Could Wall Street’s downturn be good news for drug and device stocks?
It’s an old adage that drug and device makers are safe havens for investors when the broader market starts faltering.
Their steady growth, predictable markets and dependable insurer, hospital and government customers make them appealing as more volatile sectors head south.
“We believe the aging population, combined with relatively stable pricing and the nondiscretionary nature of medical devices should provide a level of stability to the sector versus the general market during periods of volatility,” said Larry Biegelsen, a Wachovia Capital Markets analyst, in a recent research note.
During the last market downturn, the medical technology sector outperformed the Standard & Poor’s 500 index by 77% from August 2000 to March 2003, Biegelsen said.
During the past month or so, Wall Street has been battered by concerns about subprime loans, tightening credit and a slowing economy. The S & P; is off about 5% from July 24.
To varying degrees, all but one of Orange County’s largest medical device and drug makers has done better than the S & P; since July 24. As of last week, two of them were holding on to gains, while two were in negative territory, albeit better than the S & P.;
The fifth was down more than the S & P.;
Beckman Coulter
Fullerton’s Beckman Coulter Inc. has outperformed the S & P; 500 since the market turned. As of last week, its shares were up about 4% since July 24.
For the year, Beckman’s stock is up 18% with a recent market value of $4.5 billion.
Still, the company has had its share of negative vibes from Wall Street this year.
When Beckman said in March it planned to spend $1.55 billion for San Diego-based Biosite Inc., investors balked.
Shares fell about 7% on the news and dropped another 3% when Waltham, Mass.-based Inverness Medical Innovations Inc. threw down a challenge bid.
The six-week chess game for Biosite had a yo-yo effect on Beckman’s stock.
Wall Street seemed pleased when Beckman walked away from the bidding war: Investors sent shares up 3% on the news.
Biosite wasn’t the only news that affected Beckman’s shares this year. At the end of July, shares were up about 10% on rumors that Beckman,the only major stand-alone company in the $10 billion medical testing market,could be a takeover target.
Speculation of buyout deal was fueled by rival Dade Behring Holdings Inc. of Deerfield, Ill., which accepted a $6.3 billion takeover bid by Germany’s Siemens AG.
Beckman has declined to address takeover talk. Chief Executive Scott Garrett said on a recent earnings call that he was confident Beckman could compete as an independent.
“We still have a very compelling position,we have the breadth and depth (of) automation that our customers want,” Garrett said. “Long term, clearly Siemens is going to be our most important competitor. But I think we have everything we need to compete on a global basis.”
Edwards Lifesciences
Irvine heart valve maker Edwards Lifesciences Corp. also has fared better than the S & P; in the past month or so, though its stock was flat last week from July 24.
Edwards has rebounded some after joining the S & P; in negative territory in early August.
For the year, Edwards is up about 1% as of last with week with a market value of $2.7 billion.
The maker of replacement heart valves and other products has had a relatively quiet news year, even though it has restarted a clinical trial for a minimally invasive heart valve, a major deal since the product won’t require surgery for it to be implanted.
Citigroup analyst Amit Bhalla downgraded Edwards in late July, though its second-quarter profit of $35 million was in line with expectations. Bhalla said a downward revision in the company’s guidance, continued competition in heart valves and minimal contribution from new products could hurt the company.
Edwards is facing sales pressure in the U.S. The company is “responding decisively on several fronts,” Chief Executive Michael Mussallem said during an earnings call. Edwards also is gaining share in Europe and Japan, he said.
Edwards needs new products, said JP Morgan analyst Michael Weinstein. That would help the company regain some market share from Minnesota-based rival St. Jude Medical Inc. and improve sales of key products, he said.
Weinstein’s concerns echo other views expressed in the past about Edwards and a need to diversify.
Valeant Pharmaceuticals
Drug maker Valeant Pharmaceuticals Inc. in Aliso Viejo has fared better than the S & P; during the past month or so, though the gap’s narrowed more recently.
Valeant’s shares were up about 2% in mid-August while the S & P; was down about 1%. As of last week, Valeant still was doing better than the index, though both were in negative territory since July 24: Valeant off 4.5%, the S & P; down 5%.
For the year, Valeant’s shares are down about 7%. The company counted a recent market value of $1.4 billion.
