Top Medical Device Stocks Analyzed By Gabelli And Company Senior Analyst; Cantel Medical (CMN) And Covidien (COV) Making Top Acquisitions In The Sector
March 23, 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: Where are you focusing your attention in the medical device space these days?
Mr. Jonas: I think one of the most exciting technologies out there is for renal denervation, and it has just gained approval in Europe. They're still doing the clinical trials here in the U.S. It uses an energy source, usually heat, to basically deactivate certain nerves in the kidneys. It makes the kidneys much better at filtering the blood and treating hypertension, which is an enormous problem worldwide. We saw a significant transaction. Medtronic (MDT) bought privately held Ardian for $800 million, as they're the furthest along in the space.
TWST: Are there other companies moving along that path?
Mr. Jonas: We know St. Jude (STJ) has an internal program. They're going to be first in man this year and could potentially get European approval by the end of next year. Boston Scientific (BSX) has disclosed that they're doing some work in the area, but they haven't really said where they are. It's potentially a $5 billion market, and some think even larger, so many of the large players are very excited and trying to get involved.
TWST: Morningstar recently wrote about how share buybacks have become more popular in this space. Are you seeing that, and do you expect to see it continue?
Mr. Jonas: Yes, absolutely. This is an industry that has great cash flow, low capex and generally conservative balance sheets. That gives them a lot of cash to return to shareholders. We are seeing more and more dividends as well. St. Jude has become a significant dividend payer. Medtronic continues to pay an attractive dividend, about 2.5% right now. Share buybacks are certainly significant as well. Johnson And Johnson (JNJ) has actually laid out the potential for one. They're in the process of buying Synthes, who is a trauma maker, for almost $20 billion.
Two-thirds of that is stock, in large part due to some uncertainties over whether they could use their international cash to fund the acquisition. If they get a private letter ruling from the IRS, they'll potentially have $10 billion or $15 billion that they could use to repurchase some of the stock. They're issuing about 200 million shares, and have talked about ways to make that more efficient. And they've done repurchases in the past. Right now, they're sitting on a significant cash position, about $13 billion of net cash. They certainly have the firepower.
We continue to see St. Jude do opportunistic share repurchases, generally well timed after a tough quarter. As we said, Boston Scientific has delevered and is buying back stock now. Covidien (COV) is another interesting medical device manufacturer. They were spun off from Tyco (TYC) and have done a great job improving margins. They've done a couple of smart acquisitions, most notably ev3. At this point, they're really just focusing on integrating those deals and using the bulk of their cash flow to increase the dividend and buy back stock. That's something that has been very accretive and should continue.
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.
TWST: Any others that you'd like to highlight?
Mr. Jonas: Cantel Medical (CMN) is an infection-control company. They make a lot of products for the endoscopy suite, and then even some more basic products, such as masks and cleaning products that are used more generally around the hospital, as well as water-filtration devices that are mostly used for kidney dialysis, where you have to have ultrapure water. So Cantel has a very attractive product pipeline, diversified across several different markets. They also just made a fantastic acquisition. They paid $100 million for privately held Byrne Medical, and that gets them deeper into the endoscopy suite with a lot of disposable products that are starting to replace capital equipment that needed to be heavily washed and sterilized between users. A lower-cost disposable can improve productivity and then save a substantial amount of labor for their customers.
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