Business Analysis: St. Jude Medical Inc.
Business description
St. Jude Medical Inc. was founded in 1976 and headquartered in Saint Paul, Minnesota. The Company develops, manufactures and distributes medical devices. The company operates in two divisions Implantable Electronic Systems, and Cardiovascular and Ablation Technologies. The company sells its product through direct sales and independent distributors
St. Jude has four main business segments: Cardiac Rhythm Management (CRM) (59% of net sale) Cardiovascular (20%), Neuromodulator (14%), and Atrial Fibrillation (7%). St. Jude Medical Inc. is one of the three principal manufactures and suppliers in global Cardiac Rhythm Management market
St. Jude Medical Inc. develops innovative product that reduce health care cost and improve …show more content…
outcome for cardiac, neurological and chronic pain patients. The company works with independence to frame problems and develops and executes action plans to gather data to develop strategies. The company establish as the market leader which have multiple segment business and ability to work in multi-disciplinary organization. Identifies market opportunities, business plans and required for strategic.
St. Jude’s strategy is focus on innovation rather than delivering cheaper products to emerging market. The company delivering high-tech medical product to addressing the demand of health care environment and cost-effectiveness.
After acquisition of Nanostim, a company making a wireless and leadless pacemaker. St Jude Medical Inc. increase domestic market as well as continues to innovate a drive sales growth. The company will produce the new devices on market (the miniaturized pacemaker) this new technology will have patient more safe got EU and FDA approval.
Industry overview
The US medical supplies and devices manufacturing industry remains the largest medical device market in the world with a market size of around $110 billion, and it is expected to reach $133 billion by 2016. Major companies include Johnson & Johnson, GE Healthcare, Siemens Medical Systems, and Medtronic. The medical supply and device manufacturing industry includes subsectors that produce electro-medical equipment, irradiation apparatuses, surgical and medical instruments, surgical appliances and supplies, and dental equipment and supplies. Medical device companies are located throughout the country, but they are mainly concentrated in regions with high technology industries like biotechnology and microelectronics. The highest number of medical device companies located in the states of California, Florida, New York, Pennsylvania, Michigan, Massachusetts, Illinois, Minnesota, and Georgia; while Washing, Wisconsin, and Texas are states that have significant sector employment.
The industry has significant influences due to government involvement and legal liability concerns. They can have impacts on an organization’s bottom line. Healthcare costs keep on increasing that cause insurance companies and government programs to limit payments for several medical treatments that require medical supplies or devices. As strict regulations are provided by government policies, organizations will continue to have to weigh the costs of doing business. As long as with the government involvement, the market also experiences a high level of legal liability. Companies face high risk as have to hold liability for injuries which causes by their products. So lawsuits, investigations, and recalls will cause major costs to the companies. The other legal costs are come from patents, licenses, and intellectual property rights due to the rapidly evolving of medical industry technology.
The medical device industry currently experiences some trends that are slowing growth, environment update, greater attention to quality, and product trends. The industry is predicted to the reality more modest 2 to 5% annual growth through the decade, according to Healthcare Finance News, May 2013. Also Bloomberg Businessweek assessed the performance of the industry’s top ten players and pegged industry median sales growth at 2.35% in 2013 and estimated 2.79% growth in 2014. These statistic indicates a slow growth for the medical device industry. Second, a 2.3% excise tax charged to manufacturers on their sales of medical devices has been into effect from 2013. Another change that affects the manufacturers is the requirement for clinical studies up to five years after CE making. This change means that no longer is a CE Mark a guarantee to marketability or for early revenue while a new device undergoes the more complex, lengthy approval process in the US. Then, quality is most closely associated with safety and consistent effective outcomes. The FDA’s center for Devices and Radiological Health (DCRH) reported that annual number of medical device recalls increased by 97% from 604 recall events in FY2003 to 1,190 in FY2012. The report also concluded that from FY2010 to FY2012, US based manufacturing firms accounted for approximately 80% of device recalls. These showed that the quality of medical devices is upgrading that makes safety and effectiveness devices. Finally, the product trend now focus on patient experience that indicated in some product sectors are predicted to have greatest growth within the industry. The sectors included structural heart, robotic assistance for surgery and treatment planning, home care, neuro devices.
