Drug Eluting Stent Volumes To Increase At 2% To 3%; Pricing Pressure Will Decrease Worldwide Market According To Industry Expert

• On 6:45 am EDT, Tuesday September 22, 2009

67 WALL STREET, New York - September 22, 2009 - The Wall Street Transcript has just published its Medical Devices Report report offering a timely review of the sector to serious investors and industry executives. This 41 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Developments in the Industry -- New Devices -- Negative Price Pressure -- Inject Mix -- Hospital Capital Spending Behavior -- Growth -- Rate of Growth Reliability -- Execution of Management -- Clinical Trials -- The Next Big Thing -- Innovation -- Acquisition -- Loss -- Major Turnarounds -- Productive Work Force -- Medication Adherence -- Undervaluation -- Improvement in Earnings -- Price Sensitivity -- Weakening Dollar -- Winning Market Share -- Significant Share Gains -- Profitability -- Regulatory Standard -- Opportunities -- Licensing Opportunities -- Collective Experience -- Drug Approvals -- Growth in Revenue -- Measuring Success -- Profit Margins

Companies include: Medtronic (MDT); Boston Scientific (BSX); Greatbatch (GB); Vascular Solutions (VASC); AngioDynamics (ANGO); St. Jude Medical (STJ); Edwards Lifesciences (EW); Stryker (SYK); Zimmer Holdings (ZMH); Abbott Laboratories (ABT); Johnson and Johnson (JNJ); Baxter International (BAX); Thoratec (THOR); HeartWare (HTWR); Hill-Rom Holdings (HRC); Accuray (ARAY); Smith and Nephew (SN.L); Wright Medical (WMGI); NuVasive (NUVA); TranS1 (TSON); Becton, Dickinson (BDX); C.R. Bard (BCR); Covidien (COV); CareFusion (CFN);Edwards Lifesciences (EW); Zimmer (ZMH); Nanosphere (NSPH)

In the following brief excerpt from just one of the 11 interviews in the 41 page report, an industry expert discusses the outlook for the sector and for investors.

Bruce Nudell is a Managing Director and Senior Healthcare Analyst at UBS Investment Research. An analyst since 2000, he specializes in coverage of medical devices. Dr. Nudell joined UBS in June 2007. He previously worked as a Senior Healthcare Analyst at Sanford Bernstein, where he had been the Senior Analyst in the sector since 2000. For the past four years, he has been ranked number one or number two by Greenwich Associates for "Best Original Research." Prior to becoming an analyst, Dr. Nudell was a Vice President for Business Development and Strategic Planning with Datex Ohmeda, a provider of anesthesia and critical care solutions. Dr. Nudell earned his Ph.D. in cellular electrophysiology from UCLA, his master's in finance from the University of Colorado and his B.A. in bio-geography from Northwestern University.

TWST: What key trends do you see on the macro and micro levels of the sectors you cover?

