St. Jude Medical Inc
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St. Jude Medical, Inc. One Lillehei PlazaSt.
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One Lillehei Plaza

St. Paul, Minnesota 55117-9983

U.S.A.

Telephone: (651) 483-2000

Toll Free: (800) 328-9634

Fax: (651) 490-4333

Web site:http://www.sjm.com

Public Company

Incorporated: 1976

Employees: 5,000

Sales: $1.17 billion (2000)

Stock Exchanges: New York

Ticker Symbol: STJ

NAIC: 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing; 339112 Surgical and Medical Instrument Manufacturing; 339113 Surgical Appliance and Supplies Manufacturing

St. Jude Medical, Inc. (SJM) is the world’s leading maker of mechanical heart valves and serves physicians worldwide with medical devices for cardiovascular applications. Besides heart valves, the firm’s other products include pacemakers, implantable cardioverter defibrillators (which are used to treat hearts that beat too fast), and specialty catheters. Based in St. Paul, Minnesota, the company maintains manufacturing operations in Arizona, California, Minnesota, South Carolina, Puerto Rico, Canada, Brazil, and Sweden. SJM sells its products in more than 100 countries worldwide.

Mechanical Heart Valve Origins in the 1970s and 1980s

In 1972, the bileaflet mechanical heart valve was developed at the University of Minnesota. This new valve was made of pyrolytic carbon, a hard, shiny material that did not cause blood clots and could last for years in the human body. St. Jude Medical, Inc. was formed and incorporated in 1976 to further develop, market, and manufacture this valve. The company was founded by Manuel A. Villafana, a businessman who began his career at the helm of Cardiac Pacemakers, Inc., revolutionizing the industry with the innovation of long-lasting lithium batteries. Two years before selling his company to Eli Lilly for $127 million, Villafana formed SJM. (He named the company after the patron saint of lost causes and hospital workers.)

In February 1977, SJM made an initial stock offering at $3.50 per share. In October, the first human implant of the SJM mechanical heart valve took place. Dr. Demetre Nicoloff performed the operation on Helen Heikkinen, a 69-year-old heart patient, at the University of Minnesota Hospital in Minneapolis.

A superb salesman, Villafana convinced so many heart surgeons to try the SJM heart valve that the company was criticized for the emphasis placed on sales in what was supposedly a clinical trial program. The Food and Drug Administration (FDA) became involved, prompting Villafana’s departure from the company in 1981. Villafana would later establish Helix Biocore, a competitor company.

In 1982, SJM received approval from the FDA to market its mechanical heart valve in the United States. SJM’s profits began to ascend rapidly, rising from $2.3 million in 1982 to $4.3 million in 1983. By 1984, SJM had achieved revenues of almost $35 million and profits of $5.3 million, solely from sales of its mechanical heart valve. Twenty-five percent of the 100,000 artificial valves implanted in diseased hearts that year were SJM valves. As a one-product company with a market value of $41 million, SJM could not afford any threat to the successful manufacturing of that vital product.

A threat did come in 1984, however. The distinctiveness of SJM’s heart valve was found in the marriage of a bileaflet design, created by St. Jude engineers, and its anti-blood-clotting carbon skin coating, produced and supplied by CarboMedics, a subsidiary of Intermedics, Inc., a cardiac-pacemaker company. In March 1984, the two companies were unable to reach an agreement on a long-term supply contract and filed countersuits.

The dispute had actually begun shortly after CarboMedics was purchased by Intermedics in 1979. Intermedics’s reputation in the field was that of a tough player, and SJM executives began to quietly look for a second-source supplier of the valve’s carbon coating. In addition, Villafana had launched a pacemaker-development project, in hopes of diversifying the company. G. Russell Chambers, Intermedics’s director, threatened to raise the price of the carbon coating when he learned of the pacemaker project. Pacemaker sales accounted for the majority of Intermedics’s profits. Chambers’s threat worked; Villafana dropped the pacemaker project.

At the same time, a company called Hemex was formed in 1979, selling a heart valve that was similar to SJM’s. Observing that Intermedics officers and directors owned stakes in Hemex and that Chambers’s son, Rusty Chambers, was Hemex’s chairperson, SJM inferred that Intermedics was behind this new competitor in the valve business.

Although Chambers denied any connection between the companies, SJM’s new CEO, LaVerne Rees, was unconvinced. In 1981, Rees directed the company to take the necessary steps toward development of its own carbon coating. When this costly and ambitious project was announced in SJM’s 1983 annual report, Chambers was outraged and demanded that SJM halt all research efforts. According to Business Week, an SJM consultant then attempted to purchase the carbon formula from an employee of CarboMedics. In 1983, Chambers directed his company to stop supplying SJM with carbon components. The dispute became heated, and court depositions alleged that CarboMedics hired detectives to search SJM garbage cans for stolen trade secrets.

CarboMedics charged SJM with patent infringement, while SJM responded with breach of contract, antitrust, and restraint-of-trade claims. Essentially, SJM alleged that Intermedics sought to achieve a monopoly and to restrain trade in the heart valve business. Each company accused the other of theft of trade secrets and contract violation. In the fall of 1984, SJM’s board let Rees go, leaving Chairperson William Hendrickson in command, with Thomas M. Garrett III—the attorney who drafted SJM’s articles of incorporation—playing a greater role in advising the company.

The legal battle continued for two years and involved court cases in the United States as well as in Europe. Because CarboMedics refused to supply SJM during this period, SJM ran out of completed valves to sell, forcing doctors and patients to look elsewhere for supplies, and eroding the sales and stock market earnings of both companies. According to Business Week, in 1985 SJM produced only about one-third of the 25,000 heart valves it had produced in 1984. Intermedics lost approximately $20 million on an annual basis, and SJM sank from record revenues of $35 million in 1984 to $26 million in 1985. SJM’s stock, which had previously been a high-rated investment, plummeted, as did that of CarboMedics. Meanwhile, competitors in the heart valve industry had a field day, as their sales—and their share of the market—increased.

