Medical Device Daily Senior

Bidding farewell to 2011 will likely be a welcome occasion for most folks in the med-tech industry as the year presented its fair share of regulatory road blocks and other challenges. Heading into 2012, the med-tech analysts at Canaccord Genuity (Toronto) have identified their top picks for 2012.

In the cardiovascular device space, Canaccord analyst Jason Mills' top picks for 2012 are Edwards Lifesciences (Irvine, California) for large-cap and HeartWare (Framingham, Massachusetts) for small-cap. Mills notes in his report that both companies are expected to outperform their peer groups in 2012 due to the following factors: strong growth potential targeting under-penetrated end-markets at an inflection point; gaining share and/or developing the market; attractive product pipelines; and potential acquisition targets.

The choice of Edwards for a top pick comes as no surprise to most who follow this space as the company was recently the first to win FDA approval for a catheter-based artificial heart valve, opening the door to launch its Sapien transcatheter heart valve in the U.S. (Medical Device Daily, Nov. 4, 2011). Earlier this month at the company's annual investor conference in New York, Edwards said it anticipates 2012 Sapien sales to be between $560 million and $630 million, an estimate that includes expected U.S. sales of $200 million to $260 million.

HeartWare was another logical choice for top picks as it has the U.S. launch of its ventricular assist system and continued European uptake of its HVAD is expected to drive revenue growth of 80% in 2012 and 74% in 2013, Mills notes in the report.

The diagnostic space perhaps offers a more interesting look into the new year, particularly for small- to mid-cap companies. Canaccord analyst Jeffrey Frelick, who covers the diagnostic space for the firm, told Medical Device Daily that while there are still some challenges in the space with the FDA becoming a little more stringent, and the utilization side of the equation has not fully recovered from the economic downturn in 2008, investors should continue to focus on new product cycles coming out that deliver high value technologies and tests while displaying acquisition potential.

For his report of top picks for 2012, Frelick singled out one growth-oriented small-cap company, OraSure Technologies (Bethlehem, Pennsylvania), and one mid-cap company, Cepheid (Sunnyvale, California) that he says are poised to grow in spite of the macroeconomic volatility.

“While the diagnostic industry continues to face the challenges of regulators, payors, and utilization, we believe investors should focus on the higher growth clinical segments of molecular diagnostics and point of care, as well as new products that can improve clinical outcomes,“ Frelick said in the report.

OraSure recently received a CLIA waiver for its HCV rapid test, which opens up its marketing reach to 180,000 CLIA-waived sites. OraSure also is developing an over-the-counter HIV test that is expected to be approved in the second half of 2012, Frelick said.

HIV-OTC should experience several catalysts in 2012, with a spring FDA panel followed by FDA approval expected in late 2012, Frelick noted.

He told MDD that OraSure's revenue is poised to grow about 30% in 2012 with the release of the first rapid test for Hep C, which will be well-timed as pharmaceutical companies introduced new therapies for the virus this year.

“The awareness is starting to improve,“ Frelick said, pointing out that the government has started to call out the need for greater awareness of Hep C at least matching what has been done for HIV awareness.

“One of those drivers is an increase in testing and getting patients identified and into therapy sooner,“ Frelick said. He noted that patients with the virus can go for decades without showing any symptoms, which could mean our society is heading towards a tremendous burden to the healthcare system in the next 10 to 20 years.

Cepheid is a molecular diagnostics company with a variety of assays designed for genetic testing for organisms and genetic-based diseases. Earlier this year Cepheid received FDA clearance for its Xpert C. difficile/Epi test designed to detect the bacterium that causes C. difficile infection and simultaneously identifies the epidemic strain of C. difficile, also known as 027, NAP1 or BI (MDD, April 12, 2011).

According to Frelick's report, the company's Xpert CT/NG test is expected to launch in 2012 with CE mark expected in the first half of the year and the U.S. release anticipated in the second half of 2012.

He also noted that Cepheid's Xpert BCR-ABL v1 is on track for FDA submission soon with U.S. launch of the test targeted for 2012. The Xpert Staph Express is targeted for FDA submission in 2012 and, once approved for moderate complexity, the company will submit for a CLIA waiver. Finally, Cepheid's Xpert MTB/rif is expected to launch in the U.S. in 2013 or 2014.

Frelick notes that, despite an uncertain economic backdrop, Cepheid is demonstrating strong growth for its molecular diagnostic franchise. “Our viewpoint, which is echoed by many, is that Cepheid is the clear leader in molecular diagnostics given its platform convenience and large installed base of customers (over 2,500),“ he wrote. “We have yet to see any competitor close the convenience and menu gap, and we do not see anything disruptive to [Cepheid's] business in the near term.“

Frelick added that the company's reagent revenues are expected to grow 37% in 2012 following 28% growth this year as its test menu expands while converting laboratories to molecular testing.“

Another point investors in this space should be aware of is that 2011 was probably the biggest year for M&A activity since 2007. “We think 2011 probably approached $18 billion in M&As in the diagnostic space and that was pretty significant,“ Frelick said. “We think that continues over the next couple of years.“ He noted that the deals in this space are now becoming more strategic rather than opportunistic. In other words, acquiring companies are buying businesses based on how well they fit into their current product offerings rather than based on the opportunity to buy it because it's cheap.

In another med-tech space, Canaccord analyst William Plovanic also identified two companies in his coverage area that he believes are likely to stand out in their respective investing-cycle categories during 2012. Those picks are DexCom (San Diego) as a growth stock for 2012 and ArthroCare (Austin, Texas) as a value play.

According to Plovanic's report, DexCom remains one of two players with technology that he believes will become the gold standard for glucose testing. “We continue to believe that broader market adoption of continuous glucose monitoring (CGM) is only a matter of time,“ he noted.

New product cycles are looming for DexCom, he adds, with the company's fourth generation CGM sensor on track for completion of its clinical pivotal trial in the first quarter of 2012. Consensus expectations for 2012 have pulled back over the past few quarters, effectively resetting the bar and positively positioning the company going forward, Plovanic said.

As for ArthroCare, he notes strong strategic asset with about 50% share of the energy market in sports medicine and about 40% of the tonsillectomy market as reasons to consider the company a value play. Also, he adds, “strong positive cash flow and high free cash flow yield defensively position ArthroCare for investors.“