The medical device industry has been among the leading performers in the health care sector for many years. Companies engaged in the development and marketing of cardio and vascular implants, joint replacements and devices for cleaning clogged arteries have grown at rates exceeding inflation on a consistent basis.
Boston Scientific (BSX) is one of the largest manufacturers of cardio implant devices in the world. Its primary competitor, Medtronic, Inc (MED) reported earnings in excess of analysts’ expectations for the fourth quarter. BSX will report later this month and is expected to show strong results as well.
The company’s merger with Guidant, which got off to a rocky start due to legal and regulatory issues with respect to a Guidant implantable cardio device, has delivered on its promise of higher revenues and operating margins.
Boston Scientific stock is currently trading at around $8.60 per share, well below the 52-week high for the stock of $14.22 but also substantially above the low of under $6.00 reached in late November 2008.
Medical device companies are generally considered to be immune from economic recessions. Since the majority of medical device implant procedures are administered to Medicare patients, the loss of employment and health insurance coverage is not viewed as having as great an impact on this segment of the health care industry as is the case with some other health care expenditure.
The reality is that the involvement of government through Medicare or other governmental programs generates margin pressure on the health care industry as a result of the slow rate of change in governmental reimbursement schedules. Thus, in many cases, device manufacturers and hospitals rely on the ability to charge higher prices for private-pay customers.
A parallel problem for device manufacturers such as Boston Scientific is that the private insurers are increasing deductibles and exercising more control over health care decisions.
Health care consumers have to determine the medical necessity and affordability of a procedure before proceeding. While most of the cardio implants are done under emergency circumstances, there are many which are not and which can be delayed temporarily or permanently.
It is likely that discretionary spending on health care including device implantations will decrease as the economy continues to frighten consumers. As a result, companies like Boston Scientific will face reduced demand and competitive price pressure which will have a negative effect on earnings.
The combination of the recession and governmental expansion in health care will act to depress the stock price of Boston Scientific. While the company may continue to perform at profitable levels the stock is likely to trade at lower multiples than was previously the case.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
