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Medical Device, Drug Makers’ Stocks Hit by Wall St. Slump

Wall Street’s slump during most of 2008 has even touched what was once thought to be untouchable,medical device and drug stocks.

A combination of a sluggish domestic economy, the mortgage meltdown and high gas prices has roiled the market for most of the year,the Standard & Poor’s 500 index is down 12% so far.

Historically, drug and device makers were considered safe havens for investors when the broader market stumbled. Their steady growth, predictable markets and dependable insurance, hospital and government customers had made them appealing as more volatile sectors went south.

That was the case in 2007, but hasn’t necessarily been so this year. The stock performance records of six of the larger medical device and drug makers based in OC or nearby have varied rather wildly.


Edwards Lifesciences

For most of this year, Edwards Lifesciences Corp., an Irvine heart valve maker, has been the shining star among the county’s drug and device stocks.

Edwards’ shares are up 30% so far this year and have traded as much as 45% higher on expectations for its less-invasive Sapien heart valve. Sapien, which is inserted via a catheter, has been introduced in Europe. It’s in a major U.S. clinical trial (see story, page 28) with an eye on going before the Food and Drug Administration in 2010.

Speculation that Sapien’s success could spur a larger medical device maker into possibly buying Edwards also played into the run up.

The valve “is one of the few breakthrough products in the medical technology industry’s pipeline right now,” said Eric Crigler, a portfolio manager with Skyhawk Capital Management LLC in Memphis, Tenn., in a Barron’s article earlier this year.

A few weeks ago, however, JPMorgan Chase & Co. analyst Michael Weinstein downgraded Edwards in a research note, saying the clinical trial could end up showing a higher-than-expected death rate and prove a catheter insertion method through the ribs to be unworkable.

Weinstein’s report caused Edwards’ stock to fall some 10% initially, but it’s regained some momentum.

Edwards has said it addressed the issues raised by Weinstein in his report.

And other analysts have disagreed with Weinstein.

“We continue to believe the Sapien opportunity is the most compelling story in cardiovascular medical devices,” said Larry Biegelsen, an analyst with Wachovia Corp., shortly after Weinstein’s report came out.


Valeant Pharmaceuticals

Wall Street appears to like a turnaround plan that’s under way at Aliso Viejo drug maker Valeant Pharmaceuticals International.

Valeant’s shares have strongly outperformed the Standard & Poor’s index, particularly during the last month or so as the company has moved ahead with an extensive restructuring. Valeant’s shares have generally been in positive territory while the S & P; has stayed solidly negative.

Overall, Valeant’s shares are up 60% since January with a recent market value of $1.7 billion.

Valeant has spent most of the year reworking itself under the leadership of former McKinsey & Co. turnaround specialist J. Michael Pearson. Pearson came in as Valeant’s chief executive in February, replacing Timothy Tyson.

The company has cut jobs and eliminated overseas business, including shucking off its European operations to Sweden’s Meda AB for $392 million a few weeks ago. Valeant has also sold off its Asian operations, making it clear that it would no longer be a global drug maker,something that it was during its past as ICN Pharmaceuticals Inc.


Advanced Medical

By contrast, shares of Santa Ana-based eye care and surgical device maker Advanced Medical Optics Inc. have generally fared worse than the Standard & Poor’s index for most of the year, although they’ve begun to pick up momentum in recent weeks.

Advanced Medical’s shares are down about 12% this year with a recent market value of $1.3 billion.

The company has come off a tough couple of years in which it dealt with a pair of costly recalls for its contact lens solutions. It’s also had to deal with slowing demand for laser vision correction thanks to the weak economy.

The company was praised in June by Lawrence Keusch, an analyst for Goldman Sachs & Co., who hosted a talk by Chief Executive James Mazzo at the brokerage’s healthcare conference in Laguna Niguel.

“There are a lot of promising things happening at AMO. The company has a renewed and vigorous focus on cost-cutting,” Keusch said.

During Advanced Medical’s recent earnings conference call, Mazzo said Advanced Medical is taking share from its competitors despite the shrinking market and is focused on expanding overseas and cutting costs to offset weak domestic demand.

Advanced Medical also issued mixed guidance for the full year, cutting its profit forecast in the wake of weak demand for laser vision correction but reiterating its sales expectations.

The company said it expects to make $61 million to $69.9 million before special items, down from a previous forecast of $76 million to $88.2 million. It also forecast a 25% drop in laser vision correction surgeries from year-ago levels.

Advanced Medical reiterated its previous sales forecast of $1.22 billion to $1.24 billion.

Wall Street expects Advanced Medical to make $73 million on sales of $1.23 billion in 2008.


Allergan

Historically, shares of Al-lergan Inc., an Irvine drug maker, have outperformed Standard & Poor’s,but that’s not been the case over a good portion of this year.

