Medical-Device Stocks Fall On Pricing, Market Growth Worries

21st Jul 2010 19:11

By Jon Kamp Of DOW JONES NEWSWIRES Shares of medical-device makers fell Wednesday after some of the sector's heavy hitters signaled ongoing struggles in top markets for orthopedic and heart devices, which face growth challenges and a persistent threat to product prices. Second-quarter reports from Johnson & Johnson (JNJ) and Stryker Corp. (SYK) indicated the market for replacement hips and knees has hit a new speed bump, interrupting a post-recession recovery. Those companies also showed that spinal devices remain under pressure from declining prices and, in a potentially concerning turn, some pushback from insurers. Heart-device maker Boston Scientific Corp. (BSX) posted better-than-expected results, fueled by a fast recovery from a major sales disruption this spring. But it also called out ongoing pressure in top markets and kept a conservative outlook for the rest of the year. These reports played into an ongoing fear for investors: that device companies' power to hold the line on product prices is wilting under tight competition and as hospitals seek leverage to control costs. Executives generally haven't acknowledged fundamental threats, but old notions of industry growth aren't valid anymore, said Phil Nalbone, analyst with Wedbush Securities. "Industry executives have been very, very, very slow to change their ingrained ways of thinking," Nalbone said. In the orthopedics sector, Stryker shares dropped 8.4% to $46.98 following its late-Tuesday report. Big rival Zimmer Holdings Inc. (ZMH), which reports early Thursday, slipped 4.6% to $52.59. Among smaller players, Smith & Nephew PLC (SNN) was down 6% to $42.52. Biomet Inc., a privately held, midsized competitor in the roughly $12 billion hip and knee market, indicated last week that the market recovery is going well. But Biomet's fiscal quarter ran only through May, and reports from bigger players J&J and Stryker sent conflicting signals. Executives didn't seem alarmed. J&J's chief financial officer stressed that one quarter is a poor market snapshot, while Stryker officials noted the company is waiting for some new products to take hold while it rides out organizational changes in Europe. Chief Executive Stephen P. MacMillan said Stryker still feels very good about longer-term trends. But analysts noted that growth in hips and knees for J&J's DePuy unit decelerated from the first quarter, and that J&J also cited ongoing pressure on product prices. As for Stryker, J.P. Morgan analyst Michael Weinstein said the company's meager growth in orthopedic implant sales marked the weakest quarterly performance since the company acquired that business 12 years ago. The market has some economic sensitivity because even insured patients can have high out-of-pocket costs and surgery for worn-out joints is often deferrable. Stryker's results "appear to reinforce our view that Street optimism for a recovery in orthopedics during 2010 was misguided," Citigroup analyst Matt Dodds said. Meantime, J&J and Stryker continued to show pressure in the market for spinal implants, which Wells Fargo analyst Michael Matson said "appears to be moving from bad to worse." Shares of Medtronic Inc. (MDT), which has a big spinal business, traded 2.7% lower to $36.43. Smaller spine company NuVasive Inc. (NUVA) traded down 4.2% to $31.79. Boston Scientific's report late Tuesday beat expectations after the company's domestic business for implantable defibrillators staged a fast recovery from a month-long sales outage, caused by a paperwork filing snafu, this spring. That was good news for the company, and in the very short run, not helpful for competitors Medtronic and St. Jude Medical Inc. (STJ). St. Jude was recently off 2.7% to $34.67. But Boston Scientific executives were cautious on Wednesday's call about letting the second-quarter results translate into an upgraded view for the year. They noted they are still analyzing reasons behind the fast defibrillator recovery and are planing to ramp up spending to boost the company's presence in emerging markets. And from a broader perspective, the company's top markets remain under pressure. Chief Executive Ray Elliott said, "We continue to be concerned about pricing erosion," especially in the heart-rhythm and stent businesses, and he noted additional price pressures on the rest of the company's interventional cardiology business. Boston Scientific shares traded down 2.8% to $6.09. Despite the second-quarter beat, the outlook is "really tough going forward," analyst Nalbone said. -By Jon Kamp, Dow Jones Newswires; 617-654-6728; [email protected] (END) Dow Jones Newswires July 21, 2010 14:11 ET (18:11 GMT)