When Terry Shepherd moved up to chief executive of St. Jude Medical in 1999, the cardiac-products company was having an awful year. Net income dropped more than 80%, to $24.2 million, due to a raft of special charges, even as sales climbed 10%, to $1.11 billion. Today, St. Jude could hardly be healthier. Profits totaled $339.4 million in 2003, up 23%, on a 21% rise in sales to $1.93 billion -- enough to land St. Jude (STJ) at No. 21 on BusinessWeek's 2004 list of the 50 best-performing companies in the U.S., the second year in a row it has gained entry to this exclusive club.
The secret? Mostly, Shepherd acknowledges, it's simply being in the right business at the right time. St. Jude, which started out in 1976 with a single line of heart valves, now produces a catalog of cardiac devices including pacemakers and implantable defibrillators. Because these products are often lifesavers, St. Jude can charge premium prices. Moreover, as the number of middle-age and elderly people rise in the U.S. and other developed countries, the need for heart surgery -- and St. Jude products -- only increases.
But more than that is going on. Thanks to a plump R&D budget, the St. Paul (Minn.) company is continuously bringing out new or improved devices. Next up: a defibrillator expected to hit the market in late spring. Granted, Medtronic (MDT) and Guidant (GDT) beat St. Jude with similar implants, which avert heart failure by resynchronizing the heart's rhythm with tiny, coordinated electrical jolts. But Shepherd says St. Jude's device is smaller and easier to implant and, therefore, should enable the company to grab sales from its larger rivals and help lift 2004 earnings at least 17%, to $400 million.
Shepherd, 51, won't be on hand to celebrate, however. After just five years as CEO and two as chairman, he plans to retire in May, handing over his job to Daniel Starks, St. Jude's current president and chief operating officer.
For that matter, St. Jude itself may not be around. Despite its hefty $12.5 billion market capitalization, some industry analysts speculate that it could be swallowed up by Johnson & Johnson (JNJ) or Boston Scientific (BSX). Shepherd declined to comment directly on acquisition rumors in a recent interview with BusinessWeek Senior Correspondent Michael Arndt, but he did talk about St. Jude's good fortunes and the need for change. Edited excerpts from their conversation follow:
Q: What do you attribute the company's success to?
A: There's really no magic. The markets we're in are probably among the largest markets in medical technology. They target disease states [that] are among the largest and most-problematic disease states. And they are markets that are relatively underpenetrated. In other words, there are a lot more patients who could benefit from our technology than actually get those devices.
It's a large, thirsty, needy market, and we've got critical mass and great momentum and tremendous product flow. The rest kind of flows naturally. It's that easy.
Q: You do have strong competitors, and many are bigger than St. Jude. So how do you win against them?
A: Innovation is absolutely key. But it's not only how big you are. Medtronic is really, really big but didn't do as well as we did last year in many markets. The reason is that given that these markets are technology-sensitive, you can still capture dramatic market share if you've got technology advantages, as long as you've got critical mass.
Q: Are you worried about facing a pricing backlash from hospitals or insurers or the government?
A: There's always price pressure. The cost of health care in this country and every developed country has gotten very large. But these are disease states that are devastating. These aren't just recreational problems that someone would like to do a little better at. These are chronic, life-or-death states, so people are willing to pay for that.
And payers understand the value of that. The value of the technology is greater than what the cost of it is right now. As long as we target our disease states right, I think we're going to be fine as far as pricing pressure goes.
Q: Let me ask you a more personal question. You've been CEO not quite five years. Why are you handing over the reins so soon?
A: There's a whole lot of reasons. This is a very, very fast-moving industry. Five years is a pretty long time in our industry. Product lifecycles in our industry are maybe six months to a year, max. And we've got people in our company who've got that same kind of pace. They are very sharp people, and they are moving fast. You could get selfish and do the company harm by blocking their coming forward. Most CEOs stay at the party too long, and that becomes a problem.
Another part of it is I had my own cardiovascular surgery last summer to fix a congenital valve problem that finally caught up with me. It was very successful, and I'm fine. But that event causes you to step back and say, "What am I going to do with the rest of my life? What things have I been piling on the I'll-do-that-later pile? And how much longer is later?"
When the company is already in such good shape, it doesn't look as valuable to do this another few years as some of those other things I need to do.
Q: Such as?
A: A lot of personal things. A lot of nonprofit things. A lot of self-indulgent things that I want to do while I'll physically able to still do them. Let's put it this way: I'm not going to be one of those people who retires and wonders, Now what am I going to do?
Q: Not only is there a change at the top of the company, but there's a lot of speculation that it might change hands. What can you say about that?
A: I wouldn't comment, but I would say the board is very excited about the business plan we have right now. So there isn't a compelling drive on their part to reach out for some different business model right now. But it's a very acquisitive industry. Our company itself grew to a large extent by acquisitions. So that's not at all unusual. But there have been all kinds of rumors that are nothing more than that.
Q: What's the next big thing for St. Jude?
A: While we constantly keep our radar screen filled with other opportunities, what makes the most sense, for now at least, are smaller opportunities that enhance the areas we're already in. These areas have vast patient populations, and we're still in the early days of developing the technology.
We're going to try to not get too distracted by anything else, because almost anything else we would do would carry higher risks and less benefit. So let's stick to our knitting and work real hard at what we've got in our own backyard.