Credit Suisse Assesses St. Jude Medical (STJ) Risk; Says Product Removal Unlikely But Could Be Grounds for Abbott to Exit or Lower Bid

August 26, 2016 7:28 AM EDT
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Credit Suisse analyst Matthew Keeler assessed the risk surrounding St. Jude Medical (NYSE: STJ) after Muddy Waters issued a new short report yesterday, highlighting cybersecurity risk to the company's cardiac rhythm management (CRM) remote monitoring system.

Keeler notes St. Jude Medical has not provided any detailed commentary on the matter and they expect shares to remain under pressure until it does so. While they have been unable to assess the risk to STJ at this point their initial take is "that the breaches described in the report are not likely to serve as the basis for the removal of STJ products from the US market given that there have been no related patient events to date." That said, if the FDA believes that more severe or widespread attacks are possible and that STJ's platform is uniquely vulnerable "we could envision significant downside to STJ."

It is the firm's view that a complete stoppage of WW CRM sales for STJ is unlikely given what they know at this time. Also, assuming the company disables RF communication capability in its device to prevent a hack until a patch is developed, the suspect that it could retain meaningful market share. Using Sprint Fidelis recall as a benchmark implies ~300/~170 bps of US/OUS CRM share loss for STJ which suggests ~$225M in sales risk to STJ (~6-7% of 2017 EBITDA).

On the merger with Abbott (NYSE: ABT), the analyst said while they don't know if ABT closely vetted STJ's CRM cybersecurity during its diligence, but suspect that based on the magnitude of risk, that if STJ's CRM security platform is deemed inadequate, ABT may have grounds to exit the deal and/or negotiate a lower price.

The firm maintained a Neutral rating and price target of $81 on STJ.

For an analyst ratings summary and ratings history on St. Jude Medical click here. For more ratings news on St. Jude Medical click here.

Shares of St. Jude Medical closed at $77.82 yesterday.

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