Dr. Nudell: On a macro level, in the cardio space the two identifiable big markets, ICDs and drug eluting stents, have sluggish trajectories. The defibrillator market in the United States has basically been flat since 2005, and the ex-U.S. market has decelerated to around 10% or 11% operational growth, with a continued slow deceleration ex-U.S. likely. The big controversy in the ICD space is whether or not the U.S. market resumes growth, or whether it shrinks at a modest rate over the next five years. In our model the worldwide ICD market grows at about 2% through 2013, with the U.S. shrinking and the ex-U.S. market growing in the high single digits. The ICD market impacts all three cardiac rhythm management companies. The stent market has rebounded somewhat this year based on new data suggesting limited risk associated with late stent thrombosis. Beyond this adjustment, however, and looking forward, we expect drug-eluting stent volumes to increase at around 2-3%, driven by procedure growth rather than mix shift to drug-eluting stents from less expensive bare metal stents. Pricing pressure has been in the high single digits, so our models reflect a gently shrinking drug-eluting stent market on a worldwide basis. Summarizing, we have the ICD market at around 2% and the drug-eluting stent market shrinking. This somewhat constrains our top-line estimates for the stent and CRM cardio companies, BSX, MDT and STJ. In orthopedics, we've characterized unit growth in the United States at around 7% from 1999 through 2008. This year is a sluggish year around the world in terms of units. This year due to the downturn, I think the U.S. is enjoying perhaps 3-4% unit growth and the ex-U.S. markets - and this has been surprising - has moved down to very low single-digit unit growth. The big controversy in the ortho space is whether the companies will be able to inject mix in the key U.S. market in the face of slightly negative price pressure on established products. In our view, the companies should be able to do this because of good orthopedic department profitability which in turn is driven by the large spread between commercial and Medicare reimbursement rates. For all of medtech procedures, commercial insurance pays at around 1.5 times the Medicare rate. And commercial insurance really supplies the bulk of the profit enjoyed by the surgical departments. So it remains to be seen whether or not our hypothesis is correct, but unless the commercial-to-Medicare reimbursement spread narrows, I suspect that the orthopedic industry will be able to retain modest momentum in ASPs driven by mix. We are conservatively modeling about 5% orthopedic unit growth longer term in the U.S. and a couple of points of ASP momentum. It might turn out to be six points in units and one of ASP, but we suspect that U.S. orthopedic revenue growth will be in that ballpark. On a worldwide basis, for the next five years, we're presuming a 5% to 6% worldwide orthopedic market. But like I said, the trajectory of U.S. ASPs, net of pricing mix, is the key controversy in the space. We've been reasonably optimistic that ortho ASPs won't go into deflationary cycle, but as is true for everyone, we're waiting to see the real outcome of the health care reform initiative. Turning to the diversifieds, JNJ has a wide set of businesses, which should show buoyancy when the economy turns around. Medtech should enjoy a step-up in elective procedures and consumer should rebound from increased consumer optimism. On the pharma side, JNJ is increasingly relying on alliances to bring in lower-risk, late-stage drugs. And on the purchase of early-stage companies with interesting specialty drugs, they are not interested in me-too line extensions, focusing rather on assets which meet unmet medical needs and which fit into their commercial footprint. Net-net, we remain comfortable that JNJ can maintain their formula of about 5% top-line growth with high single-digit bottom-line growth. Also JNJ will remain a core holding because it's diverse and they have the resources to buy assets that will help them weather health care reform. On a broader level, I think one way to play the uncertainty associated with health care reform is to invest in a company like JNJ that's diverse and has the resources and track record of buying good, value-added assets. The other way to win in this very uncertain period is to focus on small, emerging companies that have novel products that fulfill unmet medical needs and which therefore provide a lot of volume upside. Edwards is a case in point. While we launched with a neutral because of valuation, we're pretty certain that Edwards' pivotal Partner trial for percutaneous valves will be positive and drive U.S. regulatory approval. A successful U.S. launch will transform the company and really create value. There is sufficient volume associated with this product so that it won't really matter whether percutaneous valves are priced at $23,000 or $19,000. Relative to Edwards' size, percutaneous valves are a really big market opportunity. If you can afford to be patient and look out two or three years, the company is going to be in a much better position than it is today simply because of percutaneous valves. So to sum up, you can probably best weather health care reform by looking to the large and well-funded companies or to the small and innovative. Continuing on with the diversifieds, I think Abbott has a similar top line and earnings profile to that of JNJ. But at this moment, the stock is somewhat handcuffed simply because the majority of future profits are attributable to HUMIRA, which has slowed somewhat in the U.S. Ex-U.S., the drug is growing remarkably well, and we ultimately think that HUMIRA will reach $8 billion in sales. We suspect that U.S. HUMIRA growth has been adversely impacted by the economy, but we need to confirm that there is still a fair amount of volume growth in the inflammatory bowel disease and psoriasis categories. If U.S. trends stabilize and improve slightly, Abbott should hit our target of $52. But movement beyond that point will probably by gated by clarity as to how the cash flow and operating margin headroom provided by HUMIRA is deployed. Rounding out the diversified companies that we cover, Baxter has been a great story. To date, it's been all about the bioscience division, which in turn is driven principally by plasma-derived products. Increasingly, attention is being focused on their emerging vaccine business, which is employing cell culture production techniques. Net-net, Baxter is a high single-digit top line and low double-digit bottom line company. I think that the plasma market is in better shape than some people fear, hence I believe that the bioscience division will be able to grow at a sustainable rate of around 10% with operating margins that meet or beat 40%. The other half of Baxter is growing at 5% to 6%, with much more modest 12-13% operating margins. While the fortunes of Baxter appear to be driven principally by bioscience, my suspicion is that if Baxter can do anything with regards to beating expectations for medication delivery and/or renal, that this will really round out the story and ensure the long-term success of the investment. Net-net, we're very comfortable with our low $60s price target.

Note: Opinions and recommendations are as of 09/10/09.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 41 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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