In February 1985, SJM named Lawrence A. Lehmkuhl as its new president and CEO. Lehmkuhl, who had previously served as divisional president at American Hospital Supply Corp., made it his first priority to end the supplier boycott of SJM, which threatened to destroy the company’s ability to produce and market its only product. Lehmkuhl was selected not only on the basis of his potential to resolve the dispute, but also as a leader who might broaden the company’s product line, eliminating the vulnerability associated with being a one-product company. In September 1985, an agreement was signed by the two companies, allowing SJM to continue its carbon manufacturing research and development efforts and to produce limited quantities of pyrolytic carbon.

In 1986, the first SJM mechanical heart valve produced with the company’s own pyrolytic carbon-coated components was implanted in a patient in Germany. SJM augmented its mechanical heart valve business in 1986 when it acquired Bioimplant, expanding into tissue heart valves. For several years, however, the company sold the tissue valves only outside of the United States. SJM implemented a two-for-one stock split, tripling its authorized common shares to 30 million. Revenues for 1986 rose to $60.5 million.

Company Perspectives:

For more than 40 years, innovative technologies and products from St. Jude Medical have given people a “Second Chance” at life.

In 1958, a Swedish business that is now part of St. Jude Medical developed the world’s first implantable pacemaker, a device that has improved the quality of life for millions of people with bradycardia. Since 1977, more than one million patients have received our “gold standard” mechanical heart valves, and we are now developing new approaches to coronary bypass surgery. The Company’s innovative catheter products have made cardiac procedures more effective. And our implantable defibrillators offer sophisticated technologies unimaginable a few years ago.

These products provide creative approaches to treating cardiac diseases and renewed hope to our many patients. For millions of people around the world, a “Second Chance” has meant the opportunity to graduate from college, get married, climb a mountain, learn to play the guitar, raise a family, ride a bike, become grandparents. It’s meant better health, a richer life, and more quality time with loved ones.

At St. Jude Medical, we are proud to be part of our patients’ “Second Chances.”

Once again, the company demonstrated consistent growth and stock market value. By 1988, SJM was again a favorite pick for investment specialists. Fiscal 1987 had closed with a net profit of $17 million and $1.55 a share, with net income rising 44 percent over the prior year to $71.8 million and sales climbing 19 percent. Furthermore, the company had no debt. In fact, SJM’s cash balance was an astonishing $65 million. In an article in Barron’s, investment specialist Bing Carlin selected SJM as his favorite investment, citing competitor Baxter Travenol’s suspension of its heart valves (due to possible malfunction) and the FDA’s approval of SJM’s new low-cost plant in Puerto Rico as optimistic factors for SJM. Another competitor, Pfizer Inc., also experienced failure with its heart valve. In addition, SJM’s decision to sell directly to hospitals, rather than working through distributors, meant that the company would retain more profits. The company achieved revenues of $114 million and $148 million in 1988 and 1989, respectively.

Conservatively Expanding in the Early 1990s

In 1990, SJM established its International Division, headquartered in Brussels, Belgium. SJM was still a top-rated pick for investors, and the company’s stock was selling at 20 times earnings. Other than the decline in profits in 1985, SJM had demonstrated revenue growth of 30 percent or more each year, with revenues of $175.2 million in 1990, and the company possessed over $150 million in cash. More than 300,000 SJM mechanical heart valves had been put to use.

One reason for SJM’s success was that the average age of heart valve recipients had declined. Older patients favored non-mechanical heart valves, which were made of pig tissue and did not require anti-clotting medication. Such tissue valves had an average age of five years, and as the age of heart patients declined, the life expectancy after implant increased. This increased life expectancy created a greater demand for mechanical valves, since tissue valves would have to be replaced through open heart surgery after five years.

In addition, SJM had reached an agreement with CarboMedics, giving SJM the right to make increasing quantities of components until 1998 and to make all parts in-house beginning in 1998. The pricing structure contained within the agreement significantly reduced SJM’s costs, in exchange for SJM’s commitment to purchase decreasing percentages of carbon components over the next five years. Since the revelation of Baxter Travenol’s design flaw, SJM had faced virtually no serious competition. The heart valve market was not large enough to attract major pharmaceutical companies as competitors.

Under the leadership of Lehmkuhl, SJM had begun to make cautious acquisitions. Those acquisitions included a Canadian company that manufactured porcine valves that were sold internationally (while awaiting U.S. FDA approval), a company that made intra-aortic balloon pumps, and a centrifugal pump system. In addition, SJM had expanded its research department, funding vascular graft research. The core of SJM’s operations, however, remained its heart valve business. In 1991, SJM received FDA approval for two internally developed products: the BiFlex annuloplasty ring and the sterile aortic valved graft. SJM became the only heart valve manufacturer with two sources for pyrolytic carbon-coated components. Revenues rose again, to $209.8 million in 1991.

After five years with annual earnings growth of 59 percent and an 84 percent rise in shares in 1991, SJM’s stock suddenly took another downturn in the summer of 1992. The catalyst was the company’s disclosure, on July 1, that second quarter sales and earnings had fallen short of analysts’ projections. On July 2, investors pulled $285 million out of SJM, 16 percent of the company’s market capitalization.

Lehmkuhl attributed the shortfall to aggressive promotion of tissue valves by two competitors, Medtronic, Inc. and Baxter International Inc. Barron’s magazine also cited a decline in open heart surgeries in Los Angeles, one of SJM’s largest markets, as a negative factor, along with an “inventory adjustment’ ‘ by a Japanese customer and decreased sales in Poland. The shortfall was estimated to be only 2 percent of the domestic market (SJM controlled more than 45 percent of the international market and 60 percent of the U.S. market). Nevertheless, since 95 percent of the company’s sales continued to be Generaled by the heart valve, even that small setback was enough to scare off investors who were wary of the risks of a one-product company.

