Wall Street predicts bull market for medical devices

Bear Stearns Headquarters in New York City. Source: Wikimedia Foundation

The medical devices market, particularly large-cap companies, could perform well despite current economic challenges, according to Rick Wise, a Wall Street analyst from Bear Stearns who spoke at the Cardiovascular Revascularization Therapies (CRT) 2008 meeting in Washington, D.C., last week.

Wise based his analysis on larger-cap companies such Johnson & Johnson, Abbott, Medtronic, Boston Scientific and St. Jude Medical.

“The medical device industry for these larger-cap stocks is positive and should grow, at least in line with their earnings growth,” he said. “Most of these companies have earnings growth in the low- to mid-teens, and many of them have dividends.”

The U.S. economy currently faces ongoing growth challenges and if this continues, the stock market could remain volatile. If this remains true, slow and steady wins the race, Wise said.

“In a weakening economy, dull is beautiful,” he said.

MedTech companies, particularly, more procedure-driven, somewhat less radically-driven companies, should perform better in this environment, he said.

In fact, Wise’s large-cap companies this year have appreciated 2% on average, a fairly strong showing compared to the 9% average dip in the S&P 500, he said.

But slowing sales growth and political uncertainties such as the upcoming presidential race could disrupt any bullish potential for the medical devices market. In addition, the lack of blockbuster new technology—compared to a decade ago when implantable cardiac devices (ICDs) and drug-eluting stents (DES) were entering the market and adding billions of dollars in revenue to their respective companies—could also affect the growth.

MedTech sales growth rates have decelerated since 2003, going from 26% to an estimated 8% in 2008. The revenues for 2009 are projected to be similar to this year, Wise said. 

While the overall rate of sales growth has slowed, MedTech stocks in 2007 fared well, according Wise. Also, a weak U.S. dollar should continue to boost growth, given the heavy international exposure of most large-cap MedTech companies.

Despite negative factors, the overall picture is quite good because of several long-term fundamentals including:

• the aging population;
• continued demand for new technologies and better therapies;
• new technologies such as percutaneous heart values, carotid stents, AAA grafts, atrial fibrillation devices, and DES; and
• more mergers and acquisitions.

With the ICD Market, the recent recalls have slowed recovery, but the market projection is somewhat stabilizing and even improving, Wise said. The worldwide DES market is also stabilizing at 62% of U.S. market, especially with the approval of Medtronic’s Endeavor and the potential approval of Abbott’s Xience.

The bottom line is the medical device industry remains attractive in the weakening economy. Wise called it “a defensive play in a volatile market.”