Competitive positioning (Porter’s Five Forces)
New entrants
The medical supply and devices manufactures industry has a very competitive background which is being motivated by population demographics and advances in medical knowledge and technology. However, it has a high barrier to enter into this industry. There are strict medical device regulation for product approval by the Food and Drug Administration (FDA) which include establishment registration, medical device listing, investigational device exemption for clinical studies, and so on. Besides, there are some requirements for copyrights and patents which cause the barrier to enter this industry even higher. Moreover, new entrants have to deal with the large size of the competitors in this market. There is a barrier to entry for small companies as these large companies can utilize their economies of scale.
Substitutes
Some St Jude Medical Inc’s competitors are Medtronic Inc (MDT), Stryker Corporation (SYK), C.
R. Bard, Inc (BCR), Abbott Laboratories (ABT), Boston Scientific Inc (BCR). The medical devices are usually close enough that either would effectively treat the patient’s condition, that causes St Jude Medical’s products have a lot substitutes. Also, substitute products exist for some types of medical devices but not all, such as pharmaceuticals substitutions. Moreover, due to the rapid biotechnology development, the certain devices will become out of date which is many device manufacturers’ concerns. Looking into the future, there is a significant threat that biological breakthroughs could radically alter the medical device industry by giving the patients effective treatment options that do not require a medical device. Hence, the threat of substitutes is correspondingly moderate since the demand for the products in general is strong and is …show more content…
growing.
Buyer’s bargaining power
Buyers of medical devices are usually hospitals or physicians; so the number of buyers is relatively low. This causes buyers hold a certain degree of power. Since the indifferent nature of products, switching costs in this market are extremely low. However, buyers also tend to seek high quality and reliability. Along with the advancement of technology, buyers are more knowledgeable about products and can compare prices with each other. In addition, St Jude Medical reported total revenue increase in the third quarter 2014 by 2.54% year on year. The sales growth was above its competitors’ average revenue growth of 1.67%, recorded in the same quarter. Therefore, the force of buyers is moderate.
Suppliers’ bargaining power
The producers of raw materials, component and equipment manufacturers are primary suppliers to this industry. There is little differentiation in supply materials, so consequently it is more willing to switch suppliers on basis of price. St Jude Medical can bargain cheaper prices with different suppliers. In addition, contracts with suppliers usually increase supplier power slightly. As a result, supplier bargaining power is moderate.
Rivalry
St Jude Medical has significant competitors in each its division. For Cardiac rhythm management market and neuromodulation market, there are Medtronic Inc, Boston Scientific Corporation, and Biosense Webster, a division of Johnson & Johnson, Inc. The cardiovascular market is also highly competitive with numberous competitors. Its primary competitors in this market is Abbott laboratories, Cordis – a division of Johnson & Johnson. Low product differentiation in some key markets strengthens the rivalry. Rivalry force is strong for St Jude Medical.
Investment Summary: Suggest to buy and hold due to a high expectation of growth. The target value is higher than stock price which suggests underpricing and as compared to other companies in the sector commands the third highest stock price. Economic reasons for this consistent increase in stock is rooted in the new US healthcare legislation that will increase medical device usage and acquisitions made by STJ over the recent year.
Operating Income St. Jude’s net operating income has decreased over the last three years but this is In part due to St. Jude acquiring various companies.
Acquisitions
St. Jude recently has acquired two companies within the last year; CardioMEMS and NeuroTherm. Both acquisitions are instrumental in the fact that both companies made new and innovative products that can change the field that they represent. CardioMEMS HF systems helps doctors stabilize pulmonary artery pressure by monitoring wirelessly a heart failure patient’s worsening situation and can indicate to doctors what treatment can be most beneficial without the need of constant monitoring. NeuroTherm on the other hand makes a product that uses radio frequency ablation to treat spinal pain. Both of these products lead to new market entry points. This chronic pain alone affects at least 1.5 billion people worldwide and has a hefty price tag of $300 billion in the US and €300 billion in the Eurozone.
Valuation
We evaluated STJ by use discounted free cash flow (DCF) method and capital asset pricing model (CAPM) Based on data we got we calculated growth rate by using ROE, dividend per share and EPS. We got the growth rate of 0.237510381 % of year 2013.