Valeant has made efforts to improve its business. It’s cut jobs, narrowed its focus to key drugs, made strategic deals, sold off foreign operations and moved from its longtime Costa Mesa beachhead to Aliso Viejo in an effort to distance itself from its past as ICN Pharmaceuticals Inc.
As for Valeant’s outlook, Megan Murphy, a Lazard analyst, has a hold rating on the company’s stock. She said she expects the company will seek out licensing or partnering deals for retigabine, an epilepsy drug, and viramidine, a hepatitis C drug that is in clinical trials, later this year.
Viramidine, whose progress has concerned some investors and analysts, could impact the stock because the company faces a “go or no go decision” on whether to continue developing the drug, Murphy said in a report.
A second-stage trial for retigabine and business partnerships also could lift the stock, she said.
Allergan
One stock that’s been spotty is Irvine’s Allergan Inc., which makes wrinkle-reducer Botox, eye drugs, skin fillers, breast implants and obesity-fighting devices. It’s usually at or near the top of OC’s most valuable public companies.
When the S & P; first started to fall in July, Allergan fell into negative territory before bouncing back with gains as much as 11% in early August. The S & P; was down as much as 5% at the same time.
As of last week, Allergan was down about 1% since July 24, versus the S & P;’s 5%.
For the year, Allergan is off some 2%. Allergan counted a market value of about $18 billion at recent check.
2007 hasn’t been a headline grabber for Allergan, unlike 2006, when the company spent $3.2 billion for Santa Barbara-based Inamed Corp.
Wall Street still is upbeat on Allergan. Products that came from Inamed,breast implants, skin filler and the Lap-Band,along with growing sales and profits, have cheered analysts.
“No company is better positioned than Allergan to benefit from age-related conditions, treatment of obesity, and appearance-enhancing products,” said Alexander Arrow, an analyst with Lazard Capital Markets, in a coverage initiation report.
On the drug side, Allergan should benefit from increasing use of eye drugs and “baby boomers entering their greatest years of (eye product) consumption,” Arrow wrote.
Advanced Medical
Shares of Santa Ana’s Advanced Medical Optics Inc. have fared far worse than the S & P; in the past month or so.
The eye care and surgical device maker has been solidly negative since July 24, well below the S & P.;
As of last week, Advanced Medical was off about 13% from July 24.
For the year, Advanced Medical’s shares are down about 15%. The company counts a market value of $1.7 billion.
Advanced Medical’s had a busy year. It started out tackling a recall of a small amount of its Complete MoisturePlus contact lens solution after contamination was found in its Chinese plant.
Shortly afterward, Advanced Medical said it was buying laser maker IntraLase Corp. in Irvine for $808 million. That deal closed in April.
The buy first drew a mixed reaction from Wall Street.
Joanne Wuensch of BMO Capital Markets, told Forbes.com that it made strategic sense. Others such as Peter Bye and Brian Kennedy of Wachovia Securities questioned its timing, noting that growth of laser vision was a concern and Advanced Medical was “mired in challenges” at the time.
Another bombshell came in late May, when investors sent the company’s stock down 12% after it expressed interest in buying rival Bausch & Lomb Inc. of Rochester, N.Y., following a second contact lens solution recall.
An activist hedge fund quickly stepped in, buying blocks of Advanced Medical shares. San Francisco’s ValueAct Capital Management LLC now holds a 15% stake in the company. The shareholder came out against Advanced Medical’s formal bid of $4.23 billion for Bausch.
The company scrapped its bid in July.
IPOs
A pair of medical device makers has gone public this year.
In August, Masimo Corp., which makes patient monitoring devices that are used in hospitals, went public in a $200 million offering.
Masimo shares debuted with a first-day bang and had a market value of $1.1 billion last week.
They’ve held up relatively well in the downturn. As of last week, they were flat from July 24.
Shares of SenoRx Inc., an Aliso Viejo maker of breast biopsy devices, haven’t fared so well.
As of last week, they were down 15% from July 24, well below the S & P;’s drop.
SenoRx is up about 3% since its late March debut with a recent market value of $145 million.
In July, Aliso Viejo-based Eyeonics Inc., which makes eye replacement lenses for cataract patients, said it was planning to raise up to $86.3 million in an initial public offering.
A date hasn’t been set yet.
Lake Forest-based Devax Inc., which makes stents for treating blood vessel diseases, also filed plans to go public in May.
