April 19, 2010 – The Wall Street Transcript has just published Medical Devices Reportoffering a timely review of the Health Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Joanne K. Wuensch is a Research Analyst in the equity research group of BMO Capital Markets Corp., where she covers medical technology companies in the cardiology, ophthalmology, orthopedic and respiratory sectors. Her career in financial services began at JPMorgan, where, among other positions, she was an Associate in municipal finance investment banking in the health care and higher education group. Ms. Wuensch joined BMO Capital Markets in 2002. She holds an MPA from New York University and a B.A. from the University of Delaware.
TWST: Which of these will have the most impact? Do you think it will be health care reform, consolidation or something else?
Ms. Wuensch: For the stocks, it is probably consolidation. For the industry, I could argue that both health care reform and consolidation over the next several years will be impactful. The good news is that we know that it is a 2.3% excise tax that will begin impacting the medical technology companies in 2013. With this knowledge, I think it is easier for organizations to value potential acquisitions and plan for the future. In 2009 there were 23 M And A transactions above $68 million, with only two above $1 billion. This compares to 2007, when there were 40 transactions, with 12 above $1 billion. Looking over the next 12 months to 18 months, we believe that the industry is prime for consolidation.
TWST: What stocks will benefit the most over the next several years? Which are in good shape to take advantage of the sway of the tide at the moment?
Ms. Wuensch: There are several ways to answer this. On a fundamental basis, we anticipate that hospital supply companies Covidien (COV), C.R. Bard (BCR) will benefit from the increased patient flow starting in 2014. From a consolidator point of view, companies such as Medtronic (MDT), Johnson And Johnson (JNJ), Abbott Laboratories (ABT), Covidien, Stryker (SYK), Zimmer (ZMH) and St. Jude Medical (STJ) have a fair amount of cash on their balance sheet and could benefit from purchasing faster-growing technologies.
Finally, the smaller companies and their stocks could benefit. From my list, I’ve got a long list of possible acquirees. Some of this has already begun. In the last 12 months to 18 months, Covidien purchased VNUS Medical; Medtronic purchased Invatec and CoreValve; and Abbott purchased Advanced Medical Optics. But we believe that with health care reform well understood, large-cap multiples recovering and cash on the balance sheet, there will be more sooner rather than later.
TWST: What are the strongest stocks now?
Ms. Wuensch: Strongest in what way?
TWST: The best stock picks.
Ms. Wuensch: I think that Covidien is in a great position. The company, which has been publicly traded since June 2007, has been executing its strategic plan. Management has sold off noncore, lower-margin businesses, purchased adjacent, higher-margin businesses, and invested in research and development to drive higher operating margins. In addition, management has managed the company’s debt burden, tax rate and cash flow. For the stock to work, continued leverage of the P And L, which should drive top-line growth and bottom-line returns, should do the trick. Stryker is another one. The stock should benefit from a recovering orthopaedic market, a recovering hospital purchasing environment – the MedSurg business is roughly 40% of sales – and an easing regulatory environment.
Two of the company’s four FDA warning letters have been lifted. Further, the company has almost $4 billion in cash on the balance sheet. Finally, I would point to NuVasive (NUVA). With reimbursement questions behind it, the company management has guided to 30% to 35% revenue growth in 2010, as it continues its momentum in the U.S. with the introduction of lateral access spine surgery. And management is just beginning to push outside of the United States. Further, the technology is well positioned in the current health care economic environment, as the procedure lowers operating room time, the number of hospital days and returns patients to their normal activities faster.
TWST: How is the economy affecting the industry at the moment?
Ms. Wuensch: At the moment, the industry is in a recovery mode. At the first light of the economic downturn, we witnessed a slowdown in breast augmentations, lap-band procedures and laser vision correction – things that are truly elective. The secondary items were items that are not so elective but can be considered elective for now, such as hips and knee procedures. During a very brief period, items that we never thought of as elective were impacted, items such as glaucoma eye drops. In the recovery mode, we are beginning to see a return of the hip and knee procedures but have not returned quite yet to the truly elective procedures, such as laser vision correction.
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