More Medical Device Firms on Sale
We look back on how our past picks have performed and offer some fresh ideas.
We look back on how our past picks have performed and offer some fresh ideas.
Last summer, the market put some of our favorite health-care firms in the discount aisle, and we highlighted four medical device makers that looked especially attractive in "Medical Device Firms on Sale." If you took our advice, two of those firms, Biomet and Zimmer Holdings (ZMH), would have made phenomenal investments, while the other two, Johnson & Johnson (JNJ) and Medtronic (MDT), largely treaded water. As we revisit this topic, we'll explore why the paths of these shares diverged so dramatically and what bargains we see in the medical device industry today.
A year ago, two of the world's top orthopedic implant makers, Biomet and Zimmer, languished under a cloud of doubt, which included worries about an antitrust investigation of the top orthopedic players and possible Medicare reimbursement rate cuts. The orthopedic industry's growth rate had also slowed, as new product launches were few and far between that year, making some investors question the long-term growth prospects of this niche. Those worries turned out to be largely overblown, and both stocks came back to life after Medicare actually raised reimbursement levels for most orthopedic procedures and the Department of Justice revealed the limited scope of its antitrust investigation. Biomet received a boost after that--and a private-equity deal offer. This has catapulted the stock up nearly 50%, from about $31 at the time of our article last summer to roughly $46 per share, which reflects the size of the recently raised tender offer. Zimmer's stock also ran after industry-specific worries subsided and its new gender-specific implants gained traction; its shares are up 56% since we highlighted the firm in July. These two firms handily outperformed the S&P 500, which turned in a 22% run during the same period, and we think both stocks are fairly valued at this time.
The other two highlighted companies, Johnson & Johnson and Medtronic, didn't fare as well. J&J barely budged during the period while Medtronic only rose 9%. While several factors have held these two stocks back, we still admire both firms enormously and think J&J and Medtronic are trading at attractive discounts to their fair value estimates, warranting a second look from investors.
Johnson & Johnson (JNJ)
J&J has been hampered by the drug-eluting stent saga of the past year, as its Cypher product is one of the top two drug-eluting stents worldwide. Recently, Medicare and the Food and Drug Administration also dealt blows to J&J's anemia franchise, calling into question Procrit's widespread use in cancer patients. While important, we remind investors that J&J is the most diversified health-care company we cover, and these two product sets only account for about 10% of the firm's sales. The firm has plenty of other products to fall back on, and we think existing and pipeline products should more than offset additional disappointment from its drug-eluting stents and anemia drugs. To read more about J&J, click here.
We also see three other bargains in the medical device industry. Despite woes related to drug-eluting stents and a pricey Guidant acquisition, Boston Scientific (BSX) still has a wide economic moat and is trading at an attractive price, in our opinion. A couple of other bargains would qualify as wildcard plays versus the tried-and-true firms mentioned above. Angiotech Pharmaceuticals and FoxHollow Technologies both lack economic moats and have above-average risk profiles. In all three cases, though, we think the market is underestimating the value these firms can create in the long run.
AngiotechBoston Scientific (BSX)
Boston Scientific also aims to transition from its dependence on Taxus. While we think it destroyed value with the Guidant acquisition, one good thing may have come out of a related transaction--the right to market a private-label version of Abbott Laboratories' (ABT) Xience drug-eluting stent. Boston Scientific plans to market this stent, which showed safety superiority to Taxus in a recent trial, with the Promus brand name. If successful in that effort, the firm may actually benefit from some of the competition threatening its Taxus franchise. Read our Boston Scientific report to learn about its other diversification efforts.
FoxHollow Technologies
FoxHollow has placed all its eggs in one basket--a catheter-based plaque excision device for peripheral artery disease--and its risk/reward potential is very high based on that concentration. Growth has stalled recently as FoxHollow is pursuing new product development rather than merely blanketing the market with existing products. We'll see if those efforts pay off when next generation devices start fully launching later this year. To learn more about FoxHollow, click here.
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