NEW YORK If trends and momentum mean anything and surely they do then the Piper Jaffray Health Care Conference, the 17th edition of which is being held this week at the Pierre Hotel, is an obvious bellwether for the medical device and diagnostics sectors.
Launching the conference this year was the Medical Technology Overview, with lead med-tech analyst Thom Gunderson noting that in 1989, a slender roster of just 18 companies made their pitches to investors at the first Piper Jaffray (Minneapolis) healthcare gathering, then a single-room affair at the Waldorf-Astoria.
From that launching pad consisting only of med-tech firms, the pharma and healthcare services coming along later this year, the conference totals just under 200 companies across all sectors, 138 public and 60 private, featuring nearly every important med-tech firm in the country and many coming on strong.
Gunderson also suggested the tantalizing alteration, repositioning and volatility of med-tech over the past 17 years, referring, as just one example, to a key change in one of the lead technology sectors, cardiology.
While he noted that in 1989 coronary angioplasty was "coming on," there was little hint of those little tubes now used to open arteries and other vessels.
"Lasers were the hot thing of the day," he said. "Our coronary arteries would be scrubbed and cleaned with laser power. But that didn't work out, did it?"
Overall, Gunderson and two other Piper Jaffray analysts, Steve Hamill and Raj Denhoy, were consistently upbeat concerning the year just past and the prospects for 2005.
Hamill highlighted his portion of the overview with "key story lines" for 2004.
Among the plot of those stories were:
- The "big year for stents," living up to the hype and large expectations preceding drug-eluting stents (DES).
- Unusual strength in the wound care market.
- Orthopedics "driven by demographics" and having "continued strength but with the first sign of weakness," that being Stryker (Kalamazoo, Michigan) falling short of revenue expectations over the summer.
- Diagnostics having "a remarkable run in 2003 and 2004."
- Breast implants experiencing "quite a saga" in 2004 and likely to produce "interesting headlines" again this year.
- And 2004 "capped off" with the proposed merger of Guidant (Indianapolis) into Johnson & Johnson (J&J; New Brunswick, New Jersey).
While the outburst in the DES market produced the biggest and most frequent headlines in 2004, Hamill was even more enthusiastic about the diagnostic sector, saying it "led the way this time up 62% in terms of median return. Diagnostics is no longer the weak stepchild within the medical devices sector, as multiples have shown."
Moving to a broader overview of med-tech, he noted that large-cap med-tech firms, with their 20% to 25% premiums, outdid the small caps, which were "down into the teens." But, he added, "both the large-cap and small-cap revenue multiples increased in 2004."
In terms of "liquidity events" he called 2004 a banner year for mergers and acquisitions. Even taking out J&J's proposed $24 billion buy of Guidant, he put the M&A total for the year at $17 billion, with average deal sizes increasing to $400 million as compared to $300 million in 2003. And he called the breadth of transactions across several sectors "dramatic."
Echoing other analysts this year, Hamill noted what amounted to an outbreak in initial public offerings (IPOs), putting the number in med-tech at 17 and calling these "an encouraging mix from the venture capital standpoint [and] a large number of early or pre-revenue deals."
Gunderson's overview highlighted "winners and losers" in the med-tech space.
Losers "coming in at the bottom of the list" were Wilson Greatbatch (Clarence, New York), Synovis (St. Paul, Minnesota) and Closure Medical (Raleigh, North Carolina), all suffering share slumps in the 40% range, all experiencing a similar problem, he said their major customers making big purchases in '03 and then "working off inventory" in 2004, hurting their sales and pumelling their shares.
Echoing Hamill, Gunderson praised the diagnostics sector, saying that there were at least five firms in that space among his top "winners."
At the very top of that list he put Immucor (Norcross, Georgia), saying that "customers, the hospitals, the labs that are buying Immucor's products are moving with the trend to automation. Hospitals have labor issues, as that becomes more and more of an issue with profitability and their replacing labor with machines."
Another diagnostics firm he placed as a major winner was Cytyc (Marlborough, Massachusetts).
Turning to cardiovascular, Gunderson said that both Guidant and St. Jude (St. Paul, Minnesota) had continued strong in 2004 especially in the implantable defibrillator market but he questioned their having sufficient platforms "for new hope in growth."
By contrast, Boston Scientific (Natick, Massachusetts) had "knocked the cover off the ball, hitting a powerful, once-in-a lifetime home run with the Taxus stent and now reinvesting that cash. Again, we expect them to execute well in 2005." But in 2006 there will be an expectation for "a lot more of the execution side," he said.
Medtronic (Minneapolis) "had executed well this year, absolutely," with possibilities for future growth "from drug-coated stents or a new acquisition or an area they haven't revealed yet."
Denhoy, leaning on metaphor, described the med-tech opportunity as "still lots of unplowed acreage," that acreage consisting of "hundreds of millions of people suffering medical states that can benefit from some sort of med-tech fix."
Operating margins in the sector ranged around 30%, a figure he called "virtually unheard of in the broader industry."
He cited also "the sickness of Big Pharma companies the last couple of years," suggesting that this is good medicine for med-tech's cause, but warning: "Of course, the monsters are never truly dead. They will come back eventually [and that's] something to look out for."
And he offered another set of warnings from the regulatory side, saying 2005 will likely bring "increased scrutiny" of clinical trials and marketing practices, further pushed by a more selective consumer.
Reimbursement also should continue to "draw some attention," he said, coming from "pushback" by government reimbursing agencies and other payers.
He cited cardiovascular, diagnostics and ophthalmology as arenas continuing to feature technologies that "just keep coming" and offering solid near-term gains.
"Med-tech is solid in 2005 and beyond," Denhoy concluded. "There's a lot of unplowed land. Earnings growth looks sustainable."