St. Jude Shows Cracks

The heart-device maker's shares plunge a day after its profit warning.
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Updated from 12:53 p.m. EDT

A profit warning from

St. Jude Medical

(STJ)

was sending a jolt through that company's stock and the rest of the heart-device makers on Wednesday, putting a serious dent in Wall Street's thinking about the sector.

Traders were punishing St. Jude a day after it offered disappointing first-quarter estimates. The stock was the biggest percentage loser at the

New York Stock Exchange

and was lately sinking $5.24, or 12.7%, to $36.06. Nearly 37 million shares had changed hands, roughly 12 times the average volume for a normal trading day.

Other companies that make heart mechanisms like defibrillators and pacemakers were also weaker, but to a much lesser extent.

Medtronic

(MDT) - Get Report

fell 1.5% to $50.62, and

Guidant

(GDT)

, whose shares are offered protection by the fact that it's about to be acquired, dipped 0.4% to $76.85.

Boston Scientific

(BSX) - Get Report

, the company that's buying Guidant, was losing 1.2% to $21.87.

After the market closed Tuesday, St. Jude lowered its quarterly sales expectations to $784 million from between $799 million and $839 million, citing weaker-than-expected revenue from implantable cardioverter defibrillators in the U.S.

The reduced forecast represents year-over-year growth of 18%, but analysts surveyed by Thomson First Call were looking for a top line of $827.5 million.

The St. Paul, Minn., company expects to report first-quarter earnings of 35 cents to 36 cents a share when its results come out April 19. Analysts had been calling for a profit of 39 cents a share.

"While most of our business continues to meet or exceed expectations, the events in the marketplace over the past year have led to increased volatility and have made ICD market growth patterns in the United States less predictable," St. Jude Chief Executive Daniel Starks said in a statement.

Defibrillators, which deliver a shock to hearts with potentially deadly arrhythmias, should have sales of $262 million in the quarter, a 27% increase from the same period a year ago but below St. Jude's earlier projections.

"The quarter missed our estimates and guidance dramatically, leading us to conclude that our thesis on St. Jude and/or the ICD market is broken," Robert Faulkner, a medical-devices analyst at JMP Securities, wrote in a research report. "The EPS and growth outlook are unclear with significant potential variability, we believe."

Based on the St. Jude estimates alone, Faulkner lowered his first-quarter worldwide ICD market growth estimate to 8% from 12%. Faulkner also downgraded St. Jude's shares to market perform from strong buy and lowered his earnings estimates through 2008.

What kept him from dropping his rating further, he says, is the possibility that St. Jude could be taken over by a company attracted to its pacemakers, defibrillators and stents -- the devices that are used to prop open arteries cleared of blockages.

St. Jude has in the past been mentioned by analysts as a potential target for bigger companies like

Johnson & Johnson

(JNJ) - Get Report

.

"To date, we have not heard a compelling explanation from the industry of why the market has slowed," Faulkner says. "We have not been able to account for it ourselves, and it seems clear the companies do not fully understand what is going on either."

JMP Securities downgraded Medtronic as well, lowering its rating to market-outperform from strong buy. JMP performs and expects to perform investment-banking and advisory services for the companies it covers in its research reports.

Other analysts were also commenting on how the St. Jude news might affect perceptions of Medtronic. Merrill Lynch analyst Katherine Martinelli tempered her growth expectations but maintained her neutral rating on Medtronic. Merrill Lynch has provided investment banking for the company.

Meanwhile, Bear Stearns medical-devices analyst Rick Wise reiterated his outperform rating on the stock.

"We think

Medtronic's diversified profile of market-leading franchises makes it highly likely that the company can continue to turn in mid-teens EPS growth over the next few years," Wise wrote in a research report. Bear Stearns has provided noninvestment-banking services to St. Jude, Medtronic and Guidant.

Last year, St. Jude and Medtronic saw a modest benefit from the market share Guidant lost amid its recalls of tens of thousands of defibrillators and pacemakers. Guidant's problems led J&J to abandon a $76-a-share takeover offer, and ultimately resulted in Boston Scientific's plan to buy the company for $80 a share.