Know Your Medtech Growth Drivers: Joanne Wuensch
Source: George S. Mack of
The Life Sciences Report
Medical technology has been stalled in a quagmire of
regulation, lowered usage and a more tight-fisted health
insurance environment, but Analyst and Managing Director Joanne
Wuensch of BMO Capital Markets has identified a few
ground-breaking technologies that will drive increasing cash
flows in particular companies. In this exclusive interview with
The Life Sciences Report
, Wuensch delivers the names that will provide essential
diversification while they return growth for investors.
The Life Sciences Report:
Medical technology (medtech) stocks have taken a breather since
the beginning of February, but they had quite a run-up between
mid-December and early February. I'm wondering if this has been a
response to an improving economy or does it mean medtech is in a
I think that the group was generally oversold in Q411. Multiples
were meaningfully compressed. There was some positive commentary
about increased or improving utilization from management at
Johnson & Johnson (JNJ:NYSE) on its Q4 call, and from one of
the lab companies. It then became sort of a self-fulfilling
prophecy whereby depressed stocks reacted and we saw a lot of
short covering and a lot of money chasing money. So, we had some
very nice price performance in the first eight weeks of the
So, if medtech is not in a secular uptrend, is this a response to
an improving economy?
I think that in many ways the fundamentals are no different today
than they were in November. The only thing that has changed is
that multiples have become a little bit more normalized and not
as depressed. And, as we look at 2012 guidance, a lot of these
companies are not assuming a recovery in the second half of the
year, which means that estimates are largely achievable for 2012.
And that's a relief.
You've written rather extensively about more rigorous U.S. Food
and Drug Administration (FDA) regulation around medical device
development. It has slowed approvals. How significant is this
Well, it's significant because this industry is driven by
technology innovation. So, whether you slow down innovation by
slowing down approvals or by increasing hurdles required to bring
new technology to market, it is more difficult. We are seeing the
need for clinical data for 510(k) premarket notifications that
were previously accomplished without clinical studies. [Note:
Under the 510(k) process of the Federal Food, Drug and Cosmetic
Act, if a device is substantially equivalent in safety and its
activity or effectiveness, clinical trials are not required].
Sometimes companies run a clinical trial according to
specifications from the FDA, and then the FDA sort of sits on the
approval process until further notice. We have also seen
increased need for economic data from the FDA.
How much of this is attributable to increasing complexity in the
Some of it is increasing complexity. Some of it has to do with
some very high profile problems, such as concerns about
metal-on-metal hips, things like that. A new brand of hips was
approved by FDA with limited clinical data, and it was a little
bit of a black eye on the FDA.
What are the other headwind issues you are seeing?
Well, the most basic one is decreased utilization, and that is
somewhat driven by the economy. Also, the delivery of healthcare
has changed over the last 24 months with the advent of higher
co-payments and annual deductibles. Overall, price pressure is
higher. Hospitals are more conscious of cost. Administrators have
even changed the way products are stocked to save money.
Physicians who used to be independent are now working for
hospitals, who are managing their expenses. Also, payers are
requiring more clinical data to reimburse for a product, and
patients have to pay a higher percentage of the surgical and
product cost. All of these things have changed healthcare.
I can't help but wonder if all of this additional FDA diligence
going into development might help when going to Centers for
Medicare & Medicaid Services (
) to request approval for reimbursement?
if you have more economic data, it would help when going to CMS
Are these extended approval times driving medtech companies to
sell products in emerging and international markets?
Sadly, yes. There's a push for product sales outside the United
States because you don't have to go through the FDA hoops, and
you don't have to go through the CMS gauntlet. There is also a
push into emerging markets because they are largely untapped. It
used to be that a company would get a product approved first in
Europe, then here in the U.S. and then in Japan. There was zero
discussion of emerging markets. The amount of time between
approvals from one region to another was one year, maybe two
years, but not an extreme period. Now you have products, like
transcatheter heart valves (TCHV), that are approved in Europe
four years before they're approved in the United States. And,
then there's another 18-month, maybe 24-month gap before it is
approved in Japan. That's for a high technology product. Now,
even for a lower technology product, companies are talking about
emerging markets on every single conference call. Going into
emerging markets may mean opening a manufacturing facility in
China. It may mean increasing your selling, general and
administrative expense (SG&A) or redirecting your SG&A to
hire feet on the street in those markets. Or in a more subtle or
direct way, a company might create a product that is particularly
attuned to the emerging markets.
Can those data from markets outside the U.S. be used at the
Well, can they be submitted? By all means submit it. How much the
FDA uses that to come to a conclusion on approvability is still,
in my opinion, in question. If you run a U.S. clinical trial and
you have data from outside the U.S., I don't know if it matters a
hill of beans versus a U.S.-run clinical trial and making a
decision toward approvability.
Does dramatic innovation exist in medtech now?
It does. I would say that TCHVs are a dramatic innovation. I
would argue that renal denervation is dramatic innovation. Also,
patent foramen ovale (
) closure type devices, abdominal aortic aneurysm (AAA) devices
and neurovascular products still hold a wide-open opportunity.
So, I think there is dramatic innovation. There's less of it, but
it still exists.
