Originally Published MX May/June 2006

COVER STORY

Interview by Steve Halasey

When competing in one of medtech's hottest sectors, it pays to have a strong operating plan, a robust product pipeline, and a reputation for high integrity. Under the leadership of chairman, president, and CEO Daniel J. Starks, St. Jude Medical (St. Paul, MN) boasts all three.

Throughout 2005, as news of major cardiology product recalls dominated national headlines, St. Jude Medical remained a darling of the media. While other companies in its sector faced both public and regulatory scrutiny, St. Jude Medical was recognized by multiple national publications for its admirable management practices. Among its accolades in 2005, the company was named a "most admired company" by Fortune magazine. In addition, Forbes magazine selected St. Jude Medical as the best-managed healthcare equipment and services company, and Medical Device & Diagnostic Industry named the company as one of its medical device manufacturers of the year.

As a result of its strong reputation—and arguably even stronger financials—St. Jude Medical has constantly been at the center of the medtech industry's ever-present acquisition rumors. Although none of the rumors pegging St. Jude Medical as a target have ever come to fruition, in recent years the company has been particularly active on the acquiring side. In 2005, the company executed a handful of complementary acquisitions, including its first outside the cardiovascular sector.

Starks, who has served in his current capacity since May 2004, joined the board of directors of St. Jude Medical in May 1996. He assumed the role of president and CEO of the company's cardiac rhythm management business in 1998, and in 2001 was promoted to corporate president and chief operating officer.

Since joining the company's board a decade ago, Starks has seen St. Jude Medical's annual sales catapult from $877 million in 1996 to nearly $3 billion as of last year. The company's 27% sales growth in 2005 capped a five-year period in which the company's compound annual growth rate exceeded 21%. And as far as Starks is concerned, the company is poised to sustain its top-tier performance for years to come.

MX: St. Jude Medical has been rumored to be a potential takeover target for large, diversified companies seeking to reduce their reliance on an uncertain drug pipeline and increase their profile in medical devices. Is St. Jude Medical being courted by any particular companies?

Daniel J. Starks: Whenever I'm asked a question like this, my answer is always the same: these kinds of rumors and speculation come with the territory of being in the medical device business. In the 21 years that I have been in the medical device business, every single year there have been rumors about my organization—either as an acquirer or as an acquiree—and very often there are rumors on both levels going on at the same time. Rumors of this nature just come with the territory. They are characteristic of a company that is well positioned in a hot growth market, and this is certainly the case with St. Jude Medical. It is undoubtedly indicative of the level of success that the company has had on a sustained basis and the amount of attention that it gets due to its sustained success year-over-year in very strong growth markets.

Has St. Jude Medical's board or major investors expressed an interest in being acquired under certain conditions?

We don't think about it that way. We focus on maintaining our own independent growth plan for maximizing shareholder value. This growth program has been in place since I became associated with St. Jude Medical, and it is a five-year rolling plan. We update the plan at least annually, and we revisit it more than once every year between the formal annual updates. We are always evaluating our growth plan: How confident are we in it? What is our record in delivering on the company's growth plan in past years with the current management team and technology base? How does that bear on our confidence and optimism that we will be able to continue delivering this growth plan?

If alternatives to our independent growth program were offered, we would, of course, consider them and compare them to our independent growth program. But as you know from looking at our record of growth over the last seven years, and as you can see from the communications that we have issued this year at our annual analysts' meetings, we have a strong record of growth as an independent organization. And we continue to provide an optimistic and confident growth program going forward. St. Jude Medical's growth program has set the bar very high for anybody who might try to present the company with a plan B.

When you hear rumors from the investment community that St. Jude Medical might be a takeover target, are you flattered by that attention or is it a distraction to your business?

Since the rumors are always out there, it has become a nonissue for us. It is neither flattery nor a distraction. We are flattered by the recognition the company gets and the confidence that is expressed in the company and its programs by its customers, who continue to allocate more market share to the company across its many product platforms. That is a never-ending flattery. But again, the rumors and gossip from outside the organization are neither flattering nor distracting.

