Insurance Companies Beginning to Balk at Paying for Vascular Devices and Spinal Procedures as Overutilization Studies Demonstrate No Better Outcome: Will Future Increased Scrutiny Develop Long Term Profit Hurdle?

Wall Street Transcript

67 WALL STREET, New York - August 14, 2012 - The Wall Street Transcript has just published its Medical Devices Report offering a timely review of the sector to serious investors and industry executives. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Orthopedics and Cardiovascular Medical Devices - Medtech Tax Affects Earnings

Companies include: Abbott Laboratories (ABT), Baxter International Inc. (BAX), Johnson & Johnson (JNJ), Covidien, Ltd. (COV), Boston Scientific Corporation (BSX), Edwards Lifesciences Corp. (EW), Medtronic, Inc. (MDT), St. Jude Medical Inc. (STJ), Zimmer Holdings Inc. (ZMH), Stryker Corp. (SYK), NuVasive, Inc. (NUVA) and many more.

The following excerpt is from an interview with the Managing Director Glenn J. Novarro of RBC Capital Markets:

TWST: Where are you focusing your attention in the medical device space these days?

Mr. Novarro: We focus on three subsectors of the device group. We cover the big large-cap medical supply and diversified health care companies such as Abbott (ABT), Baxter (BAX), J&J (JNJ) and Covidien (COV). We focus on cardiovascular device companies, including Boston Scientific (BSX), Edwards Lifesciences (EW), Medtronic (MDT) and St. Jude (STJ). And then, we focus on the orthopedic and spine companies, such as Zimmer (ZMH), Stryker (SYK) and NuVasive (NUVA).

TWST: Broadly speaking, where do your views on the three areas stand right now relative to each other?

Mr. Novarro: This year, our call has been to be overweight the medical supply sector. These companies are big and diversified, and they have multiple growth drivers. We think that's a good combination given all the headwinds that face the group, such as a weak European device market and utilization uncertainty in the U.S. as the economy slows.

Abbott and J&J, for example, are global with drivers in so many segments of the marketplace, such as pharmaceuticals, devices and consumer. More importantly, they have a proven track record of making numbers in difficult environments. They make their numbers by cutting costs where they need to, they have strong balance sheets so they can do deals to support growth, and generate significant cash flows so they can buy back stock.

Within our medical supplies group, our favorite names have been Abbott and Baxter this year.

TWST: What are your general thoughts on the cardiovascular/medtech space?

Mr. Novarro: The cardiovascular device space has faced many challenges over the last couple of years. You've seen slowing volume in stents, ICDs, pacemakers and surgical heart valves, among others. You've seen more pricing pressure. This is a function of impending health care reform. You've also seen this dynamic play out in the spine and orthopedic segments of our coverage. We have seen the government get more involved in certain aspects of cardiovascular.

For instance, in 2011, the government started to review ICD implants to make sure that hospitals and physicians were doing implants on-label. That was all driven by a report that was released in early 2011 suggesting that ICDs were being implanted off-label. This led to the government auditing certain hospitals, and that led to a slowdown in ICD volume. There have been various studies published over the last few years that stents may be overutilized, and on the margin, stent volumes have slowed.

Lastly, payers, whether it's insurance companies or Medicare, have begun to question the benefit of certain procedures, and have made it difficult for hospitals to receive reimbursement. This has occurred mostly in spine, and has resulted in a slowdown in spine procedures.

TWST: And do you have a weighting for that group?

For more from this interview and many others visit the Wall Street Transcript. Available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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