The result was that SJM’s shares, which had been priced at $55.50 in January 1992, dropped dangerously to $27.50. Ironically, sales climbed 3.5 percent over the previous year’s second quarter to $57 million, and earnings per share rose from 45 cents to 52 cents. Moreover, the company would close 1992 with another dramatic increase, achieving $239.5 million in revenues.

Seeing competition from tissue valve companies as a major challenge, SJM began to work toward sales of tissue valves in the United States. The company already sold both tissue and mechanical valves in Europe, and in 1992 it formed a partnership with Hancock Jaffe Laboratories to design and market a new bioprosthetic tissue valve in the United States. Also during this time, SJM began construction of a new 65,000-square-foot facility for manufacturing pyrolytic carbon-coated components. The facility would undergo FDA qualifications in 1994 and 1995.

Key Dates:

1976:

Manuel A. Villafana founds St. Jude Medical, Inc. to develop, market, and make the bileaflet mechanical heart valve.

1977:

Company goes public and begins a clinical trial of the heart valve.

1982:

FDA grants approval to SJM for the marketing of the mechanical heart valve.

1994:

SJM purchases the cardiac pacing device businesses of Siemens AG.

1996:

Daig Corporation, a maker of specialized cardiovascular catheters, is acquired, as are the assets of Telectronics Pacing Systems, Inc. and Medtel.

1997:

SJM acquires Ventritex, maker of implantable cardioverter defibrillators.

1999:

SJM acquires the Angio-Seal unit of Tyco International Ltd. and Vascular Science, Inc.

2000:

FDA approves the Photon DR, SJM’s first dual-chamber defibrillator, and the Integrity Micro AutoCapture Pacing System, the world’s smallest dual-chamber pacemaker.

Taking a long-anticipated step toward long-term stability, Lehmkuhl made his first aggressive maneuver toward an acquisition strategy when he hired John Alexander as vice-president for corporate development in July 1992. Alexander had previously spearheaded business development and strategy for Baxter International’s diagnostics division. SJM had been criticized for being too conservative with its $300 million cash supply by observers who could not understand why the company did not diversify through acquisitions earlier. Lehmkuhl had been cautious, in part, because any acquisition would initially dilute SJM’s tremendous earning power. Healthcare company prices had dropped significantly since the beginning of 1992, and the time was seen as ripe for the beginning of an acquisition strategy.

Ronald Matricaria, formerly an executive with Eli Lilly, replaced Lawrence Lehmkuhl as president and CEO in 1993, while Lehmkuhl remained as company chairperson. Matricaria was known as an aggressive competitor, having built Lilly’s cardiac pacemakers unit from a failing business to a world leader. Matricaria breathed new life into the acquisition hunt, giving it the code name “Project Runner,” and involving the company’s top management in a process of self-examination and assessment. This process focused on identifying SJM’s business strengths—the manufacture of implant devices and an intricate knowledge of blood flow and clotting—and applying those strengths to potential areas of acquisition. The company studied 16 medical specialties fields in order to make its decision.

In the spring of 1993, the company signed an exclusive license and supply agreement with Telios Pharmaceuticals, Inc. to utilize Telios’s proprietary cell adhesion technology. In August, SJM bought a large minority stake in InControl Inc., a company developing an implantable machine to stop atrial fibrillation (rapid pulsing of the heart’s upper chambers). In December, SJM acquired Electromedics, a Colorado maker of blood management and blood conservation equipment and related disposable devices, in a $90 million deal. Yet the industry, according to the Wall Street Journal, was “on the rocks” as a consequence, SJM’s stock suffered.

The decline in market value was attributed to two primary factors: cost cutting by corporations and insurance companies and a looming uncertainty, due to President Clinton’s proposed healthcare plan, about the future of medical care. SJM faced other problems as well. The company’s tax rate went up by almost five percentage points through the loss of tax benefits from manufacturing in Puerto Rico. Moreover, in September 1993 CarboMedics received approval to sell heart valves in the United States. SJM was not yet ready to promote the improved tissue valve being developed. Instead, the company continued its acquisition strategy, hoping to renew growth through diversification. Revenues continued to rise, with sales of $252.6 million at the end of 1993.

Diversifying More Aggressively in the Mid-to-Late 1990s

In June 1994, SJM announced that it was prepared to make a major acquisition. Project Runner had arrived at its conclusion—SJM would enter the expanding market for cardiac rhythm management. SJM would purchase the cardiac pacing device businesses of Siemens AG—the world’s number two maker of pacemakers for slow heartbeats (behind Medtronic)—for more than $500 million. The acquisition, which was completed in September 1994 at a cost of $525 million, launched SJM as a top-tier company in the realm of pacing device manufacturers. Further, SJM more than doubled its sales and tripled its workforce. In 1993, Siemens’s cardiac rhythm management business demonstrated more than $350 million in sales and retained 1,300 employees.

The year 1994 brought several new developments in existing products as well. SJM announced the first U.S. implants of its stentless tissue heart valve, previously marketed internationally. It also received FDA approval to market its new collagen-impregnated aortic valved graft in the United States. In addition, the company launched an alliance with Advanced Tissue Sciences to pursue the joint development of tissue engineered heart valves and, under the auspices of The Heart Valve Company (the joint venture between SJM and Hancock Jaffe Laboratories), made its first implant of the new bioprosthetic heart valve at Glenfield Hospital in Leicester, England. Finally, the company made a $12 million equity investment in Endo Vascular Technologies, Inc., a leading company in the development of products to less invasively repair damaged or diseased blood vessels.

