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Matt Dolan is the Senior Medical Device Research Analyst at ROTH Capital Partners, LLC, and has been covering the industry at the firm for four and a half years.

David Turkaly joined Susquehanna Financial Group as the Senior Medical Device Analyst in August 2006.

TWST: David, what do you focus on in the medical device space?

Mr. Turkaly: We have been covering this space for about 10 years now, and historically the focus has been on the ortho, neuro and spine. If you were going to divide it into two, cardiovascular and ortho, then we would certainly be on the ortho side. We do some one-offs as well — blood management, diagnostics, diabetes and other areas.

TWST: Matt, where do you focus?

Dr. Mr. Dolan: At our firm, we do not focus on any particular specialty or application but rather look across the board at all small cap medical device companies. We typically seek out companies below $1 billion in market cap with businesses that develop or sell innovative technologies that compete well with the bigger players in the market. That profile moves across the spectrum of medical specialties, whether it be in cardiovascular care, orthopedics or an up and coming area. Ideally, we look for ideas that hold the potential to be well reimbursed, are well along in their regulatory pathway or even approved, and can provide good competitive arguments through either clinical data or simple technical differentiation.

TWST: Matt, medical devices have been a pretty rapidly growing space. Is that continuing? Is there enough going on in this market to generate strong growth for a longer period of time?

Mr. Dolan: Definitely. Over the last 10 years, medical devices have been one of the standouts in the stock market, with products like stents, ICDs and orthopedic implants becoming significant markets since the 1990s. But there are still a lot of new devices coming. A broad demographic factor supporting this trend is the aging US population, which is discussed almost on a daily basis. The baby boomers want to remain active, and the orthopedic and spine markets, as examples, have continued to generate a lot of interest because of this. This trend is also being driven by the appetite of the now big medical device players, like Medtronic (MDT), Boston Scientific (BSX), St. Jude (STJ) and Stryker (SYK). These companies are looking for further innovation out of smaller companies through acquisitions, such that they can continue to drive growth. This may be medical devices in the traditional sense of the industry, but we are also seeing growth in hybrid technologies that combine a biologic or pharmaceutical element. We have seen this in the tissue regeneration space and as diagnostics shift toward personalized medicine. From a financial standpoint, I think the interest in pursuing medical technology is going to remain, as an aging demographic drives the overall market opportunity and larger players look to sustain the growth realized over the past several years.

TWST: David, are aging baby boomers going to support that growth in this industry?

Mr. Turkaly: Just as a quick background, if you look a long time ago, a lot of these device companies came from pharma. Pharma spun them out and they were pretty successful. Now I think we have seen a trend back toward some of the Big Pharma and diversified companies looking back to this space to consolidate, primarily because of the growth in some of the biggest markets. Like Matt, we are mainly focused on small and mid-caps, but even in pharma-land and in device- land, when you look at the bigger cardio markets, some of them are slowing down. It is really the niche areas with the novel technologies that seem to be providing the majority of the growth.

Spine is an area that big guys compete in that we still think is fairly robust. Outside of that, if you look at cardio-land with pace makers, defibrillators and stents, and ortho-land with the bigger reconstructive joints, there is not a lot of double-digit growth going on anymore. We think consolidation will still be a theme. We are looking toward the small and mid-caps as interesting areas, because they do have the growth, and the big guys need it. We had 15 companies under coverage last year and four got bought. We are actually looking to find some new ideas as well.

Mr. Dolan: In terms of growth opportunities, there are certain devices that are maturing and becoming more commoditized, which means that pricing comes under pressure and the profitability of those product lines becomes constrained for bigger companies. This drives the pursuit of new product concepts. As an example, in the orthopedic setting, there is a long-term move toward combination-type therapies, where companies are developing products that have some biologic or regenerative qualities. We are seeing that in general surgery, and we are seeing it a lot in bone work, especially in the spine. I think that will continue. There is definitely a blurring of the lines in what used to be distinct industries.

TWST: David, you both touched on consolidation. Is that going to be an ongoing theme in this space because the big guys need the growth?

Mr. Turkaly: I think you hit it, right there. As you get bigger, it is tougher to move the needle. If you follow this sector you know that there have been a lot of consolidators out there; Boston, Medtronic, Johnson & Johnson (JNJ) and even some of the ortho guys have done a fair amount of deals in the past. Yes, I think that you could argue that the big guys still have access to capital and they need to bolster that top line. When you really look for things that are growing 20% or even in the high teens, a lot of the companies that are posting sales gains like that or in excess of that tend to be these smaller guys. Anywhere from $200 million to $3 billion is probably the real hot stop, sometimes a little north of there. That is where I think they are going to continue to search this year.

TWST: Matt, do you see the same thing going on, continued consolidation?

Mr. Dolan: Absolutely. 2007 was very hot, and we had four acquisitions on this end as well. The premise is to continue to bolster the growth of the larger cap companies, which are seeing the effects of the law of large numbers. As they get bigger, it gets harder to grow, and they need to look beyond their organic means to continue to drive growth. I can think of three deals of publicly traded companies that have been acquired in the last week or two alone. So even though there is consistent talk of a broader market slowdown, I think the pace will continue. The first half of 2007 was pretty wild. There was one publicly traded company being acquired per week on average. That has slowed a bit, but the long- term thesis here is that it almost has to continue.