Allergan had joined the S & P; in negative ter-ritory in April, and in fact, had fared worse than the index for some while, until seeing a bounce back in mid-August.

For the year, shares of the maker of Botox, eye drugs, skin fillers, breast implants and obesity-fighting devices are off about 9%. That’s consistent with shares of other companies involved in cosmetic medicine, which has been trending down on weakening consumer demand for pricey procedures.

Allergan, which is one of OC’s most valuable companies, counted a market value of about $17.5 billion at recent check.

Allergan has been somewhat quiet on the news front. In January, however, it roiled Wall Street after offering a conservative first-quarter forecast, although its shares did regain ground and climbed after a potential rival to Botox, its longtime flagship, hit a regulatory snag.

Wall Street remains relatively bullish on Allergan.

Allergan has several “very significant” projects in development, most notably the drug bimatoprost for longer eyelashes, said Sean Lavin, an analyst with Lazard Capital Markets LLC, in a June research note.

Lavin wrote that bimatoprost, an active ingredient in Allergan’s glaucoma drug Lumigan, eventually could spur yearly sales of $500 million or more.

“Few companies could hold a nearly four-hour discussion of their pipeline, as Allergan did,” he said.


Beckman Coulter

Fullerton medical testing company Beckman Coulter Inc.’s stock also has lagged behind the Standard & Poor’s index at times so far this year.

During the past month, Beckman has outperformed the index despite its stock price being essentially flat since July 25. For the year, Beckman’s stock is up 4% with a market value of some $4.8 billion at recent check.

Last year, Beckman’s stock gyrated quite a bit during a six-week competition for Biosite Inc., a San Diego testing company that it sought to buy. Investors initially balked at Beckman’s plans to spend $1.55 billion for Biosite and sent Beckman shares down 7%. Beckman eventually bowed out and Biosite went to Waltham, Mass.-based Inverness Medical Innovations Inc., which offered a higher bid. Wall Street seemed happy, sending Beckman’s shares up some 3% after it walked away from the deal.

In addition, Beckman’s stock also bounced up on rumors last summer that it could be a takeover target as the only major stand-alone company left in the medical testing market.

Beckman officials have consistently maintained that they are confident that the company, which will move its headquarters from Fullerton to nearby Brea next year, can compete as a stand-alone player.


Masimo

Masimo Corp., an Irvine maker of patient monitors and other devices, had one of the hottest stock debuts last summer, raising $200 million in its initial public offering.

This year, however, Masimo’s stock relative to the Standard & Poor’s index has been spotty, spending quite a bit of time in negative territory during the March to May period. Lately, Masimo has jumped into positive territory, while the larger index has remained negative.

For the year, Masimo’s stock is up 2% with a recent market value of $2.3 billion.

The company’s year included an early Food and Drug Administration clearance for its non-invasive continuous monitoring of hemoglobin,which carries oxygen,through its Rainbow SET device. In a conference call, Chief Executive Joe Kiani said that analysts have predicted that non-invasive continuous hemoglobin monitoring would be a $1 billion-plus market.

Masimo also just issued upgraded guidance. The company said it expects to make $36.2 million in 2008, up from a previous forecast of $29.4 million.

It sees sales, excluding royalties, coming in at $253 million, up from previous guidance of $246 million.

Analysts expect Masimo to post a profit of $36.8 million on sales of $301 million.


Watson Pharmaceuticals

Watson Pharmaceuticals Inc., a brand and generic drug maker located just over the county line in Corona, has also fared better than the Standard & Poor’s index for most of the year.

Shares of Watson, whose founder, Allen Chao, is an Anaheim Hills resident, are up 12% with a recent market value of about $3.2 billion.

A few weeks ago, Watson saw increased options action, leading some on Wall Street to think of it as a possible takeover target.

“This is an interesting stock because it has landed in the crosshairs of very eager call buyers on speculation that it might make an attractive takeover target,” said Rebecca Engmann Darst, an analyst with Interactive Brokers Group Inc. of Greenwich, Conn., on the CNBC program Squawk Box.

Darst pointed out that on Aug. 14, when Watson’s shares closed essentially flat at $29.51, its call volume hit a 52-week high, sending its overall volume to about 14 times the normal.

Calls give buyers the option to get a stock at a particular price in the future. On Squawk Box, Darst said the number of open call position contracts in Watson rose 77% from mid-July, “so that tells us there’s a rising litany of bulls on Watson Pharmaceuticals, and this is going to be an interesting stock to watch, even though there’s not a specific rumor right now.”

Watson’s fellow generic drug makers have been caught up in consolidation. For example, Teva Pharmaceutical Industries Ltd., whose Sicor unit has some 895 workers in Irvine, said it was buying Barr Laboratories Inc. for about $7 billion.

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