Net revenues jumped to $848.1 million by 1995, while net profits stood at $117.1 million, resulting in a 13.8 percent profit margin. The following year the company continued its program of diversification through acquisition. In May 1996 SJM acquired Minnetonka, Minnesota-based Daig Corporation, a maker of specialized cardiovascular catheters, for more than $400 million. During medical procedures, surgeons used Daig catheters as high-tech probes able to maneuver through blood vessels to the heart. One line of Daig catheters were known as electrophysiology catheters and were used, for example, to deliver precise doses of radio-frequency energy into the heart to correct an irregular heartbeat.

In April, St. Jude Medical announced that it would pay about $72 million for Cyberonics Inc., which was based in Webster, Texas, and was developing a pacemaker-like device for the treatment of epilepsy. SJM pulled out of this deal in October 1996, however, just prior to announcing the purchases of Ventritex, Inc. and the cardiac rhythm management assets of Telectronics Pacing Systems, Inc. and Medtel for a total of more than $500 million. In November SJM completed the acquisition of the assets of Telectronics and Medtel from Pacific Dunlop Ltd., an Australian conglomerate, while the purchase of Ventritex closed in May 1997. Ventritex brought St. Jude Medical a significant position in another segment of the cardiovascular device market—implantable cardioverter defibrillators (ICDs). Similar to pacemakers, which generally treat slow heart rates, ICDs are used to correct extremely rapid heart rates. Following completion of the Ventritex acquisition, SJM created a new division, the Cardiac Rhythm Management Division, to encompass the firm’s pacemaker operations and those of Ventritex, Telectronics, and Medtel. Also in 1997, the FDA granted approval to SJM’s Toronto SPV pig-tissue heart value, which was notable as the first U.S.-approved stentless valve—that is, a valve that does not require plastic or metal frames, called stents, to hold it in place. The valve had been approved for sale in Europe in 1995. These approvals were important since valves made from tissue were gaining in popularity based on studies finding them to be more durable than originally thought, a trend that ran counter to SJM’s strength in mechanical valves.

St. Jude Medical had some difficulty digesting the acquisitions of Ventritex and Telectronics. This led to slower-than-expected revenue growth and reduced profits, the latter stemming in part from special acquisition-related charges of $52.9 million in 1996 and $58.7 million in 1997. By 1998, revenues had surpassed the $1 billion mark for the first time, specifically totaling $1.02 billion, while the net profit figure of $129.1 million translated into a 12.7 percent profit margin. Most of the profits, however, were being Generaled by the mainstay heart valve operations, which now accounted for only about 30 percent of overall revenues. The company also had to contend with a lawsuit filed by rival pacemaker firm Guidant Corporation, which had been spun off from Eli Lilly earlier in the decade. Guidant had sued SJM in November 1996, alleging patent infringement in regard to patents licensed by Guidant to Telectronics in 1994. Essentially, Guidant disputed SJM’s claim that it had obtained access to the patents when it acquired Telectronics. In August 2000 an arbitrator ruled that SJM had failed to purchase enough assets from Pacific Dunlop for the patent licenses to be transferred, thereby reviving Guidant’s original patent infringement lawsuit against St. Jude Medical, which was scheduled for trial in 2001.

Meanwhile, management changes were taking place at the company, which was feeling pressure from shareholders because of its poor performance compared to such rivals as Medtronic and Guidant. In January 1998 Fred Parks was named president and chief operating officer and appeared headed for the CEO position. But Parks, who had been hired away from EG&G Inc., a Massachusetts-based electronics company, left SJM in March 1999 when Terry L. Shepherd was named president and CEO. Shepherd, who had worked alongside Matricaria at Eli Lilly, had headed SJM’s Heart Valve Division. Matricaria remained St. Jude Medical’s chairman.

In Shepherd’s first year at the helm, St. Jude Medical made two significant acquisitions. In March 1999 the company spent $167 million in cash for the Angio-Seal unit of Tyco International Ltd. Angio-Seal, which was integrated into the Daig Division, produced vascular sealing devices used to help seal the punctures in leg arteries that are created by catheters during angioplasty, a procedure used to clear blockages in heart arteries. SJM in September 1999 acquired Vascular Science Inc. for $80 million in cash and $20 million in milestone payments tied to product development goals. A privately held firm based in St. Paul, Vascular Science was developing a device that would enable surgeons to perform coronary-artery-bypass surgery without using sutures. In connection with these acquisitions, St. Jude Medical in 1999 took charges totaling $115.2 million for purchased in-process research and development and an additional $9.8 million for a restructuring of European operations.

SJM got off to rough start in 2000. In January the company voluntarily recalled some of its mechanical heart valves, after finding that ones that had been coated with an infection-preventing substance called Silzone had a high frequency of blood leakage. About 36,000 of the valves had been implanted since the coating was introduced in 1997. Lawsuits were quickly filed in connection with the potentially defective device, with some of the suits seeking class-action status. St. Jude Medical announced that it would no longer use the Silzone coating. Later in 2000, SJM alerted doctors worldwide about possible problems with several of its pacemaker models. The problems were believed to affect a small number of the pacemakers and involved electronic and mechanical malfunctions. On the brighter side, in late 2000 St. Jude Medical won FDA approval for its first dualchamber defibrillator, the Photon DR. Dual-chamber ICDs, which worked on both the lower and upper and chambers of the heart, were gaining popularity among doctors at the expense of singer-chamber models, and SJM had been beaten to market in this burgeoning sector by arch-rivals Medtronic and Guidant. Also in late 2000 came FDA approval of SJM’s Integrity Micro AutoCapture Pacing System, which was noteworthy for being the world’s smallest dual-chamber pacemaker. In January 2001 Daniel J. Starks was named president and COO of St. Jude Medical, having previously headed the Cardiac Rhythm Management Division and thereby playing a key role in the development of the newly approved Photon and Integrity products. Although it continued to face stiff competition from Guidant and Medtronic, and had been embarrassed by the series of revelations concerning defective products, St. Jude Medical appeared to be on the verge of finally realizing the fruits of a rocky diversification program.

