STJ I believe there are three main issues driving the performance of STJs stock, all of which are

outlined below and have led to multiple compression over the past several years. I believe that if just one of these concerns are lifted there can be multiple expansion. I think the stock trades $45-$50. 1. Weakness in the CRM market 2. Skepticism about continued market share increases within CRM 3. Lack of R&D productivity Weakness in the CRM market Over the past few years the CRM market has weakened considerably. I believe this to be more structural in nature. The lack of growth has caused a struggle for market share which, combined with hospitals attempts to push back on pricing, has led to declining ASPs. Additionally, the DOJ investigation into whether ICDs are over utilized is problematic. What used to be a mid-single digit growth market is now declining.

CRM Market US ICD YOY Growth :Volumes :Price/Mix OUS ICD YOY Growth :Volumes :Price/Mix US Pacemaker YOY Growth :Volumes :Price/Mix OUS Pacemaker YOY Growth Volumes Price/Mix Total CRM Mkt

2009A $4,451.0

2010A $4,373.0 -1.8%

Q1 $1,031.0

Q2 $983.0

Q3 $960.0

Q4 $901.0

2011A $3,875.0 -11.4% -8.0% -3.4%

Q1 $972.0 -5.7% -1.0% -4.7% $694.0 -2.7% 1.0% -3.7%

Q2 $946.0 -3.8% 0.0% -3.8% $644.0 -5.7% 0.0% -5.7% $389.0 -9.5%

Q3 $931.2 -3.0% 0.0% -3.0% $589.7 -9.0% -3.0% -6.0% $403.3 -6.0% 0.0% -6.0%

Q4 $883.0 -2.0% 0.0% -2.0% $593.3 -9.0% -3.0% -6.0% $379.3 -2.0% 2.0% -4.0% $528.2 -7.0% -3.0% -4.0%

2012A $3,732.2 -3.7%

2013A $3,657.5 -2.0% 1.0% -3.0%

2014A $3,584.4 -2.0% 1.0% -3.0% $2,495.3 1.0% 4.0% -3.0% $1,444.6 -4.0% 1.0% -5.0% $2,168.5 0.0% 4.0% -4.0% $9,692.8 -1.1%

2015A $3,512.7 -2.0% 1.0% -3.0% $2,520.2 1.0% 4.0% -3.0% $1,386.8 -4.0% 1.0% -5.0% $2,168.5 0.0% 4.0% -4.0% $9,588.3 -1.1%

$2,374.0

$2,518.0 6.1%

$713.0

$683.0

$648.0

$652.0

$2,696.0 7.1%

$2,521.0 -6.5%

$2,470.6 -2.0% 1.0% -3.0%

$1,804.0

$1,713.0 -5.0%

$423.0

$430.0

$429.0

$387.0

$1,669.0 -2.6%

$396.0 -6.4%

$1,567.5 -6.1%

$1,504.8 -4.0% 1.0% -5.0%

$2,242.0

$2,225.0 -0.8%

$582.0

$605.0

$592.0

$568.0

$2,347.0 5.5%

$577.0 -0.9%

$557.0 -7.9%

$550.6 -7.0% -3.0% -4.0%

$2,212.8 -5.7%

$2,168.5 -2.0% 3.0% -5.0% $9,801.5 -2.3%

$10,871.0

$10,829.0 $2,749.0 $2,701.0 $2,629.0 $2,508.0 $10,587.0 -0.4% -2.2%

$2,639.0 -4.0%

$2,536.0 -6.1%

$2,474.7 -5.9%

$2,383.8 $10,033.5 -5.0% -5.2%

The sell-side seems to be modeling a return to 1% growth in 2012 and beyond. I think that is optimistic and I suspect investors are not expecting much better than flat growth. Skepticism about continued CRM market share gains STJ has been a perennial taker of market share for years. The majority of this was due to the misfortunes of competitors and has led to an initial implant share that is well above their replacement share. Since the majority of ICD replacements are generally done by the same vendor this leads to a market share tailwind (this is mainly a factor in US ICD). So with US ICD share of 30% in initial implants over time total US market share should approach that level. So without gaining/losing any accounts STJ should continue to gain share in US.

