MEDICAL DEVICES

Investors discovering virtue in predictability

By Naomi Aoki, Globe Staff, 5/20/2003

Biggest medical device cos. All the charts

n a year when many sectors of the tech-dominated Massachusetts economy struggled against long financial odds, medical device firms emerged as one of the few winners in the technology industry.

The state's 10 biggest medical device firms all saw their revenues grow last year, and unlike other high-tech sectors from telecommunications to biotechnology, the medical device industry has not been hard hit by layoffs.

Nearly 300 companies statewide employ 21,000 people and manufacture more than $4 billion worth of products within Massachusetts' borders. The Bay State is the nation's second- or third-largest hub for the industry.

"Seasoned investors are looking for a good place to park their money," said David Cassack, managing partner of Windhover Information Inc. in Norwalk, Conn. "Medical device firms are relatively predictable. You find out fairly quickly if a product doesn't work. The business models are relatively straightforward. So there's more interest right now than there has been for a long time."

That's not to say the industry is entirely unscathed by the economic downturn. As in other sectors, the appetite for initial public offerings has been nonexistent. Investors are scrutinizing business plans and stressing fundamentals. But companies, especially those in later stages of development and those with products, are faring better than their technology peers in other sectors.

"One area of concern in an otherwise bright picture is that early-stage companies are having difficulty getting the first or second round of venture investment," said Thomas J. Sommer, president of MassMedic, a trade organization. "Small companies develop many innovative technologies. The concern is that those innovations will be delayed."

Medical devices have helped reduce the invasiveness of surgeries, shorten recovery times, and lower medical costs. Pacemakers jump-start faulty hearts, pumps deliver life-saving insulin to diabetics, and stents prop open once-clogged arteries.

The state is home to many firms, large and small, with innovative technologies. Abiomed, a Danvers company, is developing an artificial heart. Zoll Medical, a Burlington firm, is making automatic heart defibrillators. Hologic, a Bedford concern, is taking X-ray technology digital.

Nationwide, the industry is thriving as other sectors face shrinking revenues. Sales of medical devices grew at a rate of 13 percent in the first three months of this year, up from the industry standard of 10 percent growth, according to a sector report from Merrill Lynch analysts.

Daniel Lemaitre, an analyst with Merrill Lynch in Boston, predicts growth will continue to be robust over the next two years as drug-coated stents enter the US market.

Hailed as the biggest advance in stent technology in a decade, the tiny metal mesh devices are coated with drugs to prop open clogged arteries and prevent them from reclogging.

Johnson & Johnson introduced its drug-coated stent last month, and Natick-based Boston Scientific Corp. is on track to gain US approval this year or next.

The coated stents are expected to double the size of the worldwide market to nearly $5 billion in coming years, a key driver of investor interest in the sector. J&J's stock has risen more than 5 percent this year; Boston Scientific's has risen nearly 9 percent.

Medical devices have long offered investors steady, predictable growth, Cassack said. But in the era of booming dot-com and high-flying biotech stocks, 10 percent growth seemed lackluster. As stocks in one technology sector after another plummeted, the medical device industry took on an appeal it hasn't had in years.

"When there's tremendous euphoria over a technology, slow and steady businesses look poor by comparison," Cassack said. "But when the market comes back to earth, medical device companies start to seem like the right kind of play. In a state like Massachusetts, one of top three centers of device innovation, that's tremendously good news."

Naomi Aoki can be reached at naoki@globe.com.

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