Cost of equity:
The cost of Equity was calculated by the CAPM model, using 10-year government bond risk free rate of 2.29 the expected market expected return of 8.46 and the adjusted beta of 1.506 % to reflect the Cost of Equity of 11.59%. The Data was extracted from Morningstar.
We use constant growth (DDM) with assumption that growth rate reflect term expectation and equal to 5-years average growth rate for DCF model with dividend per share equal – 0.9825783 and average 5 years growth rate of 0.232446 and cost of equity r of 11.59% to calculated intrinsic value equal 10.38708344
Multiple Valuation: Price earning per ratio
The average price/Earnings ratio of STJ next 4 year from 2013 equal 16.575
Investment Risk: Current risks for investing in Saint Jude Medical are from; changes in Healthcare, rapid changing of technology and assimilation of new acquisitions.
Changes in Healthcare: Even the slightest change in healthcare can affect STJ. Most notably new regulations could cause new technology to not go to market due to insufficient testing of products. This could slow production of new products and will cause companies such as STJ to pay more for extra test trials. With the rising cost of healthcare hospitals have raised prices on items and procedures that can cause an increase in cost for new technology to enter the process.
Rapid Technology Advances In the medical devices industry new technology eventually over take the conventional technology. With competition being so fierce in the medical devices field. Compromising is not an option. Cheap competitive devices/products do not necessarily mean good quality. So technology makes these devices more risky
Patents:
Considering having new technological breakthroughs with medical devices are important so is protecting patents. Recently STJ hasn’t really had a huge lawsuit under way but constant protecting of Intellectual Property is a
risk.
New Acquisitions: Newly purchased companies usually have no issue with combining with the acquiring company but there have been cases where the transitions are costly and unsmooth. With NeuroTHERM being the newest acquired there is slight risk with taking them aboard.
Conclusion:
By combining both valuation methods for company’s intrinsic value and the market sentiment with the growth potential with the current price of 68.14 and target price of 111.52 help to make more clear for recommendation to buy with a potential upside gain. And given the current risks, industry standing and investments; we strongly suggest a purchasing plan for STJ.
St. Jude Medical Inc. was founded in 1976 and headquartered in Saint Paul, Minnesota. The Company develops, manufactures and distributes medical devices. The company operates in two divisions Implantable Electronic Systems, and Cardiovascular and Ablation Technologies. The company sells its product through direct sales and independent distributors
St. Jude has four main business segments: Cardiac Rhythm Management (CRM) (59% of net sale) Cardiovascular (20%), Neuromodulator (14%), and Atrial Fibrillation (7%). St. Jude Medical Inc. is one of the three principal manufactures and suppliers in global Cardiac Rhythm Management market
St. Jude Medical Inc. develops innovative product that reduce health care cost and improve …show more content…
outcome for cardiac, neurological and chronic pain patients. The company works with independence to frame problems and develops and executes action plans to gather data to develop strategies. The company establish as the market leader which have multiple segment business and ability to work in multi-disciplinary organization. Identifies market opportunities, business plans and required for strategic.
St. Jude’s strategy is focus on innovation rather than delivering cheaper products to emerging market. The company delivering high-tech medical product to addressing the demand of health care environment and cost-effectiveness.
After acquisition of Nanostim, a company making a wireless and leadless pacemaker. St Jude Medical Inc. increase domestic market as well as continues to innovate a drive sales growth. The company will produce the new devices on market (the miniaturized pacemaker) this new technology will have patient more safe got EU and FDA approval.
Industry overview
The US medical supplies and devices manufacturing industry remains the largest medical device market in the world with a market size of around $110 billion, and it is expected to reach $133 billion by 2016. Major companies include Johnson & Johnson, GE Healthcare, Siemens Medical Systems, and Medtronic. The medical supply and device manufacturing industry includes subsectors that produce electro-medical equipment, irradiation apparatuses, surgical and medical instruments, surgical appliances and supplies, and dental equipment and supplies. Medical device companies are located throughout the country, but they are mainly concentrated in regions with high technology industries like biotechnology and microelectronics. The highest number of medical device companies located in the states of California, Florida, New York, Pennsylvania, Michigan, Massachusetts, Illinois, Minnesota, and Georgia; while Washing, Wisconsin, and Texas are states that have significant sector employment.