US ICD BSX % share STJ % share MDT % share Other % share Total YOY Growth Volumes Price/Mix

2009A $1,248.0 28.0% $998.0 22.4% $1,980.0 44.5% $225.0 5.1% $4,451.0

2010A $1,037.0 23.7% $1,138.0 26.0% $1,973.0 45.1% $225.0 5.1% $4,373.0 -1.8%

2011A $948.0 24.5% $1,046.0 27.0% $1,655.0 42.7% $226.0 5.8% $3,875.0 -11.4% -8.0% -3.4%

Q1 $229.0 23.6% $266.0 27.4% $417.0 42.9% $60.0 6.2% $972.0 -5.7% -1.0% -4.7%

Q2 $220.0 23.3% $267.0 28.2% $399.0 42.2% $60.0 6.3% $946.0 -3.8% 0.0% -3.8%

Q3 $214.18 23.0% $264.46 28.4% $393.90 42.3% $58.67 6.3% $931.2 -3.0% 0.0% -3.0%

Q4 $203.09 23.0% $253.42 28.7% $370.85 42.0% $55.63 6.3% $883.0 -2.0% 0.0% -2.0%

2012A $866.3 23.2% $1,050.9 28.2% $1,580.7 42.4% $234.3 6.3% $3,732.2 -3.7%

2013A $841.23 23.0% $1,042.40 28.5% $1,539.82 42.1% $234.08 6.4% $3,657.5 -2.0% 1.0% -3.0%

2014A $806.49 22.5% $1,039.47 29.0% $1,505.44 42.0% $232.99 6.5% $3,584.4 -2.0% 1.0% -3.0%

2015A $779.82 22.2% $1,036.25 29.5% $1,475.33 42.0% $228.33 6.5% $3,512.7 -2.0% 1.0% -3.0%

The other issue, however, is the Riata lead. Its tough to judge the fallout from such issues but it seems the company will lose some share in the US. While they gained dollar share, volume share was probably less so. They launched a new product with a higher ASP. To attempt to keep business competitors took prices down. These product launches seem to have some longevity however, so I think its likely the company continues to gain some dollar share but not really on the volume side. Netnet, they probably make their way towards 30% share in the US. Below is the CRM growth rate for the company under 28%, 30% and 32% US ICD share. (I also adjusted OUS share but to a much lesser degree)
CRM Scenerios 30% US Share by 2015 YOY Growth 28% US Share by 2015 YOY Growth 32% US Share by 2015 YOY Growth $2,905.0 $2,870.0 2012A $2,895.0 2013A $2,870.0 -0.9% $2,821.0 -1.7% $2,888.0 -0.6% 2014A $2,879.0 0.3% $2,801.0 -0.7% $2,915.0 0.9% 2015A $2,866.0 -0.5% $2,771.0 -1.1% $2,940.0 0.9%

So while this obviously makes a difference in overall CRM sales, its not a game changer. Keep in mind, CRM is only 60% of the overall business and declining. The sell-side seems to expect 32% US share by 2015, which again, is probably optimistic. Lack of R&D Productivity I believe the biggest impediment to multiple expansion, throughout large cap MedTech, is the lack of product cycles. Companies have continued to spend on R&D to seemingly tread water. If this changes AT ALL I believe it will be a significant contributor to multiple expansion. The chart below depicts R&D productivity at STJ through this year. It takes the cumulative sales in a three year period and divides it by the cumulative R&D in a semi-trailing two year period. For example, sales from 2007/ 2008/2009 is divided by R&D from 2006/2007. This is what it looks like through this year based on sales estimates.