Track Record, Projected

One of the reasons that St. Jude Medical is so often named as a potential takeover target has to be the company's strong record of growth over the past seven years. What do you consider the key measures of the company's financial success?

The company focuses on sustained growth and earnings per share. Over the past five years, St. Jude Medical's compound annual growth rate in net adjusted earnings per share has been slightly greater than 28% when adjusted for special items (therefore a non-GAAP measure). As a secondary financial measure, the company pays almost the same level of attention to its sustained rate of top-line growth. Again, when adjusted for special items, that rate over the past five years has been slightly above 21% on a compound annual basis. Those two factors are triangulated with the level of investment the company is making in future growth drivers and in refreshing its technology base. Such investment ensures that we maintain confidence in the growth opportunities included in our rolling five-year plan and beyond.

We closely monitor the level of research and development (R&D) as a percentage of sales. Over the past five years, St. Jude Medical has increased its R&D as a percentage of sales more than 100 basis points. At the same time, top-line growth has been accelerating. R&D as a percentage of that accelerating level of sales has continued to increase. In 1998, St. Jude Medical invested less than 10% of sales in R&D, which was a little bit less than $100 million. In 2005, the company invested about 12.7% of sales in R&D—an investment of close to $400 million. This investment is important to St. Jude Medical. It provides a reality check to the company's earnings-per-share growth, and it helps balance the need to deliver superior short-term results while simultaneously investing a healthy amount in St. Jude Medical's continued long-term success.

You mentioned St. Jude Medical's R&D investment. What other key elements have helped the company sustain its top-tier performance?

In terms of creating a corporate culture, St. Jude Medical's executives adhere to the mantra that we are going to do what we say we are going to do. Accountability and operating discipline are the essential ingredients for our sustained success. Other ingredients include our focus on continuous improvement. We benchmark ourselves against best competitive capabilities in all of our fundamental corporate aspects and put a good deal of effort into achieving incremental gains according to an appropriate list of priorities. These efforts continue until St. Jude Medical surpasses and establishes new best competitive benchmarks in key areas, which include R&D as a percentage of sales. These areas also include gross margin percentage, net operating profit margin, and a variety of other financial and productivity metrics.

Beyond financial benchmarks, another key element in St. Jude Medical's successful performance is the balance the company strikes between delivering short-term results and investing in the long term. This balance is a third key ingredient of our multiyear superior results.

Yet another element high on the list would be the decisions St. Jude Medical has made in regard to the markets it targets. If the company had chosen to target relatively unproductive areas in which it would have little likelihood of gaining market leadership, we would be nothing more than a bright group of people beating our collective heads against the wall. Instead, we have disciplined ourselves to be very selective in picking large potential growth opportunities in which the company has a realistic opportunity to achieve an above-average level of market growth on a sustained basis.

In a recent meeting with analysts, St. Jude Medical projected that it intends to sustain this level of performance over the next five years and continue improving its operational margins. What factors make the company believe this is possible?

A number of factors. The first would be St. Jude Medical's demonstrated track record year after year of continuously improving its net operating profit margin. We are always suspicious of people who say, 'Don't watch what I do, listen to what I say.' We have far more confidence in someone who says, 'Look at what I have done, and here is why one can expect me to continue to do what I already have demonstrated I have an ability to do.' St. Jude Medical has a seven-year track record of demonstrating strong corporate competence in continuous improvement of the company's gross margin; of R&D as a percentage of sales; of selling, distribution, and administrative expenses; and of its net operating margin.

More importantly, behind that seven-year track record, St. Jude Medical has a strong corporate culture of structured continuous improvement programs that is now pervasive throughout St. Jude Medical. The company has structured training programs, structured black-belt programs, green-belt programs, Six Sigma programs, lean manufacturing programs. Year after year, everyone on St. Jude Medical's management team understands that it is incumbent on each person to ensure that the company's list of priorities includes activities that look beyond the current year. Consequently, when we define the company's operating plan for the subsequent year, it will include continued improvement in St. Jude Medical's net operating margin as a baseline.