Principal Subsidiaries

Pacesetter, Inc.; St. Jude Medical S.C., Inc.; St. Jude Medical Sales Corporation (Barbados); St. Jude Medical Europe, Inc.; St. Jude Medical Canada, Inc.; 151703 Canada, Inc.; St. Jude Medical Hong Kong Ltd.; St. Jude Medical Australia Pty., Ltd.; St. Jude Medical Brasil, Ltda. (Brazil); Medical Telectronics, Ltd. (New Zealand); Daig Corporation; St. Jude Medical Colombia, Ltda.; St. Jude Medical Cardiovascular Group; SJM Europe, Inc.; St. Jude Medical Puerto Rico, Inc.; Pacesetter AB (Sweden); St. Jude Medical Sweden AB; St. Jude Medical Denmark A/S; St. Jude Medical Pacesetter Sales AB (Sweden); St. Jude Medical (Portugal)—Distribuicao de Produtos Medicos, Lda.; St. Jude Medical Export Ges.m.b.H. (Austria); St. Jude Medical Medizintechnik Ges.m.b.H. (Austria); St. Jude Medical Italia S.p.A. (Italy); N.V. St. Jude Medical Belgium, S.A.; St. Jude Medical España, S.A. (Spain); St. Jude Medical France S.A.; St. Jude Medical Finland O/y; St. Jude Medical Sp.zo.o. (Poland); St. Jude Medical GmbH (Germany); St. Jude Medical UK Limited; St. Jude Medical AG (Switzerland).

Principal Divisions

Cardiac Rhythm Management Division; Daig Division; Cardiac Surgery Division.

Principal Competitors

Guidant Corporation; Medtronic, Inc.; Abbott Laboratories; Pfizer Inc.; Johnson & Johnson; Boston Scientific Corporation; Arrow International, Inc.; Baxter International Inc.; ATS Medical, Inc.; C.R. Bard, Inc.; Datascope Corp.

Further Reading

Alexander, Steve, “St. Jude to Buy Houston Company: First Will Spend $84 Million for Cyberonics,” Minneapolis Star Tribune, April 9, 1996, p. 1D.

——, “The Wait Is Over: St. Jude Announces Big Acquisition,” Minneapolis Star Tribune, June 29, 1994, p. 1D.

Barker, Robert, “All Heart: Examining a Bitter Corporate Feud,” Barron’s, February 11, 1985, pp. 14-30.

Burton, Thomas M., “St. Jude Medical Agrees to Acquire Ventritex,” Wall Street Journal, October 24, 1996, p. B4.

——, “St. Jude Medical’s CEO to Step Down in the Wake of Disappointing Results,” Wall Street Journal, March 3, 1999, p. B17.

——, “St. Jude to Buy Siemens Cardiac Pacemaker Lines,” Wall Street Journal, June 28, 1994, pp. A3, A8.

——, “Some Pacemakers Are Defective, St. Jude Says in Letter to Doctors,” Wall Street Journal, February 16, 2000, p. B7.

Cochran, Thomas N., “Heartening Prospects,” Barron’s, June 6, 1988, p. 60.

David, Gregory E., “Heart to Heart: Crosstown Rivals Medtronic and St. Jude Fight to Keep the World’s Blood Flowing,” Financial World, September 1, 1994, pp. 22-24.

Dorfman, John R., “St. Jude Medical Shares Will Reap Rewards for Long Term Investors, Some Managers Say,” Wall Street Journal, January 17, 1994, p. C2.

Fiedler, Terry, “Approval for Defibrillator Puts St. Jude in Big Market,” Minneapolis Star Tribune, October 31, 2000, p. 1D.

——, “St. Jude Buys Local Firm with New Product,” Minneapolis Star Tribune, September 10, 1999, p. 1D.

——, “St. Jude Buys Vascular-Seal Company,” Minneapolis Star Tribune, February 6, 1999, p. 1D.

——, “St. Jude Issues Second Product Warning in Month,” Minneapolis Star Tribune, February 17, 2000, p. 3D.

——, “St. Jude Makes Some Deals,” Minneapolis Star Tribune, October 24, 1996, p. 1D.

——, “St. Jude Recalls Valves That Pose Risk of Leak,” Minneapolis Star Tribune, January 25, 2000, p. 1D.

——, “St. Jude to Restructure, Hire President, COO,” Minneapolis Star Tribune, May 17, 1997, p. 1D.

Forsyth, Randall W., “Too Good to Last?,” Barron’s, January 6, 1992, p. 35.

Gianturco, Michael, “Go with the Greats,” Forbes, July 19, 1993.

Matricaria, Ronald A., “Diversification Process Developed at St. Jude,” Minneapolis Star Tribune, December 26, 1994, p. 3D.

Metzler, Melissa, “One-Time Charges Hurt St. Jude’s Bottom Line,” Minneapolis-St. Paul CityBusiness, July 7, 2000, p. S39.

Miller, James P., “St. Jude Medical to Acquire Daig for $427 Million,” Wall Street Journal, January 31, 1996, p. B3.

Netzer, Baie, “These Health-Care Stocks Can Prosper Even in the Face of Cost-Cutting,” Money, July 1990, pp. 55, 58.

Pitzer, Mary J., “The Bad Blood Over a Heart Valve,” Business Week, May 13, 1985, pp. 141, 144.

St. Anthony, Neal, “Diversification Starting to Pay Off for St. Jude Medical,” Minneapolis Star Tribune, October 30, 1998, p. 1D.

“St. Jude Agrees to Buy Electromedics in $90 Million Deal,” Wall Street Journal, December 8, 1993, p. C14.

“St. Jude Medical Picks Lawrence Lehmkuhl As President and Chief,” Wall Street Journal, February 12, 1985, p. 47.

Twitchell, Evelyn Ellison, “Heartfelt Gains: But Is St. Jude Medical Fully Priced?,” Barron’s, November 20, 2000, p. 56.

