St Jude sees possible FDA warning letter, shares tumble

St. Jude Medical Inc warned Wall Street that U.S. health regulators might issue a warning letter about one of its manufacturing facilities in California as it reported another weak quarterly performance and reeled in its outlook.

St. Jude shares fell 5.7 percent to $40.48 in late morning trading on the New York Stock Exchange.

During a conference call with analysts, Chief Executive Officer Dan Starks said there was a possibility St. Jude would receive a warning letter, known in the industry as Form 483, from the U.S. Food and Drug Administration about its manufacturing facility in Sylmar, California, where it makes cardiac rhythm management products.

"It's a risk, and don't be shocked if that risk is realized," Starks said, adding that the company wanted to communicate this possibility in order to avoid surprising investors if it actually happens.

Executives would not say whether its Durata leads -- wires that connect the implantable defibrillator to the heart -- were at the core of a potential problem at the Sylmar facility.

Durata leads came under scrutiny earlier this year as a prominent cardiologist raised safety concerns. An earlier version of the Durata lead, called Riata, were recalled because the insulation covering the wires wore away, exposing the cables.

In a telephone interview, Chief Financial Officer John Heinmiller said there are five facilities around the world that make products and components for St. Jude's cardiac rhythm management products, and each facility makes all products.

Asked why management thought a warning letter may be coming, Heinmiller said "it is too early to speculate."

Typically, warning letters are issued 60 to 90 days after a facility has been inspected. Heinmiller said the inspection is near an end. He declined to say what questions inspectors asked or what comments they made during the inspection process.

Sometimes companies get warning letters over their record-keeping practices, rather than the actual production of a device or component.

"Even if they get a warning letter, I don't think it'll have any impact on their business," said Jeff Jonas, a portfolio manager for Gabelli Health and Wellness Trust Mutual Fund. "But it's a negative in light of their lead issues, and the weaker sales. I'm betting Medtronic will be the main beneficiary."

Starks told the conference call that the warning letter does not change his view that the market for cardiac rhythm products will stabilize by the middle of next year.

Stark acknowledged that the company has lost share in leads, selling fewer of them even as it sells more implantable defibrillators.

"We've lost share in high-voltage leads...there's no question about it," he told analysts.

Earlier, the company posted lower quarterly net earnings on softer sales as well as restructuring and other charges.

Third-quarter net earnings fell to $176 million, or 56 cents per share, from $227 million, or 69 cents per share, a year earlier.

Excluding the charges, earnings were 83 cents per share, 2 cents higher than the consensus estimate on Wall Street, according to Thomson Reuters I/B/E/S.

Sales fell to $1.33 billion from $1.38 billion, hurt by weakness in European markets driven by austerity measures. Sales fell in every business unit except for atrial fibrillation.

Sales of cardiac rhythm products, including implantable defibrillators, fell 8 percent to $691 million. Sales of defibrillators, known as ICDs, dropped 7 percent to $412 million.

Starks said he expects ICD sales to be $2.832 billion to $2.862 billion in 2012, down from the previous forecast of $2.860 billion to $2.900 billion.

He also said he expects market shares to remain "stable to slightly higher" in 2012, backing off his previous outlook calling for one half percentage point of market share gains.

The disclosure about the possibility of a warning letter has caused significant consternation among investors, Bernstein Research analyst Derrick Sung wrote in a note to clients.

"But we are less concerned about the impact of a warning letter as we are about the ... deceleration in St. Jude's ICD sales," Sung said.

Boston Scientific Corp , the third-largest maker of heart rhythm products after Medtronic and St. Jude, is scheduled to report its third-quarter results on Thursday.

(Reporting By Debra Sherman; Editing by Gerald E. McCormick, Maureen Bavdek, Lisa Von Ahn and Andrea Ricci)