From time to time, the company must sacrifice a short-term goal in favor of a long-term investment. For example, when St. Jude Medical acquired Getz Bros. Co. in Japan in 2003, the company sacrificed a 12-month period of continued improvement in its net operating margin. However, the acquisition enabled the company to achieve strong improvement in its net operating margin the following year, which occurred on top of an acceleration in total sales growth. The acquisition positioned the company to achieve stronger sustained growth in the second-largest medical device market in the world. The purchase was a very principled and deliberate exception to the company's rule of striving for continuous improvement in its operating profit margin. We will make those kinds of sacrifices on a short-term basis.

Beyond the five-year range that you projected in your recent meeting with analysts, are you able to project further into the future of St. Jude Medical's business? Can St. Jude Medical sustain that kind of growth pattern, and what changes might St. Jude Medical need to undertake to continue its growth?

Looking out five years from now to 2011, we can have a general idea of the relative maturity of some of our current and emerging growth platforms. For example, in the case of atrial fibrillation, we anticipate that the growth in our atrial fibrillation platform will still be in the early stages of gaining momentum. We anticipate that five years from now the atrial fibrillation market will be in a growth phase very similar to that which we are currently seeing in implantable cardioverter defibrillators (ICDs). That population is very large, and the level of penetration of curative approaches to atrial fibrillation five years out will still be modest. Therefore, we have at least a pretty good sense now that we will still have a lot of growth available to us in the area of atrial fibrillation in five years. That would be one example.

We can make the same kind of observations with respect to some of our emerging cardiology growth drivers, particularly in regard to our patent foramen ovale (PFO) closure system, a technology that closes the small hole between the two upper chambers of the heart. We have given this technology special attention. On the regulatory side, St. Jude Medical anticipates that this technology could be fully released to the U.S. market by 2009. Looking forward to 2010 or 2011, one could anticipate a very large patient population for the treatment, and St. Jude Medical would just be starting to see the mainstream growth in that part of its product technology platform.

The same observations apply to the neuromodulation sector. The growth that the neuromodulation market will see over the next five years will pale in comparison to the growth that will be seen after 2011. At that time, all of these indications that St. Jude Medical currently has in clinical trials will just be starting to see strong sustainable growth.

The three areas I've mentioned are examples from our current development program in which growth will just be getting under way in five years. These areas have huge patient populations and huge unmet needs, and they are areas in which medical device technology can be very cost-effective and provide significant benefits. So in answer to your question, yes. Looking out beyond five years from now, we do think that St. Jude Medical will still be well positioned for growth under its current business model.

Are there any diversified business models that might change the way that St. Jude Medical is formulated as a company?

We think that details will change, but the company's broad business model is robust and has huge capacity. It will be sustainable beyond the next five years.

A Pipeline for Future Opportunities

In 2006, St. Jude Medical expects to have the greatest number of product releases in the company's history. What do you see as the major achievements that will be embodied in the company's new products?

The achievements will take different shapes in different product classes. The products drawing the most attention these days are pacemakers and ICDs. Therefore, St. Jude Medical has indicated that it expects to launch about 24 new products in those categories into the U.S. market during 2006. The new products will be focused on improving the cost-effectiveness of medical practice with respect to pacemaker and ICD patients. They will save procedure time and extend the benefit of the therapies to patients with especially difficult anatomies. The new devices will also be easier to implant, and it will be more cost-effective and more efficient to follow up on patients who have the devices.

While cost-effectiveness will be the main achievement in the realm of pacing and ICDs, it will be different in other sectors. In the area of atrial fibrillation and some emerging areas of cardiology, the main benefits will be the opportunity to cure the disease state.

