October has not been kind to St. Jude Medical (NYSE:STJ).
On Wednesday, the company, apparently against all industry precedent, warned Wall Street of a possible warning letter from the U.S. Food and Drug Administration and saw its shares decline 6 percent.
But earlier in October, it received communication from a key supplier that may have a significant impact on its Cardiac Rhythm Management Division. AorTech plc makes a polymer — the so-called Optim coating or insulation– that is used in many St. Jude Medical products including the much-touted Durata defibrillator lead. The durability and safety of the Durata lead is under the spotlight ever since previous generations of leads lacking the Optim coating have been recalled for causing deaths and for their potential to cause severe injury. St. Jude has repeatedly talked about the strength of the Optim coating although a recent study calls that into question.
In early October, AorTech sent St. Jude Medical a rectification letter in which it alleged that St. Jude Medical had breached its contract with the company and threatened that it would stop making the Optim polymer starting Nov. 4.
On Tuesday, St. Jude asked for legal relief from a Los Angeles district court that would require AorTech to continue supplying the polymer by clearing St. Jude of any alleged breach as cited by AorTech. From that document, it appears that AorTech has taken umbrage over St. Jude hiring an AorTech employee, among other alleged breaches.
Before St. Jude filed for that injunction, an analyst described the AorTech situation as “another headache” for St. Jude. Raj Denhoy of Jefferies said this in a research note on Oct. 12:
Optim insulation has been used in STJ CRM leads since July, 2006. STJ is all in on Optim as the material is widely used across the company’s entire CRM portfolio. Currently all STJ leads — pacing, LV [left ventricle] and defibrillation –are coated with Optim. STJ has an exclusive supply agreement with AorTech for the material that extends into perpetuity. The terms of the contract have not been favorable for AorTech and the company has operated at a loss every year since. AorTech put itself up for sale earlier this year and the company has disclosed 11 companies looked but no deal was consummated. There was one nonbinding offer for the polymer business. Given the backstory of AorTech pursuing a sale of the polymer division and recently the company as a whole, the rectification notice has been viewed skeptically. However, as a public company, AorTech could not make baseless claims without ramification and the company has been insistent that their position is sound.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Denhoy estimates, after a conversation with AorTech’s chairman, that St. Jude likely has an 18-month supply of Optim.
St. Jude CEO Dan Starks has sought to calm investors by saying the company has contingency plans, but it’s not clear what they are.
And whatever they are, Stark’s statement appears to contradict what St. Jude Medical said in the temporary restraining order it filed Thursday. In that motion, St. Jude said that it has “suffered immediate and irreparable harm as a result of AorTech’s threatened repudiation and termination of [Pacesetter’s] supply of licensed products.”
Meanwhile, AorTech said Friday that it will do everything it can to prevent St. Jude’s attempt to prevent a contract termination.”
