Where to find value in the medical market – MoneyWeek

Where to find value in the medical market – MoneyWeek

Investorswhoconsiderthepharmaceuticalssectortobeadefensiveinvestmenthavehadsomethingofashockoverthelastyear,saystheInvestorsChronicle。

LastSeptember,USgiantMerckwasforcedtowithdrawVioxx,itsarthritispainkiller,whenitwasdiscoveredthatregularuseraisedtheriskofheartattacksandstrokes。

Mercklost40%ofitsvalue,oran“astonishing”$40bnofinvestors’money,asaresult。

Meanwhile,discoveringgenuinelynewdrugsandtreatmentshasbecomemoredifficultthanever:thenumberofnewdruglaunchesfellfrom51in1997tojust30in2003。

Butgiventhatthehealthcareeconomyisworth“trillions”ayearglobally,investorswillbekeentoretainexposuretomedicalstocksregardlessofthetroubles。

What’sasafewaytodoso?

Oneanswercouldbetolookatfirmsthatsellmedicaldeviceseverythingfromartificialjointstodiagnosticequipment。

Itis“considerablyeasier”tobringmedicaldevicestomarketthandrugstheformerhavelowerdevelopmentcostsandmorefavourabletimescales。

Takethemarketforreplacementbodyparts。

Wehaven’tyetmovedintotherealmsofthe“bionic”,buttheyarealreadybigbusiness,withtheglobalorthopaedicsmarketcurrentlyworth$10bnayearandsettogrowatdouble-digitratesfortheforeseeablefuture:SmithNephewalreadysells$1bnworthofartificialknees,hipsandtrauma-relatedproductsandenjoysa20%annualgrowthrate。

Anumberofwell-observedhealthtrendsaredrivingthis“booming”growth,notleasttheeffectofanageingpopulation。

Butit’snotjustnewjointsthatmightproviderichpickingsforinvestors。

DiagnosticsisalsoagrowthareaasequipmentmanufacturerstargetsmallhospitalsandthelargerGPsurgerieswiththeirnew,scaled-downlaboratorysystems。

It’snotallplain-sailinginthedevicesbusinessthough,sayLeilaAbboudandPaulDaviesinTheWallStreetJournal。

There’srecentlybeensomethingofabacklashfromthedevicemakers’biggestbuyershospitals。

Foryears,theyhaveputupwithabsorbingsteadypriceincreasesof4%-5%ayear。

Nowthough,withhealth-carecostsspirallingoutofcontrolandthereimbursementshospitalsgetfrominsurersstayingflat,somehospitalsarefightingtocontainspending。

Historically,thishasn’tbeeneasy,thankstothefactthatthemanufacturersspendhundredsofmillionsofdollarsmarketingtothesurgeonswhochoosewhichdevicestouse。

Now,hospitalsareworkingtoconvincedoctorstouselessexpensivedevicesandtodriveharderbargainsthemselves。

Cedars-SinaiMedicalCentreinLosAngelesisnearingtheendofsix-monthnegotiationstolowerpricesfororthopaedicdevices,forexample。

AndLeePerlmanoflobbyinggroupGreaterNewYorkHospitalAssociationVentures,saidits120hospitalsinNewYorkandNewJerseywerebandingtogethertoreducethecombined$250minannualspending。

Asaresult,somenowexpectatougherpricingenvironmenttoslowthe15%-30%growthrateswehaveseenoverthelastfewyearsfororthopaedic-devicemakers。

Thisdoesn’tmeaninvestorsshouldavoidthesector。

Orthopaedic-devicefirmsmakegrossmarginsof60%-70%,socanaffordtocutpricesalittle。

Also,similarcost-containmentmeasureshavefailedinthepast,andgivenhowfastdemandfromthebabyboomersisrising,theycouldeasilyfailagain。

Twopromisingmedical-equipmentplaysDeaneDonniganistherecentlyappointedmanagerofthe£391mFramlingtonHealthFund。

Thefundinvestsinseveralsectorsinthehealthcareindustry,thebiggestbeingbiotechproducts(29%oftheportfolio)。

Hersecond-biggestexposure,however,istothemedical-devicessector,whichaccountsfor28%oftheportfolio。

Sheexpects“strongdemand”,butalsonotesthatthesecompaniesbenefitfromweakercompetition(thereisnosuchthingasa“generic”device)andaneasierapprovalprocessthandrugs。

Onestockinparticularthat’sworthalookisSmithNephew,saystheInvestorsChronicle。

ItmaybebestknownasoneofthelargestaerospaceanddefencestocksintheUK,butthisbeliesitshugepresenceinmedicalequipment。

Itoffersa“significant”rangeofproductsfrominsulinpumpstoIVFequipmentandlastyearthisdivisionaccountedforalmost20%ofgroupsales。

Thisshouldjumptonearlyaquarterby2007,takingthemintothemedical-devices“bigleague”。

Axis-Shield,theScottishandNorwegiancompany,isanotherfirmtoconsider。

Itmakesdiagnostictestsusedinlaboratoriesanddoctors’surgeries,foreverythingfromalcoholismtoheartdisease。

Thecompanyis“wellfunded”andforecasttoreachprofitabilitythisyear。

NakedTextNakedText