You mentioned the long-term growth opportunity in neuromodulation, which is still a relatively new area. Can you describe St. Jude Medical's current activities in this sector and where you see the company five years from now?

Yes. Even though neuromodulation is relatively unknown and in its infancy, it is already a $1.3 billion market. The largest segment of the current neuromodulation market is chronic pain management. The technology that St. Jude Medical employs stimulates targeted areas of the patient's spinal column to relieve otherwise intractable chronic pain.

The chronic pain management segment of neuromodulation is currently about a $700 million to $800 million market, and it is growing about 15 to 20% a year. St. Jude Medical currently has a strong number- two share in the spinal cord stimulation for chronic pain management segment of the neuromodulation market.

Other areas of special interest to the company include deep brain stimulation for treatment of Parkinson's disease and an analogous disease called essential tremor. Other areas where the company has early clinical research activities and early clinical trials under way are focused on understanding the benefits that neuromodulation technology can provide to patients with migraine headaches, obesity, depression, and a range of other diseases.

Outside of cardiac and neuromodulation devices, in what other areas do you see St. Jude Medical expanding its efforts? You mentioned the PFO closure opportunity earlier.

There is a variety of emerging therapies in the cardiac sector, and PFO closure is one. Others would include embolic protection. This therapy category includes devices to help access difficult parts of the patient anatomy during stent placement procedures. It also includes technologies to help physicians protect patients from the risk of stroke during a variety of interventional cardiovascular procedures. St. Jude Medical already has some embolic protection systems on the market, and the company is preparing to send others through the regulatory process.

Generally speaking, the market potential is so large in the broad areas of cardiovascular disease and neuromodulation—and St. Jude Medical is currently so early in its participation in these sectors—that in the foreseeable future, the company expects to stay focused on cardiovascular and neuromodulation opportunities.

These are both fairly competitive markets, and St. Jude Medical already is at the top in many of the sectors. What do you see as the main opportunities and challenges as St. Jude Medical works to expand its market share in the United States and globally?

The main challenge is to keep the company as hungry going forward as it has been in the past. In other words, the company must continue to execute, continue to focus, and continue to refresh its offerings at the same high-performance level that it has successfully maintained over the past seven years. The company's technology is well positioned, so the challenges do not extend much beyond that. Our market opportunities have been well chosen. St. Jude Medical's technologies are cost-effective, putting the company in a good position to address the challenges of providing affordable healthcare to a variety of populations in global markets. This is particularly a concern among the baby-boomer generation in the United States. The opportunities are clear, and the challenge is for us to stay focused and continue to execute at the same level of excellence that has characterized our performance the past seven years.

Are there particular regional markets that you think offer an opportunity for St. Jude Medical? Perhaps ones that are underpenetrated or where St. Jude Medical has not previously been active?

One of St. Jude Medical's historic strengths has been its focus on global markets. The company currently participates in about 130 markets. We have offered direct sales in a number of emerging markets for a number of years. For example, St. Jude Medical has been building a direct-sales organization in the People's Republic of China since late 2003.

Over the last seven years, we have put in place direct operations both in remaining major markets and also in all of the hot-growth emerging markets. For example, the acquisition of Getz Bros. instantly made St. Jude Medical direct in Japan, which is the second-largest medical device market in the world. We went from seven direct employees to 400 direct employees as a result of that acquisition. St. Jude Medical's presence there is just one example of its global competitiveness. Others include the company's direct presence in China, India, a number of Latin American markets, and other emerging growth markets.

You have already mentioned the strong investment in R&D that St. Jude Medical has had over the last few years. Going forward, how large does that investment have to be to sustain growth? Is the company at the right level now?

We think we are. There is not a magic number. There are a number of factors that bear on an appropriate level of internal R&D. One of those factors is the acquisition of developed R&D through a business development program.

