Med-tech poised to beat market, analysts say

  • Article by: JANET MOORE , Star Tribune
  • Updated: January 31, 2010 - 4:49 PM

A strengthening economy and less uncertainty in health reform could bode well for a sector that many investors have been ignoring.

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Steve Ubl is a native of New Brighton who is now Med-tech's top lobbyist in Washington.

Photo: Elizabeth Flores, Star Tribune

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As lawmakers wrestled with health care reform during the last year, many investors passed on medical technology stocks. With uncertainty hanging over details of the legislation -- and indeed its fate -- some saw the sector as a risky proposition.

But now? Med-tech stocks are poised to outperform the overall market this year, according to a recent report by senior industry analysts at Piper Jaffray Cos., who find hope in a gradually strengthening economy for health care consumers.

That bodes well for Minnesota's publicly traded medical device companies, including St. Jude Medical Inc., SurModics Inc. and Rochester Medical Corp., which were among the first to begin reporting fourth-quarter and yearly results last week.

Several more will report results between now and Feb. 23, including Uroplasty Inc., Vascular Solutions Inc., Boston Scientific Corp. and Medtronic Inc.

In the past year, the prospect of major health care legislation has made med-tech investors anxious, in large part because bills pending in Congress called for a tax on medical device companies. No one was quite sure how much the tax would be, or how long it would last. The industry's Washington lobbying group, AdvaMed, opposed the tax, rallying many local companies and members of Congress to join the fight.

When lawmakers finally settled on a $2 billion annual levy for 10 years, much of the uncertainty fizzled.

"Before [the tax] was nailed down, there was no good way to handicap the debate," said Thomas Gunderson, a senior med-tech analyst with Piper Jaffray. "The lifting of uncertainty will dissipate the lingering clouds that have kept generalists out of the sector for the last several months."

Interestingly, Piper's yearly med-tech preview was published Jan. 6, just days before Scott Brown won the U.S. Senate race in Massachusetts, an upset that could waylay health care legislation inCongress.

"The recent special election in Massachusetts sent shock waves through Capitol Hill that are still reverberating today," said Steve Ubl, the Minnesota native who heads AdvaMed. "The path forward [for Congress] is not clear and there are no easy answers, or a plan would have been presented at this point."

Nevertheless, industry leaders are optimistic.

St. Jude Chief Executive Officer Daniel Starks said on a conference call last week that the company had already figured in health care legislation when crafting its 2010 guidance for investors, which called for annual earnings to increase 12 percent to 14 percent from those of 2009.

Fundamentals improved

Given recent political events, the outlook for the industry now is "even better," Gunderson says, noting that President Obama focused on jobs and the economy in his State of the Union speech last week. "For the economies in Massachusetts, California and Minnesota, the jobs are in med-tech," he said.

But even before the political rumble in Massachusetts, med-tech's fundamentals improved as the economy rallied slightly.

Last year, there appeared to be a paradigm shift in the "recession math,'' so that health care was no longer seen as immune to the economic cycle, and many cash-strapped patients, some of whom lost their jobs and health insurance, delayed out-of-pocket medical costs.

The problem with deferring procedures is that medical conditions often worsen as a result, requiring more expensive care later, the Piper report states. Some procedures, it says, can't be delayed forever.

That pent-up demand for medical procedures "will contribute to stock outperformance in 2010," the report concludes. "As unemployment appears to have peaked, and as COBRA benefits have been extended, we think we have passed through the trough of medical procedure deferrals -- a positive for the medical device/diagnostics sector as we head into 2010."

Janet Moore • 612-673-7752

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