Analyst Bob Hopkins of Bank of America was mystified and sounded a bit worried on the St. Jude Medical (NYSE:STJ) morning conference call to discuss the company’s third-quarter earnings Wednesday.
St. Jude CEO Dan Starks had just done the unthinkable.
He had warned investors that he was expecting a warning letter from the U.S. Food and Drug Administration, even as the FDA was continuing its inspection of the medical device maker’s manufacturing plant in Sylmar, California. The plant makes the company’s high voltage leads, and its high voltage leads are a focus of regulatory scrutiny given that the company recalled Riata and Riata ST ICD leads whose cables have the risk of coming out of their insulation and have failed to deliver treatment at times and caused deaths. Last week, the Wall Street Journal published an article that said St. Jude had known about Riata problems since at least 2005. The FDA has also been criticized for moving too slowly to classify the recall of the defective leads as a Class I recall late last year.
Despite the history, Hopkins sounded genuinely surprised given that Stark’s announcement has apparently no precedent.
“I don’t think I have ever heard a company proactively tell Wall Street they’re going to get a warning letter before actually receiving a warning letter or even a 483 [the form that the FDA uses to document and communicate worries following a plant inspection]. So, I think the important question is why did you make that comment. Did the FDA uncover something in Sylmar and told you about it? Or Have you guys uncovered something at Sylmar that you want to be proactive about and have notified FDA about? Can you give us a little more detail there that drove you to make that comment about the warning letter and 483?”
Starks tried to soothe.
“Well, the overriding motive for us is the appreciation that investors do not like surprises,” he told analysts, adding that investors should be aware that in the event of a warning letter, St. Jude has already taken into account its impact on 2013 operating plans.
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.
Starks also commented at length about how everyone should be “realistic about the role that warning letters play in today’s regulatory environment.”
And in a comment that is sure to raise eyebrows from others in the industry who often complain about the regulatory burden, he said the following:
“Another reason we made the comment is that in the long run, we think it’s good for our markets if the public knows that the FDA is exercising its regulatory oversight of medical device companies in a very rigorous and robust way, and it’s clear to us that FDA is doing that.”
But he provided zero specifics.
Starks said he didn’t know what percentage of the company’s cardiac rhythm management products are made at Sylmar, but said CRM products are also made at Puerto Rico and Malaysia. (Later, a St. Jude spokeswoman said the company doesn’t break out what percentage of the company’s products are made there. But she did say that about 1,720 employees work there.)
As each analyst tried to worm out some nugget of information that might help to frame the issue of the impact of the unissued warning letter, Starks and a cardiac rhythm management senior executive dodged each question, while apologizing profusely for not being specific.
Two things were clear, though — the FDA inspection of the Sylmar plant will end very soon. So, a warning letter, if one materializes, will come between now and the fourth-quarter conference call. And manufacturing plants in Puerto Rico and Malaysia were inspected and those didn’t lead to any warning letters.
Expect the stock to take a major beating today.
A previous version of this story misspelled Sylmar.
[Photo Credit: FreeDigitalPhotos user Idea go]