Wyatt, Edward A., “The Mugging of St. Jude,” Barron’s, August 31, 1992, pp. 17, 25.

Zipser, Andy, “Heart’s Content,” Barron’s, September 3, 1990, p. 34.

——, “Twelve Winning Months,” Barron’s, January 6, 1992, p. 34.

—Heidi Feldman

—update: David E. Salamie

St. Jude Medical, Inc.

One Lillehei Plaza

St. Paul, Minnesota 55117

U.S.A.

(612) 483-2000

Fax:(612) 482-8318

Public Company

Incorporated: 1976

Employees: 725

Sales: $252.6 million

Stock Exchanges: NASDAQ

SICs: 3842 Surgical Appliances and Supplies; 3840 Medical

Instruments and Supplies

St. Jude Medical, Inc. (SJM) is the world’s leading maker of mechanical heart valves and serves physicians worldwide with medical devices for cardiovascular applications. Based in St. Paul, Minnesota, the company maintains additional operations in Massachusetts, Canada, Puerto Rico, and Belgium. Approximately 1,500 medical centers in 75 countries actively use SJM products.

In 1972, the bileaflet mechanical heart valve was developed at the University of Minnesota. This new valve was made of pyrolytic carbon, a hard, shiny material that did not cause blood clots and could last for years in the human body. St. Jude Medical, Inc. was formed and incorporated in 1976 to further develop, market, and manufacture this valve. The company was founded by Manuel A. Villafana, a businessman who began his career at the helm of Cardiac Pacemakers, Inc., revolutionizing that industry with the innovation of long-lasting lithium batteries. Two years before selling his company to Eli Lilly for $127 million, Villafana formed SJM.

In February 1977, SJM made an initial stock offering at $3.50 per share. In October, the first human implant of the SJM mechanical heart valve took place. Dr. Demetre Nicoloff performed the operation on Helen Heikkinen, a 69-year-old heart patient, at the University of Minnesota Hospital.

A superb salesman, Villafana convinced so many heart surgeons to try the SJM heart valve that the company was criticized for the emphasis placed on sales in what was supposedly a clinical trial program. The Food and Drug Administration (FDA) became involved, prompting Villafana’s departure from the company in 1981. Villafana would later establish Helix Biocore, a competitor company.

In 1982, SJM received approval from the FDA to market its mechanical heart valve in the United States. SJM’s profits began to ascend rapidly, rising from $2.3 million in 1982 to $4.3 million in 1983. By 1984, SJM had achieved revenues of almost $35 million and profits of $5.3 million, solely from sales of its mechanical heart valve. Twenty-five percent of the 100,000 artificial valves implanted in diseased hearts that year were SJM valves. As a one-product company with a market value of $41 million, SJM could not afford any threat to the successful manufacturing of that vital product.

However, a threat did come in 1984. The distinctiveness of SJM’s heart valve was found in the marriage of a bileaflet design, created by St. Jude engineers, and its anti-blood clotting carbon skin coating, produced and supplied to SJM by CarboMedics, a subsidiary of Intermedics, Inc., a cardiac-pacemaker company. In March 1984, the two companies were unable to reach an agreement on a long-term supply contract and filed countersuits.

The dispute had actually begun shortly after CarboMedics was purchased by Intermedics in 1979. Intermedics’s reputation in the field was that of a tough player, and SJM executives began to quietly look for a second-source supplier of the valve’s carbon coating. In addition, Villafana had launched a pacemaker-development project, in hopes of diversifying the company. G. Russell Chambers, Intermedics’s director, threatened to raise the price of the carbon coating when he learned of the pacemaker project. Pacemaker sales accounted for the majority of Intermedics’s profits. Chambers’s threat worked; Villafana dropped the pacemaker project.

At the same time, a company called Hemex was formed in 1979, selling a heart valve that was similar to SJM’s. Observing that Intermedics officers and directors owned stakes in Hemex and that Chambers’s son, Rusty Chambers, was Hemex’s chairperson, SJM inferred that Intermedics was behind this new competitor in the valve business.

Although Chambers denied any connection between the companies, SJM’s new CEO, La Verne Rees, was unconvinced. In 1981, Rees directed the company to take the necessary steps toward development of its own carbon coating. When this costly and ambitious project was announced in SJM’s 1983 annual report, Chambers was outraged and demanded that SJM halt all research efforts. According to Business Week, an SJM consultant then attempted to purchase the carbon formula from an employee of CarboMedics. In 1983, Chambers directed his company to stop supplying SJM with carbon components. The dispute became heated, and court depositions alleged that CarboMedics hired detectives to search SJM garbage cans for stolen trade secrets.

CarboMedics charged SJM with patent infringement, while SJM responded with breach of contract, antitrust, and restraint-of-trade claims. Essentially, SJM alleged that Intermedics sought to achieve a monopoly and to restrain trade in the heart valve business. Each company accused the other of theft of trade secrets and contract violation. In the fall of 1984, SJM’s board let Rees go, leaving Chairperson William Hendrickson in command, with Thomas M. Garrett III—the attorney who drafted SJM’s articles of incorporation—playing a greater role in advising the company.

The legal battle continued for two years and involved court cases in the United States as well as in Europe. Because CarboMedics refused to supply SJM during this period, SJM ran out of completed valves to sell, forcing doctors and patients to look elsewhere for supplies, and eroding the sales and stock market earnings of both companies. According to Business Week, in 1985 SJM produced only about one-third of the 25,000 heart valves it had produced in 1984. Intermedics lost approximately $20 million on an annual basis, and SJM sank from record revenues of $35 million in 1984 to $26 million in 1985. SJM’s stock, which had previously been a high-rated investment, plummeted, as did that of CarboMedics. Meanwhile, competitors in the heart valve industry had a field day, as their sales—and their share of the market—increased.

