St. Jude Medical released third-quarter performance that was generally consistent with our expectations, and we have not altered our projections for the full year.  However, we plan to modestly raise our fair value estimate to reflect the reduced share count and cash flow realized since our last update. While St. Jude continues to wrestle with a lackluster implantable cardioverter defibrillator market, we still think the firm enjoys a wide moat and we see little to change our stable moat trend rating.

St. Jude saw its quarterly revenue rise 3% in constant currency, fueled by atrial fibrillation, structural heart, and vascular products. However, the ICD market remains anemic thanks to concerns about usage. St. Jude has been weathering market conditions fairly well thanks to its quadra-polar lead ICD product, but we still do not expect a substantial market recovery until new diagnostics are developed to better identify patients for ICD use.

We note that the neuromodulation business, which has historically grown in the high-single-digit range from quarter to quarter, has now slowed and it may take some time for the growth to resume. First, St. Jude’s neuromodulation product cycle is waning, which translates into greater pricing pressure. Second, the firm remains hampered by a Food and Drug Administration warning letter on its neuromodulation production facility.

This essentially translates into a hold on any neuromodulation product approvals by the FDA until the warning letter is lifted. While St. Jude has taken action to address FDA concerns at the plant, it is not clear when the FDA will schedule reinspection, since the government is shut down. This delay in the product cycle could easily run into 2014.