By Matthew Perrone
The Associated Press
WASHINGTON — Health care stocks are typically seen as a hedge against financial downturns, but medical device shares declined steeply in 2008 as broader economic worries exacerbated declines linked to product safety concerns.
With the current recession expected to be the worst in a half-century, Edward Jones analyst Aaron Vaughn said the effect on sales of pacemakers, knee replacements and other items is still not clear.
“Some of these things are medical necessities, but the question remains to be seen how sensitive these markets are to economic downturns,” Vaughn said.
Dow Jones’ U.S. Medical Equipment Index fell 38 percent for the year, roughly even with the 40 percent drop seen by the broader Dow Jones Total Market Index.
To be sure, companies that sell lifesaving medical implants outperformed more discretionary parts of the economy, like automobiles. But Boston Scientific Corp., Medtronic Inc. and other device makers performed far worse than their peers in the biotech industry.
Some parts of the sector took a hit from tightening consumer spending on non-essentials. Cosmetic treatment company Allergan Inc. slashed its outlook in October on plummeting demand for its breast implants and Botox anti-wrinkle injections.
Companies that fared better tended to specialize in inexpensive products sold directly to hospitals, bypassing cash-strapped consumers.
Becton, Dickinson & Co. and Baxter International Inc., for example, reported sharp profit gains and boosted their full-year earnings estimates. Becton Dickinson makes syringes and surgical tools, and Baxter sells drugs to treat blood and immune disorders.
“They both have products that are not considered high-tech or expensive,” Vaughn said. “They offer products that people need in their daily lives.”
Industry leaders Boston Scientific and Medtronic had some success regaining sales of their most lucrative devices in 2008 after high-profile safety issues.
In the fall of 2007 Medtronic, the world’s largest device maker, recalled faulty wires used with its heart-shocking defibrillator implants. The company said cracks in the wires may have contributed to at least five patient deaths. Competitors St. Jude Medical and Guidant had previously issued similar safety alerts.
Sales of drug-coated stents also rose in 2008 after falling more than $1 billion the year before on safety concerns. Stents are tiny mesh-metal tubes used to prop open arteries. Controversy over the devices erupted in 2006 when research suggested the drug coatings caused blood clots, but more recent studies show those concerns were likely overstated.
Wachovia analyst Larry Biegelsen estimates U.S. sales of drug-coated stents will total $1.87 billion in 2008, up slightly from $1.83 billion in 2007. U.S. defibrillator sales are expected to have edged up to $4.12 billion from $3.94 billion.
While the sales uptick is encouraging, investors are concerned the products will never regain the revenue momentum they had in the early part of the decade.
“So the skies are brightening, but no one knows if it’s partly cloudy or partly sunny,” said Stanford Group Co. analyst Jan Wald.