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Medical Devices a Healthy Stock Pick?: Union Grove Money Manager Says He Has Diagnosed Gains in Their Future

Posted on: Monday, 17 April 2006, 03:03 CDT

By Kathleen Gallagher, Milwaukee Journal Sentinel

Apr. 17--Drug companies have dramatically improved the treatment of disease in the last few decades.

Now medical-device companies, with products ranging from magnetic resonance imaging machines to defibrillators and minimally invasive surgical tools, are positioned to have the same kind of impact, one local money manager says.

Many of these companies are bringing to market breakthrough technologies that offer innovative solutions to medical issues.

"These technologies are providing not only easier management, but cheaper management of disease. And in this world of managed health care, they'll be a key factor," said Richard P. Imperiale, president of Forward Uniplan Advisors Inc., a Union Grove money management firm.

R&D spending in the medical devices and diagnostic industry, as a percentage of sales, more than doubled in the 1990s and increased more than 11% in 2005, according to testimony provided in February to the House Ways and Means Committee the Advanced Medical Technology Association.

The industry's level of spending on R&D is more than three times the overall U.S. average, according to the trade association's testimony.

Aging baboomers, the shift toward more home health care, and new trends in technology like tissue engineering, nanotechnology, and new ways for connecting, storing and using medical records, will help drive the industry, according to Canon Communications LLC, a marketing firm.

The U.S. medical device industry's revenue is projected to rise to $139.8 billion 2011, compared with $71.7 billion in 2005, according to a report done in 2005 Frost & Sullivan, a financial research and consulting firm.

Continued research spending and the resulting revenue jump suggest exciting new products will hit the market, Imperiale said. The trick for investors is to figure out which devices will be the winners that deliver easier, more efficient, effective solutions.

Imperiale starts evaluating that keeping a list of all the medical-device companies that go public. He looks at each company's products and the market for them, trying to figure out which ones can deliver something better than what's already out there.

Those with such products go on Forward Uniplan's watch list. From there, Imperiale looks at what Wall Street analysts are saying, and watches to see whether the companies achieve certain milestones. The most important is getting approval from the Food & Drug Administration.

Imperiale says he has two companies with breakthrough devices in clients' micro-cap portfolios:

Dexcom Inc. (DXCM, $20.38), San Diego, Calif., is focused on the design and development of continuous glucose monitoring systems for people with diabetes. Dexcom's FDA-approved implantable device has a small external receiver that receives continuous transmissions about blood glucose levels.

"You marry this device with an insulin pump and it becomes an artificial pancreas that helps avoid the roller-coaster ride a lot of diabetics have with blood sugar," Imperiale said.

The potential market for such a product is huge. About 171 million people around the world suffer from diabetes, and an estimated 1.3 million people are diagnosed annually with the disease in the U.S. alone, he said.

Micrus Endovascular Corp. (MEND, $12.74), Sunnyvale, Calif., produces implantable and disposable devices for treating cerebral vascular diseases associated with stroke and other conditions. It makes a stent that can be inserted into an aneurysm in the brain to create scar tissue, effectively ensuring that the balloon of air in the aneurysm won't blow up.

"Traditionally, people who had aneurysms had to have brain surgery, a horribly expensive, horribly invasive procedure with no guarantee of success, or live on blood-thinning medications with a time bomb in their head," Imperiale said.

Micrus' device can even be used on many people in bad health who wouldn't survive general anesthetic, he said.

Although Micrus' stent addresses a much smaller market than Dexcom's -- there are about 30,000 brain aneurysms detected each year in the U.S. -- the company has gotten approvals from regulators in the U.S. and Japan, Imperiale said.

"I'm willing to bet that, five years from now, this will be the standard treatment," he said.

Micrus is expected to either break even or lose a few cents in its fiscal year ending March 31, 2007, but revenue will likely ramp up to about $34 million from $29 million in fiscal 2006, Imperiale said. The company has no debt and trades at about five times book value, which is "not too high" for a medical-devices concern, he said.

The biggest risk Imperiale associates with Micrus is the possibility a competitor will come up with a better technology. However, it's more likely a big company like Guidant Corp. or Boston Scientific Corp. would buy a small player like Micrus rather than try to develop a competing technology, Imperiale said.

He began buying Micrus shares in November and has full positions. He would buy them at $12 or below and says they could go as high as $18 in the next 12 months.

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Copyright (c) 2006, Milwaukee Journal Sentinel

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Source: The Milwaukee Journal Sentinel

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