"Where Best To Invest?"-Healthcare Product Makers
Monday, January 15, 2007PAUL KANGAS: Market monitors Jim Stack of Investech Research and Eugene Peroni of Claymore Advisors like the healthcare sector for the coming year. They favor two areas in particular -- the generic drug makers and healthcare products. Joining me now to talk about the healthcare product makers is Scott Thoma, healthcare analyst at Edward Jones and Scott, welcome back to NIGHTLY BUSINESS REPORT.
SCOTT THOMA, HEALTHCARE ANALYST, EDWARD JONES: Thank you for having me, Paul.
KANGAS: Health care lagged the broader market last year, logging a 6 percent gain to the Standard & Poor's 500's 14 percent return. What is your take on this sector for this coming year?
THOMA: Well, we think after going through as you said a tough '06, we think '07 should be a very good year for health care products in particular. A lot of the issues that faced these companies in 2006 -- we has pricing pressure in orthopedics. We had some recalls in the defibrillator market and we had safety concerns in the stent market. A lot of those issues we see at least abating a bit, going into '07 and a lot of new products are going to be released as well that we think will be very good catalysts for this industry as we move throughout the year.
KANGAS: So you don't think that these problems that the orthopedic product maker and the stent makers had last year will continue?
THOMA: Well, in stents in particular, the issues with stent safety was blood clotting. I think that issue might persist, but we do see new products on the horizon, specifically from Medtronics that are much, much safer at least thus far and we think that should be a catalyst for the stent market. In orthopedics, pricing pressure that we saw back in '05 and '06 we think has really run its course and we are actually starting to see positive pricing for some of the implants and we do think that issue is behind these companies.
KANGAS: How big an issue are Medicare reimbursement rates and do you expect any changes with the Democrats now in control of Congress?
THOMA: Medicare has already been working on some changes in their reimbursement schedule and we don't see the Democrats taking power as a reason to potentially make that more severe. That being said, what the government does is always a risk, but in general, we don't see any major changes on the horizon in terms of reimbursement.
KANGAS: All right, interesting. Now which companies do you like in the group? Let's get specific.
THOMA: OK. In the cardiovascular space, we like Medtronic, a nice diversified healthcare medical products company. It's a leader in defibrillators which we think is going to recover this year. It's one of the companies that has a new stent out this year that doesn't have those safety concerns, but it's also much more diversified as it participates in spine (ph) diabetes and this helps insulate it against problems in any one particular area. It also helps that it's trading close to a 10-year low on a valuation basis. In orthopedics, we like Stryker, similar to Medtronic. It is a diversified healthcare company. It makes hips and knee implants but it also does a lot of the ancillary products that goes along with the surgery, some of the more pleasant things to think about like the bone cutters and so on that are used to actually do the surgery. Stryker has a new product cycle coming out this year in hip resurfacing which are smaller hip plants that are used for younger patients and they also have a new product for stimulating bone growth which can be used in the spine. And like Medtronic, also trading at a very nice valuation. It's well off its 10-year average. So those are the two companies we'd be looking at this year.
KANGAS: OK, fair enough and the question is now, do you own any of these securities or have any other disclosures to make about them?
THOMA: No, and no.
KANGAS: OK, Scott, I want to thank you very much for joining us. It's been a pleasure.
THOMA: Thank you, Paul.
KANGAS: Scott Thoma, healthcare analyst at Edward Jones.