Another factor that bears on the level of R&D investment as a percentage of sales is how fast a company's sales are growing. Generally, with St. Jude Medical's current business mix, we think R&D investment of about 11 to 13% of sales is pretty good. We have guided the investment community to expect R&D in 2006 to be at about 12 to 13%.

Is it a challenge to fund all the projects that St. Jude Medical would like to fund?

Our funding is in good order, and we have a long list of priorities that are appropriately funded. But if you asked any individual engineer, I am sure they would tell you that all the good projects they would like to work on haven't made our priority list and are not fully funded.

Growth Strategy

How much of St. Jude Medical's growth do you expect to accomplish organically?

Most of it. The vast majority of our growth will be accomplished organically. That has been the case over the last seven years, and that was the case in 2005, despite the attention that some of our recent acquisitions have received. When those acquisitions are put in context, it becomes apparent that most of the company's growth remains organic. About two-thirds of St. Jude Medical's revenue growth in 2005 came out of its ICD product line. That was entirely organic growth, and the vast majority of the company's other growth also came from organic sources. Certainly less than 10% of our growth in the past year has been acquired growth.

Does that indicate a determined preference by the company for organic growth over acquisition growth?

The preference hasn't been quite that principled. Instead, our principled basis for selecting between the two has been availability. We consider the growth opportunities available to us organically and internally as a baseline. Once we have determined those opportunities, we consider whether there are ways to accelerate or otherwise improve that growth rate through selective, targeted acquisitions. Sometimes there is an outside opportunity. When the stars have aligned so the opportunity was truly available to us, we have proceeded with the deal. However, we are very rigorous and selective in evaluating the possibility of acquired growth versus the investment in and support of our internal knowledge and confidence in continued organic growth.

St. Jude Medical has also been active in growing via mergers and acquisitions. Can you briefly describe the company's recent acquisitions and how they fit into the company's overall strategy?

Yes. Let me start with our acquisition of a direct sales organization in Japan. The acquisition goes back a couple of years, but it is still recent enough that it is worth mentioning. Our acquisitions have primarily been opportunities to accelerate organic growth programs. In the case of our acquisition of Getz Bros., we were already committed to going direct in Japan. St. Jude Medical already had an infant direct organization consisting of only seven people. When the acquisition of Getz Bros. became available to St. Jude Medical, it was a very natural accelerant of a growth initiative to which the company was already committed.

That same assessment holds true with each one of the other acquisitions that St. Jude Medical has made in the last two years. A number of the acquired technologies are focused on electrophysiology and atrial fibrillation, and those acquisitions accelerated St. Jude Medical's internal R&D programs. They were acquisitions of technologies. In those cases, the company had not only a good understanding of the technologies, but also a good understanding of the customer requirements and the ways in which those technologies would fulfill the customer requirements.

The situation was similar in St. Jude Medical's acquisition of Velocimed (Maple Grove, MN). In that case, Velocimed and its technologies were directed toward interventional cardiology, and St. Jude Medical has internal development programs in a number of those same areas. The main initiative was PFO closure. We had a two-year-old internal R&D program in the area of PFO closure; therefore, the acquisition was a very synergistic strategy and accelerant of a growth initiative that had already been a multiyear program for St. Jude Medical.

Surprisingly, neuromodulation is another example of that same opportunity to accelerate an internal R&D program through an acquisition. We knew for some time that it was going to make sense for St. Jude Medical to leverage the low-voltage stimulation technology platform that supports the company's pacemaker product line into noncardiac low-voltage stimulation for neuromodulation. The company had an internal development program for several indications to expand its low-voltage stimulation technology into neuromodulation before it came to an agreement to acquire Advanced Neuromodulation Systems (ANS; Plano, TX). The acquisition accelerated that whole initiative.

So there might be an exception to St. Jude Medical's organic growth strategy, but an example does not come to mind in which St. Jude Medical did an acquisition that did not enhance, accelerate, and strengthen an internal initiative.

