2.3% Excise Tax In 2013 To Be Tax Deductible, Industry Expert Sees It As Negligible On Medical Devices Industry
April 22, 2010 - The Wall Street Transcript has just published Medical Devices Report offering a timely review of the Medical Devices sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Jeff Jonas joined Gabelli & Company, Inc., as an Analyst in July 2003, expanding the firm's coverage of the medical device sector. He has focused on companies in the cardiovascular, plastic surgery and pharmacy benefits management sectors, among others. Mr. Jonas was a Co-Portfolio Manager of the GAMCO Medical Opportunities partnership from January 2006 until July 2007 and has since served as Co-Portfolio Manager of the Gabelli Healthcare and Wellness Trust. He was a Presidential Scholar at Boston College, where he graduated from the Carroll School of Management with a B.S. in finance and management information systems.
TWST: How has the medical device landscape changed since we last spoke in September 2009?
Mr. Jonas: I think it's gotten a little bit more difficult. There's been more price pressure, especially across some of the cardiovascular devices, like drug-eluting stents and to a lesser extent pacemakers and defibrillators. Last time we spoke was about six months ago, when Boston Scientific (BSX) looked like they were really getting their act together, with a new CEO and a couple of good quarters behind them. And now they run into these challenges of price pressure across their businesses, the loss of some key employees and another round of issues with the FDA. While a lot of that is specific to them, I also think some of it is kind of symptomatic of how the environment is more difficult now.
TWST: What factors are making the environment more difficult? Health care reform has been pushed through - do you foresee challenges on that front? Or is it more so the economy and/or the FDA?
Mr. Jonas: It's really all three of them. Health care reform, I think, is mostly neutral for the medical device industry. There is the excise tax, 2.3%, that starts in 2013, but I think they will be able to manage through that. It is tax deductible. It's possible they will be able to raise prices a little bit to offset that, although it's far from clear. And then I think companies will be able to operate more efficiently, cut some discretionary and other spending to offset that. But I think the FDA has gotten more difficult, and they've been pretty high profile, clamping down on the 510(k) process, demanding more data, oftentimes demanding superiority data. Timelines for product approvals have stretched out a bit longer. Then some of the price pressure is coming from hospitals as well. They are seeing more uninsured and charity cases, so their financial health is not as great. And they are asking for discounts from a lot of the medical devices companies to help deal with that.
TWST: What are some strong stock picks at the moment and why?
Mr. Jonas: I think St. Jude (STJ) is going to emerge as a winner from all of this. They'll benefit from some of the problems that Boston Scientific is going through. They will gain some share in pacemakers and defibrillators just because they are such a reliable supplier with a range of new products that are coming to market. So I think they'll benefit from Boston Scientific being off the market and hiring away certain key employees. St. Jude's business is just so well positioned on its own now. They've got great product platforms in neuromodulation and atrial fibrillation. And now they are starting to build up their cardiovascular division with guidewires, heart valves, the new pressure wire that can help determine if you need stents or not. They've got one of the fastest organically growing portfolios of the large-cap medical device companies.
TWST: You discussed several specific products, but is there any company whose product addresses an unmet need and could unexpectedly drive growth in the next few quarters?
Mr. Jonas: I think one company that has great growth is Genoptix (GXDX). They are a diagnostic testing company for blood-based cancers, like leukemia. They've got a central lab in California that they are expanding to run all of their tests. And they just continue to put up very good growth of 30% or 40% on the top line per year. They only cover about half of the country so far, so they are hiring sales people and increasing their marketing efforts to reach to the whole country. And now they are starting to test for new types of cancer as well. Colorectal cancer is another type that responds well to genetic tests, where you can guide what drug and what therapy is best. They are starting to acquire and license proprietary tests as well. I expect them to continue to grow very rapidly and the management team has always been extremely conservative in their guidance. So I think there is certainly the possibility of some upside in the next few quarters.
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