' decisions to slow purchases of medical devices. As a result, St. Jude stock sank $4.84, or nearly 13 percent, to close Tuesday at $33.40 as broader market indexes rose about 1.4 percent. It was the biggest single-day decline in the stock since Jan. 24, 2000, when the company recalled heart valves, according to Bloomberg News.
"We believe that macroeconomic factors coupled with the continued pressures surrounding health care reform resulted in changes in purchasing behavior among some of our hospital customers," said CEO Dan Starks, who promised more details in mid-October when the company releases its regular earnings report.
Good thing, too, because Stark's opaque reference to health care reform "pressures" left analysts scrambling to determine whether St. Jude's sales problems were unique to the company or a harbinger of things to come for other medical device makers like Medtronic Inc. and Boston Scientific Corp.
"What did [Stark] mean by that?" said Aaron Vaughn, an analyst with Edward Jones Investments in St. Louis. "Hospitals being more diligent in getting lower prices [from medical device makers]? Hospitals getting less revenue [from the government]? Hospitals cutting down on suppliers? We're wondering what [St. Jude] is going to say during the earnings conference call."
A St. Jude spokeswoman did not return a call seeking comment.
Experts have long wondered how President Obama's drive for reform in health care would affect medical device makers. Congress is considering wholesale changes to the nation's health care system that hospitals fear would reduce Medicare payments. A bill before the Senate Finance Committee also includes a $4 billion annual tax on medical technology companies, which the industry is lobbying to avoid.
Gary Blackford, CEO of Universal Hospital Services in Edina, says the weak economy has forced hospitals to cut costs and delay spending. His company sells, leases and manages equipment for the country's largest hospital chains. It's also natural for hospitals to freeze spending to see how major health care changes will shake out, just as they did during President Clinton's attempt to reform health care in the early 1990s, Blackford said.
