St. Jude Medical Edmundo Lozano June 21, 2010

Stock Information Ticker: STJ Price (June 18, 2010): $ week range: $ $42.87

Stock Information

Company Overview Manufactures cardiovascular medical devices Manufactures world’s most used mechanical heart valve Products: Heart Valves, Pacemakers, implantable defibrillators, and vascular catheterization devices Separated into 4 segments: Cardiac Rhythm Management (CRM), Cardiovascular, Atrial Fibrillation, and Neuromodulation 45% of total sales are foreign

Divisions Cardiac Rhythm Management (59%) ◦ Implantable Cardioverter Defibrillators Cardiovascular (20%) ◦ Angio-Seal Atrial Fibrillation (12%) Neuromodulation (7%)

Atrial Fibrillation

Industry Analysis Recession-Proof Technology-dependent Hospital spending is decreasing Medical device tax – $20 billion in 10 yrs Foreign Currency is affecting profits Short product life-cycles Year-to-date through May 21, the S&P Health Care Equipment Index was down 7.3% Increasing Global demand for quality health care

Competitors Boston Scientific (BSX) – Manufactures medical devices for CRM, Cardiovascular, and neuromodulation. Makes ICDs Medtronics (MDT) – Industry leader which manufactures medical devices for CRM, Cardiovascular, and neuromodulation Edwards Lifesciences (EW) – Specializes in cardiovascular diseases, specifically in heart valve therapy

Economic Moat Economic Moat: Wide Barriers of Entry: High ◦ FDA regulation ◦ High developmental costs ◦ New technological advancements ◦ Patents ◦ Getting behind on technology

Recent News March: BSX suspends sales of its entire line of ICDs due to product recall Management has recently revised EPS growth expectations from 15% to ‘double-digit’ growth for 2010 Announcement came when management announced better than estimated sales Management predicts 7 % - 8 % growth for 2010

BSX Market

4Q09 Growth by Division CRM: 2.5 % (-1.5 %) ◦ Decrease in inventory Cardiovascular: 9.6 % (4.1 %) Atrial Fibrillation: 9.6 % (4.5 %) Neuromodulation: 20.5 % *Source: Argus Research

New Markets

New Markets = New Competitors Description of threat/specializationDivision(s) affected ABTVascular Closure DevicesCardiovascular BAXDevelops medical productsAll BDXDevelops medical productsAll ZMHSpinal implantsNeuromodulation BSXSpecializes in cardiovascularCRM (All) IARTNeurosurgery medical productsNeuromodulation HNSNDiagnostic and ablation cathetersAtrial Fibrillation MDTMedical Technology Co.CRM, Cardiovascular, Neuromodulation EWMedical Technology Co.Cardiovascular, Atrial Fibrillation ATSISpecializes in cardiovascularCRM, Cardiovascular ATRCCardiac surgical systemsAtrial Fibrillation GBSpecializes in cardiovascularCRM, Cardiovascular, Atrial Fibrillation CADMSpecializes in CRMCRM, Atrial Fibrillation BCRMedical Technology Co.Cardiovascular CYBXSpecializes in neuromodulationNeuromodulation

Technological Factors ABT has released Star-Close, a new product that competes versus Angio-Seal Advances in minimal invasive heart-valve repair has hurt CRM market share ◦ STJ years behind EW Recent MRI-compatible pacemakers could hurt CRM market share ◦ MDT Short product life cycles

Financial Ratios STJBSXMDTEW Debt/Equity Current Ratio Dividend Payout ROE0.23(0.08) ROA0.12(0.04) Net Margin0.17(0.13) Asset Turnover Inventory Turnover Receivables Turnover

DCF Assumptions 5-yr Growth: 7.0 % Terminal Growth: 5.5 % K d : 5.0 % ◦ K d T: 3.7 % K e : 8.02 % ◦ Beta: 0.60 ◦ R f : 3.2 % ◦ Market Premium: 8.0 % WACC: 5.9 %

Equity Valuation Valuation Method Equity Value Weight Weighted Value DCF$ %$9.12 P/S Multiple$ %$9.22 P/B Multiple$ %$9.35 P/E Multiple$ %$9.35 Total $37.03

Investment Thesis STJ’s top 2 divisions are slowing down in growth Management has revised growth and EPS outlook for 2010 STJ is trying to break into the neuromodulation market - speculative High developmental costs due to recent acquisitions Uncertainty of future technological threats by competitors

Recommendation Current Price: $37.39 Equity Valuation estimate: $37.03 Recommendation: Hold

Risk Factors to Recommendation STJ takes BSX’s market share ◦ CRM division can profit in three years from battery replacements 2005 ANS acquisition puts STJ in a position to take advantage of a fast- growing market STJ wins bid for Veterans Administration contract STJ starts to hedge its foreign sales