Positive Outlook for Medical Device Stocks

October 21 , 2002

While the U.S economy struggles and the stock market reflects the economy's woes, medical devices firms posted strong second quarter results, and analysts expect third quarter earnings to remain strong. Medical technology stocks are down by approximately 14% so far this year, but third-quarter gains for medical device companies are expected to cause a rebound in these stocks. There is particular optimism for heart device and joint-replacement makers as the demand for such technologies by the aging population especially, continues to grow. In 2002, a surge in sales of implantable cardiac defibrillators and the introduction of heart devices, which treat both congestive heart failure and irregular heart beat, by Guidant Corp and Medtronic Inc. drove up earnings of companies in the cardiac field. Orthopedic product makers are also expected to show gains. Thomson First Call predicts that orthopedic companies such as Stryker and Zimmer will post earnings growth of over 20% this month, as they continue to benefit from a growing patient population.

The most promising area for new product launches by medical device companies is in cardiology, given the high incidence of coronary disease in the United States. The cardiology market includes cardiac stents, pacemakers and defibrillators, heart valves, and angioplasty devices. While the medical device sector is expected to see great progress with new products and markets emerging at a rapid pace, delays in getting new technologies to the market may impact the performance of many medical device manufacturers. Device manufacturers like Guidant and Medtronic are waiting to market products such as drug-coated stents, for which FDA approval has turned out to be a long and convoluted process. Despite the overall optimism, uncertainty surrounding the introduction of new technologies can still dampen the outlook for medical device firms.

By Ketaki Sood, Larta Research Economist