Cardiac rhythm management industry still in a slump

The cardiac rhythm management industry looks like it needs of a jolt of its own, badly.

A look at the earnings releases of two of the big three players in the CRM Market, Boston Scientific (NYSE:BSX) and St. Jude Medical (NYSE:STJ), reveals that the slump in the cardiac rhythm management business is more persistent than some industry observers initially thought.

And with Medtronic Inc. (NYSE:MDT) set to file its earnings next week, the industry might have to face up to a new reality of stagnant growth in a formerly high flying business.

At Boston Scientific, sales of implantable cardioverter defibrillator (ICD) systems and pacemakers increased by 3 percent to $544 million for the three month period ended on June 30, 2011, compared to $527 million from the same period a year ago. However, a closer look at the numbers reveals a much cloudier picture.

First, taking out the benefit the company received from a favorable currency exchange, BSX’s worldwide CRM sales fell by $10 million or about 2 percent, compared to the same period last year, according to regulatory filings.

Second, when you take into account that near the end of first quarter of 2010, Boston Scientific abruptly stopped all shipments and and pulled field inventory of its icd’s in the U.S., the numbers look even worse.

The company reported U.S. sales in its CRM business were $315 million during the second quarter, a 2 percent decrease from the $322 million the company reported last year. However, BSX officials say the ship hold in 2010 cost it about $62 million in sales during the second quarter of 2010, meaning the company was already walking into the second quarter of 2011 with a significant headstart.

So a more accurate number for Boston Scientific’s Q2 2010 U.S. CRM sales is not $322 million but $384 million. Compared with that figure, Q2 2011 U.S. CRM sales were off by about 16 percent.

For its part, BSX officials said that taking into account the shipment hold of 2010 it estimated that “U.S. CRM net sales were negatively impacted by approximately $19 million, as compared to the same period in the prior year,” according to regulatory documents.

The primary culprit for the CRM market slump in the U.S. remains the toxic mix of a U.S. Dept. of Justice investigation into the hospitals ICD implant practices and a January 2011 study published in January in the Journal of the American Medical Assn. that showed that 22.5 percent of patients fell short of medical guidelines required to receive the $25,000 devices. Those factors, combined with consolidation in physician’s practices and a bad economy and you have a sticky wicket for an industry that continued to grow even in the darkest days of the recession.

However, even more troubling for the industry is that the CRM slump, once thought contained to domestic shores alone, appears to be spreading across the pond into the E.U., where taking out the benefit the company received from favorable currency, BSX officials said sales dropped by about $3 million, or 1 percent, because of “lower average selling prices, driven by competitive and other pricing pressures.”

BSX is hoping innovation and emerging markets will help increase sales in the near term. However, the company, which has already taken a nearly $700 impairment to goodwill charge, is setting very low expectations in the business unit, which is responsible for just under one-third of its total sales.

And BSX is hardly alone, competitor STJ, which seemed to be faring well against the slump during the first quarter, finally hit a wall during the spring quarter, according to the company.

The St. Paul, Minn.-based device maker’s U.S. CRM sales were just over $401 million during the three month period ended June 30, a 2 percent drop from the $409 million the company posted last year. STJ was one of the competitors that gained market share from the BSX shipment hold.

“What we see here in the market is that the U.S. CRM market fell into a pothole during the second quarter,” STJ CEO Daniel Starks said in a conference call with investors. “It’s 28% of our sales. I mean, so it’s a meaningful percent, but on the other hand, it’s 28% that fell into a pothole. It’s not clear to us yet how much of that was timing and how much of that was something else. We’re going to need the benefit of hindsight to finalize our analysis.”

Starks was non-committal as to the reasons on the theories that the slowdown came from a number of factors, including general malaise, unemployment, soft hospital admissions and the probe by the DOJ. However, he said most of the evidence the company received was anecdotal in nature and lacked a smoking gun.

Still, they have ratcheted back estimates of the market as well and are basically hoping for the best.

“We could convince ourselves that we ought to see that this ought to be characterized as a pothole, which is how I characterized it,” he said. “And the pothole by definition is finite and we’ll climb out of the pothole, but we are humbled by the fact that we have a lot of analysis and a wide margin of error.”

Medtronic, the third leg on the stool is set to announce its earnings results for its first quarter 2012 on August 23rd.

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