In February 1985, SJM named Lawrence A. Lehmkuhl as its new president and CEO. Lehmkuhl, who had previously served as divisional president at American Hospital Supply Corp., made it his first priority to end the supplier boycott of SJM, which threatened to destroy the company’s ability to produce and market its only product. Lehmkuhl was selected not only on the basis of his potential to resolve the dispute, but also as a leader who might broaden the company’s product line, eliminating the vulnerability associated with being a one-product company. In September 1985, an agreement was signed by the two companies, allowing SJM to continue its carbon manufacturing research and development efforts and to produce limited quantities of pyrolytic carbon.

In 1986, the first SJM mechanical heart valve produced with the company’s own pyrolytic carbon-coated components was implanted in a patient in Germany. SJM augmented its mechanical heart valve business in 1986 when it acquired Biolmplant, expanding into tissue heart valves. However, the company only sold the tissue valves outside of the United States for several years. SJM implemented a 2-for-l stock split, tripling its authorized common shares to $30 million. 1986 revenues rose to $60.5 million.

Once again, the company demonstrated consistent growth and stock market value. By 1988, SJM was again a favorite pick for investment specialists. Fiscal year 1987 had closed with a net profit of $17 million and $1.55 a share, with net income rising 44 percent over the prior year to $71.8 million and sales climbing 19 percent. Furthermore, the company had no debt. In fact, SJM’s cash balance was an astonishing $65 million. In an article in Barron’s, investment specialist Bing Carlin selected SJM as his favorite investment, citing competitor Baxter Travenol’s suspension of its heart valves (due to possible malfunction) and the FDA’s approval of SJM’s new low-cost plant in Puerto Rico as optimistic factors for SJM. Another competitor, Pfizer, also experienced failure with its heart valve. In addition, SJM’s decision to sell directly to hospitals, rather than working through distributors, meant that the company would retain more profits. The company achieved revenues of $114 million and $148 million in 1988 and 1989, respectively.

In 1990, SJM established its International Division, headquartered in Brussels, Belgium. SJM was still a top-rated pick for investors, and the company’s stock was selling at 20 times its earnings. Other than the decline in profits in 1985, SJM had demonstrated revenue growth of 30 percent or more each year, with revenues of $175.2 million in 1990, and the company possessed over $150 million in cash. Over 300,000 SJM mechanical heart valves had been put to use.

One reason for SJM’s success was that the average age of heart valve recipients had declined. Older patients favored non-mechanical heart valves, which were made of pig tissue and did not require anti-clotting medication. Such tissue valves had an average age of five years, and as the age of heart patients declined, the life expectancy after implant increased. This increased life expectancy created a greater demand for mechanical valves, since tissue valves would have to be replaced through open heart surgery after five years.

In addition, SJM had reached an agreement with CarboMedics, giving SJM the right to make increasing quantities of components until 1998 and to make all parts in-house beginning in 1998. The pricing structure contained within the agreement significantly reduced SJM’s costs, in exchange for SJM’s commitment to purchase decreasing percentages of carbon components over the next five years. Since Baxter Travenol’s design flaw, SJM had faced virtually no serious competition. The heart valve market was not large enough to attract major pharmaceutical companies as competitors.

Under the leadership of Lehmkuhl, SJM had begun to make cautious acquisitions. Those acquisitions included a Canadian company that manufactured porcine valves that were sold internationally (while awaiting U.S. FDA approval), a company that made intra-aortic balloon pumps, and a centrifugal pump system. In addition, SJM had expanded its research department, funding vascular graft research. However, the core of SJM’s operations remained its heart valve business. In 1991, SJM received FDA approval for two internally developed products: the BiFlex annuloplasty ring and the sterile aortic valved graft. SJM became the only heart valve manufacturer with two sources for pyrolytic carbon-coated components. Revenues rose again, to $209.8 million in 1991.

After five years with annual earnings growth of 59 percent and an 84 percent rise in shares in 1991, SJM’s stock suddenly took another downturn in summer of 1992. The catalyst was the company’s disclosure, on July 1, that second quarter sales and earnings had fallen short of analysts’ projections. On July 2, investors pulled $285 million out of SJM, 16 percent of the company’s market capitalization.

Lehmkuhl attributed the shortfall to aggressive promotion of tissue valves by two competitors, Medtronic and Baxter International. Barron’s magazine also cited a decline in open heart surgeries in Los Angeles, one of SJM’s largest markets, as a negative factor, along with an “inventory adjustment” by a Japanese customer and decreased sales in Poland. The shortfall was estimated to be only two percent of the domestic market (SJM controlled over 45 percent of the international market and 60 percent of the U.S. market). However, since 95 percent of the company’s sales continued to be generated by the heart valve, even that small setback was enough to scare off investors who were wary of the risks of a one-product company.

The result was that SJM’s shares, which had been priced at 55 and one-half cents in January of 1992, dropped dangerously to 27 and one-half cents. Ironically, sales climbed 3.5 percent over the previous year’s second quarter to $57 million, and earnings per share rose from 45 cents to 52 cents. Moreover, the company would close 1992 with another dramatic increase, achieving $239.5 million in revenues.

Seeing competition from tissue valve companies as a major challenge, SJM began to work toward sales of tissue valves in the United States. The company already sold both tissue and mechanical valves in Europe, and it formed a partnership with Hancock Jaffe Laboratories to design and market a new bio-prosthetic tissue valve in the United States. Also during this time, SJM began construction of a new 65,000 square foot facility for manufacturing pyrolytic carbon-coated components. The facility would undergo FDA qualifications in 1994 and 1995.

Taking a long-anticipated step toward long-term stability, Lehmkuhl made his first aggressive maneuver toward an acquisition strategy when he hired John Alexander as vice-president for corporate development in July 1992. Alexander had previously spearheaded business development and strategy for Baxter International’s diagnostics division. SJM had been criticized for being too conservative with its $300 million cash supply by observers who could not understand why the company did not diversify through acquisitions earlier. Lehmkuhl had been cautious, in part, because any acquisition would initially dilute SJM’s tremendous earning power. Health-care company prices had dropped significantly since the beginning of 1992, and the time was seen as ripe for the beginning of an acquisition strategy.

