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U.S. medtech shares gain as investors seek shelter from drug price debate

By Lewis Krauskopf

NEW YORK, March 13 (Reuters) - Investors are seeking shelter in shares of U.S. medical device and supply companies, encouraged by their solid growth prospects and wary that U.S. President Donald Trump's criticism of drug prices makes owning pharmaceutical and biotechnology stocks risky.

Shares of such medtech companies including cardiovascular devices maker Boston Scientific and medical products supplier Baxter have posted strong gains to start 2017.

The S&P 500 healthcare equipment index has climbed 14 percent in 2017, topping the 10 percent rise for the broad S&P 500 healthcare sector and 6 percent gain for the overall S&P 500.

The industry represents a way to bet on increasing medical procedures as the population ages, while potentially avoiding political risks.

"They are putting up good numbers from a growth perspective and they seem like they're in a little cocoon from the political drug pricing debate," said Walter Todd, chief investment officer of Greenwood Capital in Greenwood, South Carolina, whose holdings include diversified medical device maker Medtronic and diagnostics company Hologic.

For much of last year, medtech's relative strength was even more apparent. Healthcare and biotech were out of favor as investors were concerned that Hillary Clinton would enact drug pricing reform if she won the presidential election.

So far this year, healthcare overall and biotech in particular have rebounded somewhat. But Trump's criticisms about high drug prices are keeping investors on edge, and medtech is outperforming again.

In January, the president said drug companies were "getting away with murder" in what they charge.

Trump tweeted last week that he was working on a "new system" to reduce prices. While Nasdaq-listed biotech shares dropped 1.5 percent that day, the medical devices index slipped only 0.2 percent and actually fell less than the broader market.

"We do think it still represents a safer avenue to participate in healthcare," said George Strietmann, portfolio manager at Bahl & Gaynor in Cincinnati, whose growth fund is more heavily invested in the medtech sector than in pharmaceuticals.

Investors may have to pay up for that safety. The S&P 500 healthcare equipment index is trading at nearly 19.5 times earnings estimates for the next 12 months, above its five-year average of 16.6 times, according to Thomson Reuters data.

By contrast, an S&P 500 index of pharmaceutical companies is trading at 15.8 times forward earnings estimates and an index of S&P 500 biotech companies is trading at 13.9 times.

While increasing drug prices take the spotlight, pricing in the major medical device markets has generally been declining in recent years, RBC Capital Markets analyst Glenn Novarro said.

Although those pricing declines and the strong dollar stand to pressure the industry's revenue, key markets such as pacemakers, spinal implants and knee and hip replacements should post volume growth of around 5 percent this year, similar to 2016, Novarro said.

Investors will avoid "medtech if there’s any sense of incremental pricing pressure or volume slowdowns," Novarro said.

(Reporting by Lewis Krauskopf; Editing by Cynthia Osterman)