The industry has significant influences due to government involvement and legal liability concerns. They can have impacts on an organization’s bottom line. Healthcare costs keep on increasing that cause insurance companies and government programs to limit payments for several medical treatments that require medical supplies or devices. As strict regulations are provided by government policies, organizations will continue to have to weigh the costs of doing business. As long as with the government involvement, the market also experiences a high level of legal liability. Companies face high risk as have to hold liability for injuries which causes by their products. So lawsuits, investigations, and recalls will cause major costs to the companies. The other legal costs are come from patents, licenses, and intellectual property rights due to the rapidly evolving of medical industry technology.
The medical device industry currently experiences some trends that are slowing growth, environment update, greater attention to quality, and product trends. The industry is predicted to the reality more modest 2 to 5% annual growth through the decade, according to Healthcare Finance News, May 2013. Also Bloomberg Businessweek assessed the performance of the industry’s top ten players and pegged industry median sales growth at 2.35% in 2013 and estimated 2.79% growth in 2014. These statistic indicates a slow growth for the medical device industry. Second, a 2.3% excise tax charged to manufacturers on their sales of medical devices has been into effect from 2013. Another change that affects the manufacturers is the requirement for clinical studies up to five years after CE making. This change means that no longer is a CE Mark a guarantee to marketability or for early revenue while a new device undergoes the more complex, lengthy approval process in the US. Then, quality is most closely associated with safety and consistent effective outcomes. The FDA’s center for Devices and Radiological Health (DCRH) reported that annual number of medical device recalls increased by 97% from 604 recall events in FY2003 to 1,190 in FY2012. The report also concluded that from FY2010 to FY2012, US based manufacturing firms accounted for approximately 80% of device recalls. These showed that the quality of medical devices is upgrading that makes safety and effectiveness devices. Finally, the product trend now focus on patient experience that indicated in some product sectors are predicted to have greatest growth within the industry. The sectors included structural heart, robotic assistance for surgery and treatment planning, home care, neuro devices.
Competitive positioning (Porter’s Five Forces)
New entrants
The medical supply and devices manufactures industry has a very competitive background which is being motivated by population demographics and advances in medical knowledge and technology. However, it has a high barrier to enter into this industry. There are strict medical device regulation for product approval by the Food and Drug Administration (FDA) which include establishment registration, medical device listing, investigational device exemption for clinical studies, and so on. Besides, there are some requirements for copyrights and patents which cause the barrier to enter this industry even higher. Moreover, new entrants have to deal with the large size of the competitors in this market. There is a barrier to entry for small companies as these large companies can utilize their economies of scale.
Substitutes
Some St Jude Medical Inc’s competitors are Medtronic Inc (MDT), Stryker Corporation (SYK), C.
R. Bard, Inc (BCR), Abbott Laboratories (ABT), Boston Scientific Inc (BCR). The medical devices are usually close enough that either would effectively treat the patient’s condition, that causes St Jude Medical’s products have a lot substitutes. Also, substitute products exist for some types of medical devices but not all, such as pharmaceuticals substitutions. Moreover, due to the rapid biotechnology development, the certain devices will become out of date which is many device manufacturers’ concerns. Looking into the future, there is a significant threat that biological breakthroughs could radically alter the medical device industry by giving the patients effective treatment options that do not require a medical device. Hence, the threat of substitutes is correspondingly moderate since the demand for the products in general is strong and is …show more content…
growing.
Buyer’s bargaining power
Buyers of medical devices are usually hospitals or physicians; so the number of buyers is relatively low. This causes buyers hold a certain degree of power. Since the indifferent nature of products, switching costs in this market are extremely low. However, buyers also tend to seek high quality and reliability. Along with the advancement of technology, buyers are more knowledgeable about products and can compare prices with each other. In addition, St Jude Medical reported total revenue increase in the third quarter 2014 by 2.54% year on year. The sales growth was above its competitors’ average revenue growth of 1.67%, recorded in the same quarter. Therefore, the force of buyers is moderate.
