The medical device maker, based in Little Canada, Minnesota, enjoyed a stellar 2010, mostly due to impressive growth in its pacemaker and implantable cardioverter defibrillator business.
But the party may soon be over. Morgan Stanley downgraded St. Jude stock to “underweight,” which essentially means sell, citing a weak ICD/pacemaker market, pricing pressures, and increased competition from Medtronic Inc. (NYSE:MDT) and Boston Scientific Corp. (NYSE:BSX).
In his research report, Morgan Stanley analyst David Lewis says St. Jude faces significant challenges — both big picture and small picture.
First, the most daunting problem: Lewis expects the cardiac rhythm management (CRM) market in the United States to slow to zero growth and even fall two percent by 2013 as hospitals demand steep price cuts.
As a result, Lewis estimates St. Jude, which depends heavily on its CRM business, will generate just a four percent organic sales increase this year, compared to 11 percent just three years ago.
And Lewis doesn’t think St. Jude has the financial strength to buy growth.
“Despite a strong balance sheet and cash flow profile, St. Jude does not have the financial capacity to solve its exposure to the CRM market through acquisitions,” Lewis wrote.
To make matters worse, St. Jude will have plenty of competition for shrinking CRM sales. Last year, St. Jude essentially had the market to itself, racking up sales growth through a slew of product introductions.
But with Boston Scientific and Medtronic about to launch new ICDs and pacemakers, St. Jude will find itself on the defensive, Lewis says.
As of 11:30 EST, St. Jude stock is down 58 cents to $42.16.