Will Medical Device Companies Regain Their 25% Price Premium? Technical Investing Inflows Benefit Certain Stocks As Bulls Look For Safety

• On 8:25 am EDT, Thursday October 15, 2009

67 WALL STREET, New York - October 15, 2009 - The Wall Street Transcript has recently published its Medical Devices 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 Medical Industry Industry -- New FDA Approval For Medical Devices -- Negative Price Pressure -- Inject Mix -- Hospital Capital Spending Behavior -- Growth Due To Healthcare Reform -- Rate of Growth In Product Reliability -- Execution of Device Manufacturing Management -- Clinical Trials Success Rate -- Managing Medical Device Recalls -- Major Turnarounds In Medical Device Marketplace -- Demonstrating Medication Adherence -- Undervaluation For Certain Medical Device Stocks -- Effects Of Weakening Dollar -- Medical Device Market Share Analysis

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, industry expert analyst Matt Miksic discusses the outlook for the sector and for investors.

MATT MIKSIC is a Managing Director and Senior Research Analyst at Piper Jaffray, covering medical technology and hospital supply stocks with an emphasis on orthopedics, spine and ophthalmology. Mr. Miksic joined Piper Jaffray after spending eight years in equity research at Morgan Stanley, where he was a member of the medical technology and hospital supply coverage team since 2002, with lead coverage of orthopedics, spine and hospital supplies. Prior to Morgan Stanley, Miksic was a Senior Manager with Arthur Andersen in its business consulting division, and he spent five years with a software startup. Miksic holds a bachelor's degree in computer science from Rutgers College and an MBA degree from the Leonard N. Stern School of Business at New York University.

TWST: What about the number of uninsured Americans?

Mr. Miksic: That's an interesting offset, and I will talk about that in just a second. The one last thing I would like to highlight is not as fundamental as these other factors that I have talked about, but I think it's every bit as important in terms of stock performance. The fourth factor here is the technical element at play here, which gets overlooked in that many of these health care names, particularly the large liquid names like Baxter, J&J, Covidien (COV) or Becton Dickinson (BDX) tend to attract what I would call sort of defensive fund flows, as they have been regarded historically as safe havens when the rest of the market is under pressure. We saw this at this time last year; they were trading at, some of these names, 30%, 35% premium to the market. Historically Baxter probably trades at a 10% to 20% premium to the market. What's happened now is this rally has driven other cyclical groups higher, so earlier this year these defensive names really became a source of funds and remained under what has been, I think, relatively constant pressure during that time. So all other things being equal, they have been under pressure and will probably remain under some rotational pressure through the end of the year, regardless of their fundamentals. That said, depending on the fundamentals, some have performed quite well. But this technical overhang is important to highlight, particularly as we see it as unwinding over time as the broader market stabilized. You asked about additional coverage. So again, it's a potential positive offset against what happens ultimately in health care reform, assuming that Washington can get something through. The silver lining there is that there will be better coverage for more patients and therefore potentially greater volumes of patients being treated. Again, I think before we get carried away with the potential positive effect, you have to step back and think about which sectors could potentially be impacted. Take orthopedics, for example. Given that 65% of the orthopedics to hit the knee market is Medicare and most patients are in their mid-50s or older, it's not crystal clear what kind of effect the additional coverage will have. We assume it will be positive, but is it going to be as positive for orthopedics as it would be for maybe spine or patients that are treated at an earlier age with laminectomies, or microdiscectomies or some spine therapy that affects younger patients, and that may or may not really have a dollar impact for device companies, given that it may be an instrumented procedure that does not require an implant? As we look at this as a team, I think preventative care, diagnostics, things that you can attach to higher frequency of doctor visits, seasonal care patients, I think those are the kinds of areas where we would see the biggest benefit from increased coverage.

TWST: Are those some of the qualities you look for in a good stock pick?

Mr. Miksic: Good stock picks can be good ideas for very different reasons. Our two highest-conviction names at the moment are Baxter and NuVasive, obviously very different names. NuVasive is a player in the spine market. It is, I think, one of the best growth stories in med tech, in terms of the rate of growth reliability and execution of the management team. It's just been a tremendous story over the past four to five years and continues to be. So we like the reliability; we like the quality of the management team. We like their progression from what was really a revenue growth story to a stock that's really delivering upside to the top and bottom line consistently. And looking at the company's long-term growth potential and market opportunity, they remain a 7% to 8% shareholder in a $5 billion to $6 billion worldwide market with the tools and devices to address the majority of that large market at this time. So we just see a lot of runway ahead of the company in terms of continued share gains as they move up to their goal of $500 million and then ultimately $2 billion. Of course, valuation is also important, and we see valuation support for NuVasive into the mid-50s. So those are the key elements that we like about NUVA. Baxter is obviously a much, much different story. There are, however, some similarities, I think, in terms of quality, reliability, the management team and history of execution. In the case of Baxter, it's on an entirely different scale and navigating through what's been a pretty tough few years, including an ongoing recall of one of their major devices - the COLLEAGUE pump - which you could argue could have done a lot of damage to the stock. But I think they have done a very good job of executing through it, working with the FDA, and we think they are now getting close to the end of that process over the next 12 or maybe 24 months. Despite COLLEAGUE, management has executed very well, and met and often exceeded guidance, delivering upside and margin expansion in line with or ahead of the company's long-term plan. On valuation, we see valuation support into the mid-60s. So those are two very high-conviction stocks for us. We also believe that in NUVA and BAX we are to some degree mitigating or minimizing the exposure to the risk related to the major themes we highlighted earlier. For example, we would prefer not to try to predict exactly when and how hospitals are going to come back out of the bunker in terms of spending and their capital budgets, which I would argue is very much like trying to make a bet early in a consumer downturn as to when the consumer is going to return to spending. It's a very, very difficult thing to get right, and these names help us avoid having to do that.

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 .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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