Is that the reason that St. Jude Medical's acquisitions tend to be integrated into the company rather than being allowed to exist as self-standing units?

I am flattered by your observation of integration because that means everything looks seamless from the outside. But actually, St. Jude Medical is very flexible in its internal structure and organization. The company may be more decentralized and it may have the opportunity for more entrepreneurial activity than is obvious from the outside. For example, when St. Jude Medical acquired Getz, the president of Getz became the president of Getz Bros., a St. Jude Medical company. Following the acquisition, Getz continued to operate almost entirely the way that it had before the acquisition. There were some obvious points of integration on information and accounting systems, as well as the need to coordinate the allocation of resources. There were some synergies between Getz and the rest of St. Jude Medical but, in general, Getz remained far less integrated than one might imagine.

Even in the case of the atrial fibrillation technologies and companies that St. Jude Medical has acquired, it has not shut down any of those sites. We have worked to keep the talent intact at each of those companies. One good example is Irvine Biomedical Inc. (IBI; Irvine, CA). Dr. Peter Chen, the president of IBI before the acquisition, is still the president of IBI, a St. Jude Medical company.

St. Jude Medical operates under a mantra similar to the Hippocratic Oath, in which a physician says, 'Do no harm.' When the company works to integrate acquisitions, it starts with the idea that it is making the acquisition because the acquisition target has a very talented group of people who have created a lot of value. We don't want to do anything to screw that up, so St. Jude Medical is more accommodating than one might guess in facilitating independence, entrepreneurial activity, and creativity and productivity under the St. Jude Medical umbrella. We do not automatically fold acquisitions into St. Jude Medical.

Was that the same with the acquisition of ANS?

It was.

They became the head of a new division, but it was progress as usual.

Absolutely.

How active is St. Jude Medical in looking for acquisitions? Is there a regular planning cycle in which the company considers its acquisition opportunities?

We have a regular planning cycle in terms of the company's annual operating plan as well as its five-year growth plan. Those planning cycles regularly revisit the landscape of each of St. Jude Medical's businesses, trends affecting all parts of its business, and internal growth priorities. They also regularly revisit competitive developments of emerging technologies that St. Jude Medical is tracking, as well as general competitive conditions and market dynamics. So, yes, the company does have multiple regular processes and planning cycles that would identify acquisition possibilities in the ordinary course of business.

However, the company starts with an independent growth plan that is not dependent on acquisitions. We think that St. Jude Medical currently owns technologies and growth platforms that are adequate to support the same level of growth and increase in shareholder value over the next five years that the company has delivered over the past five years. That is our starting point. However, we always have our antennae out for selective, disciplined, opportunistic acquisitions that might accelerate our internal growth plan. That is exactly where we are now. We don't need to make another acquisition; however, we have our antennae out to ensure that we stay very close to our customers, very close to the market, and very close to all of the competitive market and emerging technology dynamics. If there is an unplanned opportunity that makes sense to add to our business, we are well positioned to compete for that opportunity.

Who handles potential acquisitions? What is St. Jude Medical's corporate structure on the business development side?

It is handled on several levels. We have a business development function at a corporate level, as well as business development functions at our major product divisions. The presidents of each of our businesses are personally involved and active in that planning process. They stay abreast of all of the dynamics and developments that would help identify a potential acquisition opportunity. There is no one way that we identify those opportunities. We have a matrix of people and an organizational structure that help us identify trends, including acquisition opportunities that might be of interest.

Issues, Issues, Issues

A number of cardiology companies have had serious product recalls in the past year. Are there general problems in the design and manufacturing of complex cardiology products with which companies are having trouble? What else is going wrong?

