St. Jude (STJ) Is Developing Good Business In Cardiovascular Devices, Says Analyst At Gabelli And Co.; Read More About Them And Other Trends In The Space In This Exclusive Interview
March 21, 2012 - The Wall Street Transcript has just published Medical Devices Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Jeff Jonas, CFA, joined Gabelli & Company, Inc., in July 2003 as an Analyst to expand coverage of the medical device and service sectors. He focuses on companies in the cardiovascular, pharmacy benefits management and distribution sectors, among others. He was a Presidential Scholar at Boston College, graduating from the Carroll School of Management with a B.S. in finance and management information systems.
TWST: What are some of the other key trends you're seeing in the industry right now?
Mr. Jonas: We've been following the cardiac-rhythm management market for years, and right now is about as bad as it has ever been. It's partly the sluggish procedure volumes and price pressure, but there have also been some regulatory investigations here in the U.S. The Department of Justice and a negative article in JAMA have really cracked down on the guidelines for eligibility, and they want to make sure you're following them as tightly as possible. It's not that they're unnecessary or wrong procedures, but often it's a matter of timing. Is the patient far enough along in his heart failure progression, or has he had 40 days to recover from a heart attack before getting an implant? It's certainly weighed on the market, and it's disrupted procedure volumes and referrals. It's been a real headache for a lot of the companies involved. The U.S. market recently has been declining as much as 10% on a year-over-year basis. Hopefully, that starts to stabilize. It faces some easier comparisons as 2012 goes on, but it's really weighed on all three of the big players, which are Medtronic, St. Jude and Boston Scientific.
TWST: Would you sum up the industry's performance in 2011?
Mr. Jonas: It was definitely a challenging year. Some of the industry leaders really struggled. Boston Scientific was down about 30% last year, and they're really just in a tough spot. Their two biggest end markets are cardiac-rhythm management and drug-eluting stents, both of which are declining. Drug-eluting stents are seeing intense price pressure, close to 10% on a year-over-year basis, although again, there is some hope that they're starting to stabilize. Boston Scientific is really struggling for revenue growth at this point. They have some other good businesses in endoscopy and neuromodulation, but they're just too small to move the needle. So they've really been dealt a tough hand, and they're trying to cut costs. They have delevered, and now they're actually able to buy back stock, but it's really just not enough to make up for the lack of revenue growth. St. Jude also had a tough year. They've dealt with the slowdown in the cardiac-rhythm management market, but they have a fantastic product pipeline in renal denervation, in atrial fibrillation, in their percutaneous heart valve program. I think the outlook there is that they can still continue to grow at a high-single-digit rate on the revenue line and perhaps low double digits on the bottom line with some expense leverage and some tax savings. So that's a name that we really like despite the tough year that they've just had.
TWST: I'd like to ask you about the stocks you like right now. You mentioned St. Jude. Would you tell us a little bit more about what you like there?
Mr. Jonas: This is just an enormously innovative company who is gaining significant amount of market share in the CRM market. Even though it has been tough for most of the past year, they're gaining share in a declining market. They've just launched a great new ICD that's called a Unity Quadra, and it has very attractive features in terms of size and battery life, and the ability to deliver therapy at essentially four different points in the heart, which makes it easier to implant and less likely to need any adjustments or reoperations down the road. They just launched Quadra in the U.S. in the fourth quarter, and it should help them continue to gain market share for the next couple of years. And then, they're just remarkably well positioned in their other businesses. They and Johnson And Johnson are the two leaders in atrial fibrillation, which has been growing at a double-digit rate as the procedure becomes faster and easier for physicians to perform. They also have other good businesses in cardiovascular, where they're just starting to develop a percutaneous heart valve, and they have a very interesting imaging unit that can do intravascular ultrasound and other cardiac imaging, along with the PressureWire, which can help determine if a stent is actually needed in a patient. It's one of the few technologies that has actually been proven to save the system money. Even though it costs a couple of hundred dollars, it ends up saving more by avoiding the unnecessary use of drug-eluting stents.
TWST: Where else are you pointing investors?
Mr. Jonas: We look at a lot of small- and mid-cap names. There is a small Swiss company called Oridion (ORIDN.SW), the leader in what's called capnography, which is measuring the carbon dioxide that you exhale. This turns out to be a predictive factor of when a patient is entering respiratory distress. It's rapidly becoming standard of care in ambulances, in intensive care, and even potentially for patients under anesthesia. You need to monitor anesthesia level carefully to avoid side effects and speed recovery. It's the same with patients who are on heavy amounts of painkillers; you need to monitor their respiratory functions as well, to make sure they don't have an adverse event. Around the world, the different physician bodies are starting to make this standard of care, and this is just a simple module that's integrated with a lot of the larger sensors and monitoring systems that are sold by Philips (PHG), by Medtronic, by Zoll (ZOLL). Oridion will partner and integrate it with anyone else's equipment. And they get a recurring revenue stream, too. There's a disposable here that just costs about 2, and lasts one to two days on average. As that recurring revenue stream builds, their profit margins expand, following the standard razor/razorblade model.
TWST: Any others that you'd like to highlight?
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