Medtronic and St. Jude: Pumping Profits
Cardiac-rhythm management devices are giving new life to their stocks. New investors, however, may not get much lift
Over the past year, medical-device makers Medtronic and St. Jude Medical got a big boost from studies conducted by independent researchers and device companies on the best treatment to manage heart-rhythm problems. The studies convinced the medical community that implantable cardiac defibrillators (ICDs), though more expensive, are the best solution for an increased number of patients. The devices can regulate slow and fast heart rhythms as well as shock the heart if needed. Pacemakers manage only the rate of slow heartbeats.
ICDs cost at least $20,000, while pacemakers go for $5,000 to $10,000, and recent income reports at both companies reflect the greater use of the pricier devices. Minneapolis-based Medtronic (MDT
) saw its sales rise 20%, to $1.9 billion, in its fiscal third quarter ended Jan. 24 -- and the main contributor was $905 million in sales from defibrillator and heart-failure devices, which accounted for 47% of sales. That performance helped put Medtronic on the BW50 list of top performers at No. 21.
Ranked No. 10 on the BW50, St. Paul (Minn.)-based St. Jude (STJ
) saw an 18% increase in sales, to $410 million, for its fourth quarter ended Dec. 31. St. Jude's ICD sales, which make up 20% of the total, rose by 57% in the quarter, to $85 million. And the growth of pacemaker sales at both companies has fallen.
RECESSION-PROOF? Those who already own the stocks can reasonably expect continued solid sales growth, as an aging population works to the companies' advantage. Analysts expect sales to rise about 19% at St. Jude and 14% at Medtronic in 2003. And both device makers seem to be doing what they need to keep fundamentals strong in any kind of economy: introducing life-saving products and proving expanded uses for them. "We don't get hit by recession issues," says St. Jude CEO Terry Shepherd.
Yet investors looking for a big price run-up might be disappointed. Much of the recent growth is already reflected in the stocks, with both trading at a forward price-earnings ratio of 28. Shares in Medtronic, considered the bellwether of device companies, have been flat over the last 52 weeks at around $46, while St. Jude has gained about 20%, to $49. And if the economy rebounds after the war with Iraq, medical-device stocks may not perform as well as downtrodden cyclical tech stocks, which are overdue for a rally.
For the long term, graying baby boomers should help keep sales of medical devices robust for years to come. These companies "have good visibility into their prospects. That's important in today's environment," says Keay Nakae, analyst at Wedbush Morgan Securities. (Nakae does not own shares, and his firm has no banking relationship with either company.)
"WE'RE BLESSED." Although ICDs have been available for about 20 years, the market is hardly mature. About 65,000 to 70,000 people get ICDs annually. But still, around 300,000 who could potentially have been saved with an ICD, die each year of sudden cardiac arrest. "We've barely penetrated [the potential market]," says Shepherd.
Medtronic is leading the way, with about 50% market share. CEO Art Collins says, "We're blessed right now to have a strong new-product pipeline and strong momentum." One recent study "doubles the patient population for ICDs" by including post-heart-attack patients whose hearts don't pump blood effectively. But he doesn't want to appear overconfident. Though sales grew by 20% the past two quarters, Collins opts to stick to the long-stated goal of 15% top- and bottom-line growth a year over any five-year period.
Still, sales growth could get even better if Medicare expands reimbursement for these devices, as it's expected to do within the next several months. Mark Landy at Leerink Swann & Co. expects the worldwide ICD market could rise from $2.8 billion in 2002 to $5 billion in 2006, assuming the government expands insurance coverage.
PLAYING CATCH-UP. Though it's debatable whether or not Medicare would pay for the costly implants, Landy expects doctors will find "creative" ways to fit patients into Medicare's reimbursement guidelines. "Restrictive or not, most still will be implanted."
St. Jude is expected in early 2004 to introduce a device to treat patients with congestive heart failure, which occurs when the heart is unable to maintain adequate circulation. This product would play catch-up to similar products recently introduced by rivals, including Medtronic. Landy expects sales of $113 million for the product in 2004. "When they come to market with the heart-failure device, it will be another leg of growth," says Leslie Wright Marino, co-portfolio manager and analyst for Dreyfus Premier Healthcare Fund.
Both companies, though, must come up with new and better products to keep sales growth strong. "Our industry is highly dependent on our ability to bring technology forward all the time," says St. Jude's Shepherd.
Analysts agree. "When you look out three to five years, you have to ask, where to next?" asks Landy. He says that while "you know where Medtronic is going, you don't quite know with St. Jude." Expanding its division that makes pacemakers for other parts of the body besides the heart could be one avenue, Landy says. (He doesn't own shares, and his firm does no investment-banking work with either company.)
HOLD STEADY. Medtronic already is a top player in devices for other areas, including vascular, diabetes, cardiac surgery, and spinal surgery. But the strategy has its potential pitfalls. About a year and a half ago, Medtronic lost a legal battle over a patent on a lucrative stent -- a device that resembles a tiny scaffold to help prop open a clogged artery -- and was forced to stop selling it.
More worrisome to analysts is Medtronic's late start on developing a drug-coated stent. It just started its first human study recently, while rival Johnson & Johnson (JNJ
) will likely launch its product in the U.S. this year. "Growth in vascular will be down for a while -- for the next year and a half to two," Collins says.
Still, solid growth for products in demand seems in the bag for both companies. The stocks aren't cheap, so there's no bargain here for investors who aren't already in, but for those who are, they look like reliable holdings.
MARCH 24, 2003
Tsao covers financial markets for BusinessWeek Online in New York Edited By Beth Belton
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