Medical Device Firms Hopeful for 2010

Nearly three-quarters of industry executives are optimistic about their companies’ prospects in 2010, according to a survey conducted by Emergo Group Inc., an Austin, Texas-based medical device consulting and research firm. Perhaps buoyed by the small (but nevertheless encouraging) economic gains recorded over the last few months, 71.7 percent of the survey’s respondents said they expect sales to increase this year, and more than half (51.6 percent) anticipate adding employees by the time 2011 arrives.

“Companies are even more bullish going into 2010 than they were going into 2009,” Emergo’s survey stated. “At the time, credit markets were frozen, and the international economy was in the midst of an upheaval. People were very uncertain about the future at that time.”

And it showed. In Emergo’s inaugural survey, conducted in late 2008, 61.3 percent of respondents expected sales increases in 2009, 9.1 percent believed sales would plummet, and 20.4 percent expected sales to be flat. That pessimism dropped considerably over the past year: Only 4.3 percent of respondents expect sales to fall over the next 12 months, while 17 percent expect sales to be flat, the survey indicated.

Device companies also have become less pessimistic about the industry in general. More than two-thirds of respondents, or 70.6 percent, said they were “very positive” or “somewhat positive” about the health of the medical device/IVD (in-vitro diagnostics) space in 2010. That level of optimism was significantly scarcer last year, when 56.3 percent of medical device industry executives were hopeful about the sector’s health.

“…People in the medical device industry feel the economy is more stable now than one year ago and are cautiously optimistic,” the survey stated.

The reasons for that optimism, however, remain elusive. One factor that could be contributing to the growing sanguinity among device executives is increased sales activity. About 32 percent of respondents reported an increase in sales/orders in the three months before the survey was taken (Nov. 1-15); only 19.7 percent experienced a decline. When Emergo asked about sales in its November 2008 survey, 23.8 percent of the medical device firms that responded reported increases in sales/orders, 17.5 percent said sales fell, and 37.7 percent claimed orders were flat. In addition, the 2009 survey found that European companies were less likely to report increases in sales/orders—perhaps due to the exchange rate between the euro and U.S. dollar—while Asian firms were most likely to account for recent sales increases.

Such data led the survey’s authors to conclude that domestic sales for medical device and IVD related firms remain solid. That stability, however, did little to diffuse companies’ concerns for the new year. Some of the biggest challenges facing the industry, according to the responses of device executives, include new directives and regulations, the sluggish private equity funding market and uncertainty over healthcare reform.

“The U.S. generating unprecedented debt while simultaneously pushing for expanded healthcare seems likely to be associated with great uncertainty for the future, and changing buying patterns for healthcare providers,” one executive said. “I think this will ripple out to affect the rest of the world healthcare market.”

Another executive voiced his concern over the impact of new regulations on both device manufacturers and customers. “The new directives and regulations we will have to follow will increase costs to us as manufacturers, which could affect the end user and buyer of our product. We may have to increase our prices to compete with the market demands of the regulations changes.

For example, clinical trials and research, which was not required before, when we have been in business for 15-plus years and our industry is very small compared to other medical device manufacturers. The costs may not allow sales to continue when the economy is starting to pick up, causing us to have another economic hardship to meet sales.”

More than 1,100 people participated in the survey, which was conducted in cooperation with BSI Group, a global provider of standards, management systems, business improvement and regulatory information. Nearly half the respondents represented small companies with fewer than 50 employees worldwide. Sixty-five percent of respondents were affiliated with medical device firms, with the remainder comprised of IVD firms, distributors, laboratories, professional service and consulting firms, and government.

Analysts Predict “More Normal” Environment

Improved earnings and a stabilizing economy should help the medical device sector rebound this year, according to analysts who predict an increase in merger and acquisitions activity and a slow thaw of the frozen capital equipment market.

In a 120-page outlook, analysts from Boston, Mass.-based investment banking firm Leerink Swann predict that most healthcare sectors will outperform 2009, claiming currency fluctuations and a renewed interest by investors will help the medical supplies and medical devices industries achieve solid growth.

“In 2010, as markets continue to return to more normal growth and currency turns positive, we expect a year of top- and bottom-line improvement,” the outlook stated. “Positive earnings leverage for most larger capitalization companies is likely to remain an important factor driving largely double-digit EPS [earnings per share] growth, with most companies actively engaged in cost and efficiency enhancement programs.”

Cost-cutting is not the only path to growth, however. Some rebound in the capital equipment market is expected, and improving economic conditions could lead to a small but significant increase in the number of elective procedures performed. Such a resurgence would be welcome news to companies such as Stryker Corp., which was negatively impacted by hospital spending fluctuations and patients’ reluctance to schedule joint replacement procedures.

An improved capital equipment market and uptick in elective procedures should lead Kalamazoo, Mich.-based Stryker Corp. to EPS growth

in the low- to mid-teens and sales growth between 8 percent and 10percent, Leerink Swann analysts predict. They claim the company will achieve “above-average mid-teens EPS growth” through 2012.

“Over the next 12-24 months, as the third largest player in the estimated $11 billion worldwide hip/knee [replacement] market, Stryker should be one of the main beneficiaries of improving orthopedic procedure volume growth as patients gradually undergo surgeries that may have been delayed as a result of the weak economy,” the outlook stated. “With the economy no longer declining and the hospital environment basically stable—possibly even beginning to show signs of improvement—MedSurg growth rates should accelerate significantly from depressed 2009 levels.”

The year is not expected to be trouble-free for Stryker, though—the firm is working to remove three warning letters at its facilities in Ireland, Mahwah, N.J., and Portage, Mich., and dealing with the repercussions of a federal indictment against the former president and three current sales managers of its Biotech division. However, Leerink Swann’s analysts are confident the company can overcome those challenges to outperform in 2010 and achieve a stock value of $60 per share.

Stryker was one of 22 companies highlighted in the Leerink Swann report. More than half of the companies are expected to outperform this year, with only eight forecast to “market perform.” One of the market performers is Medtronic Inc., the medical device conglomerate based in Minneapolis, Minn.

While the company has had two quarters of solid growth in Fiscal 2010, Leerink Swann analysts believe Medtronic’s long-term growth prospects depend on the successful launch of several new products over the next 12 to 18 months.

“Fiscal 2010 and into Fiscal 2011 represents a bit of a transition period for Medtronic as the company must successfully execute on a cadence of new product launches over the next 12-18 months in order to drive sustainable high single-digit to low double-digit growth longer term—in line with management’s recent 9 percent to 11 percent sales growth guidance over the Fiscal 2008-Fiscal 2013 timeframe,” the outlook stated.

Leerink Swann analysts expect Medtronic’s stock to range between $45 and $50 per share this fiscal year.