Ronald Matricaria, formerly an executive with Eli Lilly & Co., replaced Lawrence Lehmkuhl as president and CEO in 1993, while Lehmkuhl remained as company chairperson. Matricaria was known as an aggressive competitor, having built Lilly’s cardiac pacemakers unit from a failing business to a world leader. Matricaria breathed new life into the acquisition hunt, giving it the code name “Project Runner,” and involving the company’s top management in a process of self-examination and assessment. This process involved the identification of SJM’s business strengths—the manufacture of implant devices and an intricate knowledge of blood flow and clotting—and the application of those strengths to potential areas of acquisition. The company studied 16 medical specialties fields in order to make its decision.

In the spring of 1993, the company signed an exclusive license and supply agreement with Telios Pharmaceuticals, Inc. to utilize Telios’ proprietary cell adhesion technology. In August, SJM bought a large minority stake in InControl Inc., a company developing an implantable machine to stop atrial fibrillation (rapid pulsing of the heart’s upper chambers). In December, SJM acquired Electromedics, a Colorado maker of blood management and blood conservation equipment and related disposable devices, in a $90 million deal. The company’s stock fell 87.5 cents to 27 and three-quarters the day before the acquisition was announced. According to the Wall Street Journal, the industry was “on the rocks.”

SJM’s stock market decline was attributed to two primary factors: cost cutting by corporations and insurance companies and an uncertainty about the future nature of medical care created by President Clinton’s health care plan. SJM faced other problems as well. The company’s tax rate went up by almost five percentage points through the loss of tax benefits from manufacturing in Puerto Rico. And in September 1993, CarboMedics received approval to sell heart valves in the United States. SJM was not yet ready to promote the improved tissue valve being developed. Instead, the company continued its acquisition strategy, hoping to renew growth through diversification. Revenues continued to rise, with sales of $252.6 million at the end of 1993.

In June 1994, SJM announced that it was prepared to make a major acquisition. Project Runner had arrived at its conclusion—SJM would enter the expanding market for cardiac rhythm management. SJM would purchase the cardiac pacing device businesses of Siemens AG—the world’s number two maker of pacemakers for slow heartbeats—for over $500 million. The acquisition would launch SJM as a top-tier company in the realm of pacing device manufacturers. Further, SJM would more than double its sales and triple its work force. In 1993, Siemens’s cardiac rhythm management business demonstrated over $350 million in sales and retained 1,300 employees.

That year brought new developments in existing products as well. SJM announced the first U.S. implants of its stentless tissue heart valve, previously marketed internationally. The FDA granted SJM approval to market its new collagen-impregnated aortic valved graft in the United States. The company launched an alliance with Advanced Tissue Sciences to pursue the joint development of tissue engineered heart valves. And The Heart Valve Company (the joint venture between SJM and Hancock Jaffe Laboratories) made its first implant of the new bioprosthetic heart valve at Glenfield Hospital in Leicester, England. Finally, the company made a $12 million equity investment in Endo Vascular Technologies, Inc., a leading company in the development of products to less invasively repair damaged or diseased blood vessels. In mid-1994, SJM remained dependent largely on its mechanical heart valve, over 500,000 of which had been implanted. Nevertheless, the first steps toward diversification were underway and would undoubtedly change the nature both of SJM as a company and the cardiac business itself.

Principal Subsidiaries

St. Jude Medical, Inc., Cardiac Assist Division; St. Jude Medical Puerto Rico, Inc.; St. Jude Medical Sales Corp.; St. Jude Medical S.C., Inc; 151703 Canada Inc.; St. Jude Medical Ltd.; St. Jude Medical International, Inc.; St. Jude Medical U.K. LTD; St. Jude Medical France SA; St. Jude Medical GmbH; St. Jude Medical Espana SA; St. Jude Medical Europe, Inc.; S.A. St. Jude Medical Belgium NV; St. Jude Medical AG; St. Jude Medical Nederland BV; St. Jude Medical Medizintechnik GESMBH; St. Jude Medical Acquisition Corp.

Further Reading

Barker, Robert, “All Heart: Examining a Bitter Corporate Feud,” Barren’s, February 11, 1985, pp. 14-30.

Burton, Thomas M., “St. Jude to Buy Siemens Cardiac Pacemaker Lines,” The Wall Street Journal, June 28, 1994, pp. A3, A8.

Cochran, Thomas N., “Heartening Prospects,” Barren’s, June 6, 1988, p. 60.

Dorfman, John R., “St. Jude Medical Shares Will Reap Rewards for Long Term Investors, Some Managers Say,” The Wall Street Journal, January 17, 1994, p. C2.

Forsyth, Randall W., “Too Good to Last?,” Barron’s, January 6, 1992, p. 35.

Gianturco, Michael, “Go with the Greats,” Forbes, July 19, 1993.

Netzer, Baie, “These Health-Care Stocks Can Prosper Even in the Face of Cost-Cutting,” Money, July 1990, pp. 55, 58.

Pitzer, Mary J., “The Bad Blood Over a Heart Valve,” Business Week, May 13, 1985, pp. 141, 144.

“St. Jude Agrees to Buy Electromedics in $90 Million Deal,” The Wall Street Journal, December 8, 1993, p. C14.

“St. Jude Medical Picks Lawrence Lehmkuhl as President and Chief,” The Wall Street Journal, February 12, 1985, p. 47.

Wyatt, Edward A., “The Mugging of St. Jude,” Barron’s, August 31, 1992, pp. 17, 25.

Zipser, Andy, “Heart’s Content,” Barron’s, September 3, 1990, p. 34.

Zipser, Andy, “Twelve Winning Months,” Barron’s, January 6, 1992, p. 34.

—Heidi Feldman