Markets & Finance

Medical-Device Makers Are Looking Fit


By Robert Gold Expanded research and development at medical-technology companies has generated growing pipelines of significant new devices. Of particular interest to those following the industry are emerging technologies to treat congestive heart failure, chronic pain, neurological disorders, coronary disease and arrhythmias, impaired joints, degenerative spinal-disk disease, bone fractures, diabetes, and morbid obesity. Within the lifestyle categories, Standard & Poor's continues to see product innovation in such areas as breast augmentation, impotence, incontinence, and laser vision correction.

The technological breakthroughs are coming just ahead of an expected baby-boomer-driven surge in demand for health-care products and services both in the U.S. and abroad. New-product flows are critically important in battling the inevitable pricing pressures seen in this intensely competitive segment. Consequently, S&P looks for annual growth in medical-device revenues to accelerate to the mid-teens level over the coming three years, up from the current pace of approximately 10%.

FASTER APPROVALS. S&P believes that the medical-device industry's growth will be comparable to that experienced by the drugmakers during their heyday of the 1970s and 1980s. Indeed, in some ways, the outlook for new medical devices is even more attractive. The time frame between R&D and Food & Drug Administration approval is considerably shorter for medical devices than for pharmaceuticals, since a device's effectiveness can generally be proven with narrower clinical trials. Also, medical-device companies spend an average of about 10% of revenues on R&D, vs. an average of 15% for pharmaceutical outfits.

Several markets should be reinvigorated by new-product launches during 2002 and into 2003, with a large number of devices approaching commercialization in orthopedics, plastic surgery, and urology. The most promising area, however, may be cardiology. Demand in this market has a very favorable outlook, reflecting the high incidence of coronary disease in an aging and increasingly overweight U.S. population.

The cardiology market includes cardiac stents, pacemakers and defibrillators, heart valves, and angioplasty devices. One product expected to be launched in the near future is Medtronic's (MDT) InSynch biventricular pacing device to treat congestive heart failure, which occurs when the heart loses its ability to pump enough blood through the body.

A NEW ERA. Another product in trials is the drug-coated stent, which cardiologists believe could reduce the need for coronary bypass surgery for many patients and mark a new era in treating heart disease, the No. 1 killer of Americans. One of the biggest problems with coronary stents is that the stented vessels often experience restenosis, or closure, several months after the procedure. This is typically caused by a buildup of scar tissue in and around the device.

Device manufacturers are therefore scrambling to gain FDA approval for stents coated with drugs that could prevent restenosis. Clinical studies are currently under way by Johnson & Johnson (JNJ), Boston Scientific (BSX), and Guidant (GDT).

Medical-device stocks with 5-STAR (buy) recommendations from S&P include Johnson & Johnson, St. Jude Medical (STJ), STERIS (STE) and Stryker (SYK). S&P has a 4-STAR (accumulate) recommendation on Guidant, and a 3-STAR (hold) recommendation on Medtronic and Boston Scientific. Analyst Robert Gold follows health-care equipment stocks for Standard & Poor's


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