Allow me to offer some personal commentary as well as some data. On the personal commentary side, it is always helpful to put these issues in context. If you go back to the beginning of literally every one of these medical technologies, you will find patients who have significant diseases. These diseases may be generating hundreds of thousands of deaths a year among people who have no medical treatment options. When this happens, compassionate people consider options that—although they might not be perfect—could help save the lives of some of the people who are dying every year. That is the origin of many of these medical technologies. When the first generation of a technology manifests itself, manufacturers present it to physicians with the thought of, 'I know this isn't going to save everybody, but this is something that has not previously been available. Is it something that you, as a physician, would find helpful in your efforts to provide the best medical care possible for patients?' That is the origin of these technologies, and then manufacturers keep working to expand the capabilities of the technologies and enable them to help more people and save more lives.

The progress and the continued advances and benefits of the technology that we have created have advanced to the point where people forget the context. They forget that the technologies started from nothing. The technologies become more and more helpful, and people start to expect perfection from them, it seems. That perfection is not likely to be possible in human affairs, and it is not likely to be possible in medical device technology.

If you look at data from the last five years, you will see that ICDs and pacemakers are definitely safer and more reliable than ever. Last year, product recalls became high-profile issues, and they received more mainstream media coverage. But if a person looks at the complete data, one clearly sees that medical devices continue to become safer and more reliable, rather than the reverse.

I have often heard people in the device industry comment that the lay press and the public at large have trouble understanding the nature of risk with these products and accepting that there is going to be a risk. Does that feed into this issue?

It is part of the landscape, that is for sure. Manufacturers don't have the answer to everything, including how to determine the appropriate social policy. Instead, manufacturers focus on continuing to improve the technology. We continue to offer technology that may be more helpful to more physicians and to more patients. We never stop in the endeavor.

When a company produces a high-risk product and something goes wrong, how and when should a manufacturer notify physicians and patients? There is a lot of debate surrounding this issue. Manufacturers, healthcare professionals, and FDA are involved in developing policies to define when and how such notifications should be issued. Is St. Jude Medical involved in this effort? Do you have a view on what kind of guidance is needed?

Yes, St. Jude Medical is very engaged in the discussions. We think the process that has been organized by FDA and the Heart Rhythm Society is really a very good process. Those two entities are well suited to lead an objective, complete review of all of the associated public policy issues, and they are well suited to get all of the right input and to generate good information and appropriate updates to guidelines and regulations that serve all the various interests. Where St. Jude Medical is welcome, the company is very engaged in those discussions. St. Jude Medical is happy to offer its data and experience where they are helpful for a well-informed review of all the issues.

One of the concerns in having groups like FDA and the Heart Rhythm Society compile those guidelines is that they are not in the industry and may not fully understand the implications of their decisions, particularly for a public company. What are the business and financial implications of issuing—or failing to issue—such physician and patient notifications?

The Heart Rhythm Society and FDA—and I mean this very genuinely—are both full of smart, experienced people who are devoting a high percentage of their professional lives to medical device and public healthcare policy, including policies related to providing the best possible care for patients. Throughout this process, the Heart Rhythm Society and FDA are going to continue to yield good answers and good outcomes in the future, just as they have in the past.

St. Jude Medical will fully support and comply with the best social policies as well as the regulations. On a competitive basis, it will be a level playing field, and our company's focus is on what provides the best medical care. Whatever that is determined to be—based on an objective, complete discussion and policy review—we will support.

Last year, the Department of Justice issued subpoenas to a number of ICD manufacturers. It is rumored that DoJ is attempting to identify widespread industry practices that may be in violation of the antikickback statutes. Some companies have been lambasted for some of their payments to physicians. What do you expect will be the result of DoJ's inquiries?

I can't comment on the inquiry as it relates to other companies and their business practices, but I can comment on the inquiry in relation to St. Jude Medical and its business practices. The idea that there are very serious and well-grounded antikickback statutes and regulations is not at all new. Our company has longstanding programs of compliance. These include the St. Jude Medical code of business conduct, which helps communicate, ensure, and police the company's compliance with the requirements of the antikickback statutes in the United States. The company also has similar business practice regulations in place for its operations in other countries. St. Jude Medical updated its own internal code of business conduct by adopting the AdvaMed code of business conduct when it became finalized. Therefore, as the Department of Justice examines business practices, the state of codes of conduct, and the state of programs to educate and control business conduct inside St. Jude Medical, the company has very robust programs. It is something that we have always taken very seriously, and it is something that we have given a lot of attention.