Suppliers’ bargaining power
The producers of raw materials, component and equipment manufacturers are primary suppliers to this industry. There is little differentiation in supply materials, so consequently it is more willing to switch suppliers on basis of price. St Jude Medical can bargain cheaper prices with different suppliers. In addition, contracts with suppliers usually increase supplier power slightly. As a result, supplier bargaining power is moderate.
Rivalry
St Jude Medical has significant competitors in each its division. For Cardiac rhythm management market and neuromodulation market, there are Medtronic Inc, Boston Scientific Corporation, and Biosense Webster, a division of Johnson & Johnson, Inc. The cardiovascular market is also highly competitive with numberous competitors. Its primary competitors in this market is Abbott laboratories, Cordis – a division of Johnson & Johnson. Low product differentiation in some key markets strengthens the rivalry. Rivalry force is strong for St Jude Medical.
Investment Summary: Suggest to buy and hold due to a high expectation of growth. The target value is higher than stock price which suggests underpricing and as compared to other companies in the sector commands the third highest stock price. Economic reasons for this consistent increase in stock is rooted in the new US healthcare legislation that will increase medical device usage and acquisitions made by STJ over the recent year.
Operating Income St. Jude’s net operating income has decreased over the last three years but this is In part due to St. Jude acquiring various companies.
Acquisitions
St. Jude recently has acquired two companies within the last year; CardioMEMS and NeuroTherm. Both acquisitions are instrumental in the fact that both companies made new and innovative products that can change the field that they represent. CardioMEMS HF systems helps doctors stabilize pulmonary artery pressure by monitoring wirelessly a heart failure patient’s worsening situation and can indicate to doctors what treatment can be most beneficial without the need of constant monitoring. NeuroTherm on the other hand makes a product that uses radio frequency ablation to treat spinal pain. Both of these products lead to new market entry points. This chronic pain alone affects at least 1.5 billion people worldwide and has a hefty price tag of $300 billion in the US and €300 billion in the Eurozone.
Valuation
We evaluated STJ by use discounted free cash flow (DCF) method and capital asset pricing model (CAPM) Based on data we got we calculated growth rate by using ROE, dividend per share and EPS. We got the growth rate of 0.237510381 % of year 2013.
Cost of equity:
The cost of Equity was calculated by the CAPM model, using 10-year government bond risk free rate of 2.29 the expected market expected return of 8.46 and the adjusted beta of 1.506 % to reflect the Cost of Equity of 11.59%. The Data was extracted from Morningstar.
We use constant growth (DDM) with assumption that growth rate reflect term expectation and equal to 5-years average growth rate for DCF model with dividend per share equal – 0.9825783 and average 5 years growth rate of 0.232446 and cost of equity r of 11.59% to calculated intrinsic value equal 10.38708344
Multiple Valuation: Price earning per ratio
The average price/Earnings ratio of STJ next 4 year from 2013 equal 16.575
Investment Risk: Current risks for investing in Saint Jude Medical are from; changes in Healthcare, rapid changing of technology and assimilation of new acquisitions.
Changes in Healthcare: Even the slightest change in healthcare can affect STJ. Most notably new regulations could cause new technology to not go to market due to insufficient testing of products. This could slow production of new products and will cause companies such as STJ to pay more for extra test trials. With the rising cost of healthcare hospitals have raised prices on items and procedures that can cause an increase in cost for new technology to enter the process.
Rapid Technology Advances In the medical devices industry new technology eventually over take the conventional technology. With competition being so fierce in the medical devices field. Compromising is not an option. Cheap competitive devices/products do not necessarily mean good quality. So technology makes these devices more risky
Patents:
Considering having new technological breakthroughs with medical devices are important so is protecting patents. Recently STJ hasn’t really had a huge lawsuit under way but constant protecting of Intellectual Property is a
risk.
New Acquisitions: Newly purchased companies usually have no issue with combining with the acquiring company but there have been cases where the transitions are costly and unsmooth. With NeuroTHERM being the newest acquired there is slight risk with taking them aboard.
Conclusion:
By combining both valuation methods for company’s intrinsic value and the market sentiment with the growth potential with the current price of 68.14 and target price of 111.52 help to make more clear for recommendation to buy with a potential upside gain. And given the current risks, industry standing and investments; we strongly suggest a purchasing plan for STJ.