St. Jude Medical's job cuts may pay off

At face value, St. Jude Medical Inc.'s Thursday announcement that it has shed another 500 jobs on top of the 300 positions it eliminated in August looks bad -- especially if you are someone getting a pink slip.

But that doesn't mean it was a bad move for the company, or its future fortunes, say those who are paid to follow the medical device industry. Depending on where the cuts were made and whether St. Jude preserved -- or enhanced -- its ability to develop and market its most promising technology, the moves could pay off.

"All this depends on certain things, like what types of jobs are being lost," said Steve Parente, director of the Medical Industry Leadership Institute at the University of Minnesota. "Are they jobs that are key for developing the pipeline? Are they vital to development? Or are they going to be replaced by other, smaller firms?"

St. Jude isn't providing many details on what jobs have been cut. Officials were not available to comment Friday. Still, some hints are out there. Mixed results from a recent study of a device that St. Jude had high hopes could be marketed to prevent stroke may have played a role in the cuts, analyst Debbie Wang of Morningstar said Friday.

"They are trying to make calculated bets on which technologies are going to pan out," she said. "This is a situation where if the technology doesn't pan out, you may be overstaffed."

Then there is a companywide "realignment" that combines four product divisions into two new operating units and centralizes support roles, including information technology, human resources, legal, business development and some marketing functions. In all, St. Jude has eliminated 800 jobs -- about 5 percent of its global workforce -- since August, including about 180 in Minnesota.

If it is able to cut jobs without hamstringing, say, research and development on promising projects, the moves might not be bad in the overall scheme of things, Parente said. In many ways, the industry often sheds jobs as it looks for ways to contract out some functions, or partner with firms that are smaller and more able to quickly adjust to a changing marketplace.

"The medical device industry is always in creative destruction mode -- since its inception," he said. "The drive for smaller, better devices and creativity requires a different labor force, more nimble. A key will be to look at their balance sheet. Are they continuing to grow?"

On that point, the third quarter of 2012 was not kind to the Little Canada-based company. St. Jude's earnings fell 22 percent as U.S. and European sales of implantable defibrillators and pacemakers continue to lag -- as they have for many companies.

But St. Jude also has been dogged by problems stemming from its recalled Riata leads, wires that connect a defibrillator to the heart. Riata was recalled over safety concerns that the wires were breaking through the insulation.

While St. Jude's current Durata lead is touted as a sturdy and safe alternative, Wang said in a recent note that "it remains difficult to gauge how much St. Jude is weighed down by concerns about its Durata leads and practitioners who may be avoiding the potential risk associated with the leads by implanting competitive products."

In that same note, however, Wang noted that St. Jude's restructuring plans have "trimmed approximately 200 basis points off its sales and administrative expense, allowing the firm to maintain necessary investment in research and development. Some of those investments should begin paying off in the 2013-14 time frame."

According to St. Jude, the August cuts are expected to save $50 million to $60 million. On Thursday, Rachel Ellingson, vice president of corporate relations, said she was not prepared to say how much more St. Jude expected to save from the additional 500 jobs. She said officials would give details of the overall cost savings during St. Jude's earnings conference call in January.

Thom Gunderson, a senior analyst with Piper Jaffray & Co., said Friday that the loss of 800 jobs is "in line with our expectations for the total $50 [million] to $60 million in cost savings for 2013."

If the job cuts are paring positions made expendable by the company's realignment, Wall Street may look at that in a positive light, he said. From investors' perspective, "the company is looking to do what it can to become more efficient in a continuing tough economic market."

James Walsh • 612-673-7428