2nd UPDATE: St Jude's Soft Prelim 3Q Sparks Sector Questions

Heart-device maker St. Jude Medical Inc. (STJ) issued soft preliminary third-quarter results Tuesday that it linked to a slowdown at financially strapped hospitals, sending the company's shares lower and sparking concerns about broader problems for the medical-devices sector.

St. Jude is generally well-regarded on Wall Street following a long stretch in which it captured market share in the $11 billion heart-rhythm market. But after a second quarter in which defibrillator sales also looked soft, the third-quarter news raised fresh questions about whether St. Jude or the market-at-large is stumbling.

The company, which also disclosed more job cuts, said sales were hurt by a slowdown in hospital stocking of certain medical devices.

"We believe that macroeconomic factors coupled with the continued pressures surrounding healthcare reform resulted in changes in purchasing behavior among some of our hospital customers," Daniel J. Starks, St. Jude's chairman and chief executive, said in a release.

Morgan Stanley analyst David Lewis questioned the hospital-stocking theory, which he said seems less likely this late in the year. A more obvious culprit, he said, is market-share pressure, and to a lesser extent, market-growth weakness for heart-rhythm devices.

St. Jude also said sales were below or near the low end of the company's forecasts for most business units, including the big one for implantable pacemakers and defibrillators.

"These disappointing results today point to either STJ losing some of its mojo, or something that may more deeply impact our universe," Lazard Capital Markets analyst Sean Lavin said, referring to companies he covers.

Shares of the St. Paul, Minn., company plunged after the update, recently falling 11.4% to $33.87. The stock hit a low Tuesday of $32.50, erasing nearly seven months of gains.

St. Jude's heart-rhythm rivals also slipped. Shares of industry heavyweight Medtronic Inc. (MDT) dropped 2% to $35.73, while Boston Scientific Corp. (BSX) slid 2.5% to $9.87.

Medtronic, for its part, said it has seen nothing in its fiscal quarter ending later this month that changes its expectations. The company lowered its long-term sales growth forecast to a range of 5% to 8% in early 2009 to reflect some macroeconomic pressures it's seen plus uncertainty surrounding health-reform efforts.

Medtronic still believes it's maintaining and perhaps gaining market share in its heart-rhythm and cardiovascular businesses, spokesman Steve Cragle said.

Boston Scientific declined to comment.

St. Jude said it now expects adjusted third-quarter earnings of 57 cents to 58 cents per share, below its July guidance for per-share earnings between 61 cents and 63 cents. Analysts surveyed by Thomson Reuters had projected earnings of 62 cents per share.

The company's latest forecast excludes a charge of $50 million to $55 million, or 9 cents to 10 cents per share, associated with job cuts.

St. Jude, which has roughly 15,000 employees worldwide, has terminated about 250 workers in its manufacturing divisions, a spokeswoman confirmed Tuesday. These cuts are in addition to the prior elimination of about 200 U.S. sales, service and support jobs.

The company expects to report sales of $1.16 billion for the quarter, below Wall Street's forecast for $1.19 billion.

The preliminary sales tally for St. Jude's heart-rhythm business, which includes pacemakers and defibrillators, was $690 million. That is up 2% from a year ago, or 5% excluding the impact of foreign currency, but below the $700 million to $730 million range St. Jude had forecast in July.

In the company's business for devices that treat the common rhythm disorder atrial fibrillation, preliminary sales were $155 million. The company's cardiovascular business posted preliminary sales of $230 million. In both cases, sales were at or near the low end of St. Jude's projections.

A lone bright spot was the neuromodulation business, where preliminary sales of $84 million exceeded the company's expectations.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; [e-mail]

(Joan E. Solsman contributed to this article.)