AdvaMed has just made it possible for companies to self-certify their compliance with the code of ethics. Will St. Jude Medical be participating in that?

Yes, we intend to self-certify.

Is there a need for better legal definitions or public policies regarding prohibited practices?

Philosophically, there must always be room for improvement in all of these areas. But I think that the existing regulations and codes of ethics, as well as the understanding of what the regulations and codes of ethics mean, constitute a pretty good set of requirements. There is a pretty good level of information and understanding within the medtech industry, certainly throughout St. Jude Medical and also within the overall cardiovascular device industry. I think the health of the activities inside the medical device business is pretty good.

Health Economics and Reimbursement

Reimbursement policies can have a major impact on a company's growth. How active is St. Jude Medical in helping to support coverage and payment decisions via cost-effectiveness and outcome studies?

St. Jude Medical is very active. A company can't be in this business without being fully engaged in reimbursement, coverage, and payment issues. St. Jude Medical has a number of people who focus full-time on this set of issues, both at a corporate level and also at various levels of our company's divisions. St. Jude Medical also has people within its other country structures who focus on reimbursement and coverage questions outside the United States. So St. Jude Medical is integrally involved. The topic of reimbursement and coverage is increasingly a significant criterion in establishing clinical trials and deciding what level of data to collect. The company must ensure that disciplined, controlled clinical data are generated and that those data are appropriate for the purposes of the various reimbursement and regulatory approval processes.

In designing the trials that St. Jude Medical undertakes, does the company work with medical specialty societies to figure out what they need to support reimbursement and also what the company needs to support product development?

Yes, when it is appropriate, we do. A lot of what we do in our clinical trials is within areas in which the fundamental reimbursement decisions have already been made. But in emerging areas, we absolutely collaborate with all interested parties.

If price pressures or changes in reimbursement result in a reduction in product pricing, would St. Jude Medical need to change its growth projections? Are these pressures that the company feels?

St. Jude Medical has a very rigorous planning process that takes into account the current environment and also the outlook in all areas. Within the cardiac rhythm management sector, as well as many others, the average selling prices and levels of reimbursement are under stress on an ongoing basis. This occurs in a way that likely does not hit the radar screens of observers from outside the industry, but it is a very routine, normal part of the medical device business. For all our classes of products, it is a very integral component of our ongoing annual and five-year planning processes. Forecasts related to these issues are updated at least that often and then revisited in between. Although the circumstances are always changing, they are always changing in such a way that we quickly adjust to the shifts. We factor all these issues into our outlook and expectations.

Trend Spotting

What trends do you see in the medical device area that our readers should know about?

We have already discussed the hot trends, and once you get beyond the hot trends, we get into a lot of detail that is not so interesting. There are trends affecting every part of our business. There are trends in each of the product lines. There are trends on the technology innovation side, on the regulatory side, on the public policy side, and on the reimbursement side. These are part of the richness of the medical device business. However, none of these trends in isolation really need special attention.

What kinds of activities does St. Jude Medical conduct to identify trends in each of the areas?

St. Jude Medical currently has approximately 10,000 employees. Among those 10,000 employees are people designated as specialists in each of the areas. During our annual and five-year planning processes, we sift through the observations, data, and expertise of the specialists in each area to organize the data and recognize the trends. The trends are taken into account when formulating our business plan. In between those planning processes, we start at a grassroots level. There is constant, organized communication throughout each major part of the company. That communication is routinely consolidated in St. Jude Medical's annual operating plan and its five-year strategic plan.

Are you satisfied that St. Jude Medical's planning has positioned the company for sustained growth?

We are enthusiastic about our growth opportunities going forward.

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