Analyst ups St. Jude's CardioMEMS revenue projections but says reimbursement remains an issue

CardioMEMS's HF System for monitoring heart failure--Courtesy of CardioMEMS

Jefferies equity analyst Raj Denhoy upgraded their revenue projections for St. Jude Medical's ($STJ) CardioMEMS Heart Failure Monitor from $140 million to $172 million in 2016 following a survey of 38 cardiologists, which found good satisfaction levels and decent uptake, but said so-so reimbursement and a high administrative burden were inhibiting wholesale adoption.

Denhoy predicted the company will lose a percentage point in market share in ICDs and pacemakers this year and next due to competition from Boston Scientific ($BSX) and Medtronic ($MDT). The analyst said CardioMEMS' strength will play an important offsetting role, helping St. Jude stay abreast in the cardiology arena, the company's biggest focus. He projects CardioMEMs revenues rising to $286 million in 2017.

Since CardioMEMS won FDA approval in May 2014, early adopters have tended to be large academic centers, which is typical for new technologies. According to the analyst survey, the centers have implanted the device's sensor on an average of 23 patients, with that number expected to increase to 42 patients by the end of 2015 and 86 by the end of 2016.

When asked to rate the device's change in quality of patient care, 60% of respondents said it was positive, with 26% giving a neutral rating and 13% an unsatisfactory rating. The survey found similarly high levels of patient satisfaction and good ratings for St. Jude's technical and clinical support.

But ratings of the device's reimbursement and economics were questionable, with 50% giving it a neutral rating in that regard, and only slightly more positive than negative ratings among the other respondents.

That can be attributed to limited, case-by-case insurance reimbursement. "Our conversations with heart failure clinicians suggest continued pushback by insurers, as would be wholly expected for a novel device carrying significant upfront cost for beneficiaries. Even on the Medicare side, although CMS has adopted a formal coverage policy, survey data clearly indicate that actual coverage from the regional Medicare payers remains selective and on a case-by-case basis," Denhoy wrote.

Overall, the device appears to have "breakeven economics," Denhoy wrote. Jefferies noted that the early adopters are generally less focused on profitability because they are academic centers and tend to be top performers in the field.

The latter point is important because a reduction in heart failure readmission is one of the device's main economic selling points; after all, the federal Centers for Medicare and Medicaid Services last year began penalizing hospitals for excessive 30-day readmission rates. Only one-third of centers surveyed were penalized an average of $190,000, but in the future, privately run adopters may stand to gain additional financial benefit from the CardioMEMS if they are on the wrong side of CMS' targets.

Jefferies said CardioMEMS customers were dismayed by the high administrative burden posed by processing the device's data; some cardiologists said the device's software is not compatible with hospital electronic medical records.

"We believe that technology refinements to streamline the system will be critical to broader adoption by heart failure clinics, particularly those at non-academic centers who are typically more resource constrained," Denhoy wrote.

The CardioMEMS was acquired by St. Jude for $375 million upon the device's FDA approval in May 2014. It is indicated for severe heart failure patients who have been hospitalized due to the condition within the past year.

St. Jude is on track to acquire Thoratec ($THOR), and its HeartMate II left ventricular assist device, which also treats severe heart failure patients, and is a call point for the same group of physicians.

Company CEO Daniel Starks sees the opportunities to pair the devices going forward, saying after the $3.4 billion Thoratec deal was announced, "We are in the process of expanding our footprint in the heart failure community to support the development of our CardioMEMS franchise. Thoratec's existing field resources can help us accelerate this initiative."

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