What about cardiac rhythm management (
), implantable cardioverter defibrillators (ICDs) and coronary
artery stents? Would they figure into an aging baby boomer
They do figure into an aging baby boomer theory as well as hips
and knees obviously.
Are you bullish on the cardiovascular segment?
I'm not bullish on ICDs and stents. I'm largely favoring some of
the diversified names. I am bullish on two cardiology companies,
Medtronic Inc. (MDT:NYSE) and Jude Medical Inc. (STJ:NYSE), but
for different reasons. I have them both rated Outperform.
Medtronic is trading at a discount to the group's 12-13 times
multiple. Medtronic has had its problems, particularly in spine,
but it's giving a nice dividend of almost 3%. And, I suspect the
relatively new CEO Omar Ishrak, who came from GE Healthcare
Systems, a unit of the General Electric Company (GE:NYSE), will
start to do some company portfolio management, and in the process
we anticipate that the gap in the multiple differential will
You had mentioned AAA as a growing technology. Medtronic is in
It is absolutely. It has some other higher technology pockets,
renal denervation and TCHVs, and the company just launched a new
drug-eluting stent in the U.S. But there are some larger portions
of its business, such as ICD and particularly its spine
franchises, which have been declining. ICD has been bumping along
These areas you just mentioned are catalysts for Medtronic,
Do you expect market-moving information this year?
Well, the company hasn't had an analyst meeting in almost two
years, but as I look out over the next 12 months, Medtronic will
have its first analyst meeting under the new CEO in June of this
year. As he starts to unveil plans for how he's going to make his
mark at the company, the stock should respond in kind.
You said you are bullish on St. Jude Medical.
Yes, this is a company that is still heavily devoted to the CRM
market. But also similar to Medtronic, it is investing in the
higher growth areas, such as atrial fibrillation, TCHVs, renal
denervation and PFO closure devices. It has also been steadily
taking share in the ICD market, and it received FDA approval in
Q411 for a new quadripolar pacing lead, which allowed it to take
some market share in Europe. There is a similar expectation here
in the U.S.
Can we talk about your other Outperform-rated companies?
Sure, let's take them individually. Covidien Plc (COV:NYSE) was
spun out from Tyco Healthcare Group LP about four years ago. It
has done a very good job of rearranging its architecture. It has
sold off non-core businesses and actively invested in
higher-growth business, and in the process it has expanded
operating margins and generated a heck of a lot of cash. It's
about to go through another transformation with the sale of its
pharmaceutical franchise, and I expect that to happen in H113. It
should end up as a company dedicated to medical devices,
including some hospital supplies. I expect it to be a high
single-digit revenue grower with a low- to mid-20%-type of
Do you expect a catalyst this year to move the stock?
As the company provides more information and details on the
spinout of the pharmaceutical division, I suspect that you'll see
returns that continue to outpace over the next 12-18 months.
The next Outperfom?
CareFusion Corporation (CFN:NYSE) was spun out of Cardinal Health
Inc. (CAH:NYSE) three years ago. A year ago the company got a new
CEO, Kieran Gallahue, who came from ResMed Inc. (RMD:NYSE). When
he was at ResMed he had a very good eye on expense management,
taking several hundred basis points out of SG&A over a
two-year period. He moved or expanded manufacturing of ResMed
products into Singapore, which is more sheltered from foreign
exchange movements than was manufacturing in Australia. I think
he's going to bring this approach to market expansion and expense
management to CareFusion. Management guidance is up, and by the
time CareFusion exits fiscal 2014, the company will be showing
operating margins of 20%.
Joanne, what are the product lines that will move CareFusion?
This one is less about product lines and more about blocking and
tackling to get that operating margin up. The stock will trade as
the operating margin moves.
What's your next Outperform?
ArthroCare Corporation (ARTC:NASDAQ) is a small-cap name, sub-$1
billion. The company has moved through a lot of legal issues. It
has two lawsuits still outstanding that are associated with U.S.
Department of Justice inquiries. The older one I expect should be
resolved in late spring/early summer. The second one is a new
one, and so I do not have any timing for that one. The company is
in sports medicine and it is part of our consolidation call on
the orthopedic market.
So, it's a takeout candidate. Is its low relative strength due to
the Justice Department inquiry?
Assuming the first Justice Department issue is resolved, would
another company assume liability of the newer issue and acquire
the company, or must both issues be resolved prior to
I don't have an answer to that. It's a great question though.
Thank you very much. I've enjoyed this.
Joanne Wuensch is a research analyst in BMO Capital
Markets' Equity Research Group, covering medical technology
companies in the cardiology, ophthalmology, orthopaedic and
respiratory sectors. Before joining BMO Capital Markets, she
was a research analyst with ABN Amro (ING Barings) covering
medical products and was a research associate in the medical
technology group at UBS Securities. Her career in financial
services began at J.P. Morgan, where, among other positions,
she was an associate in municipal finance investment banking in
the healthcare and higher education group. Wuensch joined BMO
Capital Markets in 2002.
1) George Mack of
The Life Sciences Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Life Sciences Report:
3) Joanne Wuensch: I personally and/or my family own shares of
the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
for participating in this story.
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