Investors Applaud Guidant Revenue

The company swings to a loss but posts a 20% gain in revenue, sending shares up 7.4%.
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Updated from 11:27 a.m.

Shares of

Guidant

(GDT)

gained 7.4% Thursday, even though the company said it swung to a loss in the second quarter.

The Indianapolis-based maker of cardiac care and treatment devices said it lost $79.7 million, or 26 cents a share, from continuing operations for the quarter ended June 30, compared with a profit of $217.3 million, or 70 cents a share, for the same period last year.

The biggest hit to earnings was a $422.8 million litigation charge primarily related to a preliminary arbitration ruling in favor of

Cordis

in a patent dispute over a heart stent -- a wire mesh tube inserted into arteries after patients have undergone a procedure to unclog the arteries.

What captured investors' attention, however, was the company's reporting a 20% gain in second-quarter revenue to $944.9 million from $787.8 million last year. The second quarter's revenue is a company record.

The company's stock closed up $3.45 at $49.96.

Guidant reported Thursday that the Food and Drug Administration had approved for marketing a new implantable cardioverter defibrillator (ICD), thus augmenting Guidant's existing ICD business, whose second-quarter revenue jumped 50% to $377 million. ICDs are designed to combat dangerously fast heart rates by delivering electrical therapy to treat heart rhythm disorders.

The company also reported late Wednesday that the FDA had approved for marketing a new coronary stent called Multi-Link Vision.

The strong sales prompted the company to raise its full-year earnings per share guidance by 30 cents a share to a range of $2.27 to $2.37. The company predicts third-quarter EPS will be in the range of 52 cents to 57 cents.

The company also raised is full-year revenue guidance to a range of $3.65 billion to $3.8 billion from a range of $3.3 billion to $3.5 billion. The third-quarter revenue guidance is $910 million to $955 million.

"This looks like the mirror image of St. Jude Medical," said Thomas J. Gunderson, of U.S. Bancorp Piper Jaffray, in Minneapolis, referring to a Guidant competitor whose strong second-quarter financial report on Wednesday was met with a declining stock price because St. Jude simply matched Wall Street expectations. "Guidant beat expectations, and the the Street likes companies when they beat expectations," said Gunderson, who has a market perform rating on Guidant. "The market is giving a high value to their cardiac rhythm management business, which is doing very well." Gunderson doesn't own the stock, and he doesn't know of any investment-banking relations between his firm and Guidant.

Analysts raised some caution about the pace of future growth given the company's unsuccessful efforts so far to produce a drug-coated stent. Such products are more attractive to physicians because the drug-coated stents can do a better job of preventing arteries from reclogging.

Guidant has tried to develop two drug-coated stents; it is now in the early stages of working on a third. "That's the concern for the long term," said Stephen A. O'Neil, a health care analyst for Hilliard Lyons, in Louisville, Ky. "The first two drug-coated stents did not prove to be effective."

O'Neil has a long-term buy on the stock, primarily because of "the continued growth" of its ICD business. He owns shares of Guidant stock; he said he doesn't know of any investment-banking relationships between his firm and Guidant.

Second-quarter stent revenue dropped 2% to $224 million.

Thursday's announcement took some of the sting out of the company's recently announced settlement with the federal government related to Guidant's Ancure Endograft System used to treat abdominal aortic aneurysms. The company's EndoVascular Technologies unit last month agreed to pay $43.4 million plus an additional $49 million civil settlement to the government, as well as plead to 9 felony counts for misbranding products and to one count of a former employee's making false statements to the government.

Federal investigators charged the company with failing to disclose more than 2,600 malfunctions with the Ancure Endograft System. Guidant recalled the system in March 2001, but reintroduced it in August 2001 after receiving approval from the FDA.

But last month, Guidant said it would discontinue the Ancure Endograft line. The company expects to report for 2003 an after-tax loss of $100 million to $125 million for discontinued operations, settlement charges, costs associated with closing the business and operating losses. In the second quarter, Guidant recorded a $17 million net loss to operations for Ancure.

The company has said that patients who received the devices aren't at risk as a result of the company's decision. The company will ship the product and assist doctors in implanting Ancure through Oct. 1.