$14.5 $14.0 $13.5 $13.0 $12.5 $12.0 $11.5 1

Forward Sales/$1 R&D

Sales/R&D $

I believe that when this bottoms the stocks multiple will. The company has some pretty interesting product cycles within vascular and structural heart, while neruomodulation and AFib are experiencing nice, market growth rates. Vascular Through an acquisition and some internal development STJ got into the FFR and the vascular imaging business. Vascular imaging is only used in a small amount of interventional procedures and FFR is used in even a smaller amount. There are surely benefits from using these products as it helps give docs better perspective on blood flow and improves stent placements. Two studies, Fame I and Fame II, demonstrated this and it should improve utilization going forward. Docs are resistant to change unless it is strongly recommended by clinical societies like the HRS. I believe 2013/2014 to be an inflection point for this business and it should add to topline growth. STJ, along with Volcano, are leaders in this space. Credit Suisse did a survey that expects 45% CAGR over the next three years in the FFR space. The same survey suggests 7.5% growth in IVUS. (this comprises a portion of Other Vascular). *Note- 2012 is a
poor comp because the company lost $45 in distribution sales not related to growth products
2009A Total Vascular YOY Growth CC Growth :FFR Related products (est) YOY Growth :Other Vascular (est) YOY Growth $590.4 $40.0 $55.0 37.5% $616.8 4.5% $70.0 27.3% $670.0 8.6% $630.4 2010A $671.8 6.6% 2011A $740.0 10.2% Q1 $181.0 -1.6% Q2 $180.0 -4.8% 5.0% $87.0 24.3% $634.2 -5.3% $121.8 40.0% $672.2 6.0% $176.6 45.0% $712.6 6.0% $238.4 35.0% $755.3 6.0% Q3 $166.5 -6.0% Q4 $193.6 2.0% 2012A $721.2 -2.5% 2013A $794.0 10.1% 2014A $889.2 12.0% 2015A $993.7 11.8%

Structural Heart STJ has limited market share is the heart valve market (about 20%). It recently launched a new product for the traditional valve market that expands their market opportunity. With the traditional valve market growing 5% they should grow faster through some share gains. Additionally, they are rolling out a transcatheter (THV) valve in 2013 in Europe. This is also an incremental market but is bigger ($800mil) and growing much faster. In addition, through an acquisition they have some other

interesting products that could bear fruit. They are announcing results from a recent trial in a month that could serve as a catalyst for AGAM/Other below. These closure devices do only $100 million in sales today, but could eventually go to $500 million the company believes. I assume only modest uptake.
2009A Total Structural Heart YOY Growth CC Growth :AGAM/Other (est) YOY Growth :Traditional Valves (est) YOY Growth :THV Heart $323.2 $334.8 3.6% $0.0 $30.0 $235.0 683.3% $362.3 8.2% $323.2 2010A $364.8 12.9% 2011A $597.3 63.7% Q1 $155.0 8.4% Q2 $160.0 4.6% 9.0% $240.0 2.1% $376.3 3.9% $252.0 5.0% $402.6 7.0% $5.0 $277.2 10.0% $430.8 7.0% $15.0 $304.9 10.0% $461.0 7.0% $25.0 Q3 $150.8 0.0% Q4 $150.5 0.0% 2012A $616.3 3.2% 2013A $659.64 7.0% 2014A $723.03 9.6% 2015A $790.90 9.4%

AFib/Neuromodulation The company also operates in two markets that are growing 10%+cc. Growth has been hampered due to FDA warning letters and some softness in the capital equipment markets, but the markets remain attractive. Within AFIb, the company has about 40% market share so I would not assume any share gains. I do expect a reacceleration growth in 2013 as products that are available in Europe are rolled out in the US as a result of the warning letter being lifted. I believe the new product cycles will lead to a bottoming of sales/R&D and expect the chart to look like the following moving forward. I think this year is the bottom.

Valuation

STJ had historically traded between (need historical multiples here) . It is currently at the lower end of that range. I believe CRM growth will be non-existent, but growth in other areas will be catalysts for multiple expansion. I really believe that if sales/R&D $ has bottomed the stock will begin trending toward $50. I think $45-$50 to be fair value which is a mere 13-14 P/E on a healthcare reform taxed 2013 EPS.

2013 CY
STJ at Revenue EBITDA EBITDA-MainCap CFF CFF- Main CapEx EBIT P/E $35.0 2.2x 6.6x 7.4x 8.3x 9.7x 7.9x 10.0x

2013 CY
$40.0 2.5x 7.4x 8.3x 9.3x 10.8x 8.9x 11.4x

2013 CY
$45.0 2.8x 8.2x 9.2x 10.4x 12.0x 9.8x 12.9x

2013 CY
$50.0 3.0x 9.0x 10.1x 11.4x 13.2x 10.8x 14.3x

I think if the CRM market recovers there is upside to these numbers. Assuming no growth in the CRM market, no new implant ICD share gains, and growth in other parts of the business assumed in previous pages I get to a DCF value of $50 pretty easily using a 10% WACC.