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Long-Term Prognosis Good for Medical Supply Firms

By Robert Gold Near-term concerns about valuation continue to linger in the medical product and supplies sector, long after last year's strong results. Pricing pressures, as well as adverse foreign exchange rates, could cut into the forward earnings rate.

Year to date through May 11, the Standard & Poor's Health Care (Medical Products & Supplies) Index was down 17.9% versus a 5.2% decline in the S&P Super 1500. During 2000, the industry advanced 40% while the S&P 1500 fell 8%. Neverthless, S&P looks for sales growth in this sector to average about 16% in 2001.

Over the long term, this group looks to benefit from growing global demand for quality health care and a rise in new product approvals. Gains in research and development outlays will spawn a steady flow of new diagnostic and therapeutic products. Key to the industry's success, new product approvals such as cardiac and peripheral vascular stents, heart failure, defibrillators, pacemakers and cancer therapies such as radioactive seeds already have successfully entered the market.

Legislation passed in 1997 also has helped to speed up and streamline the FDA approval process for new drugs and devices. One important part of the legislation deals with having independent outside experts review safety and efficacy data on new device applications. However, the purview of the outside reviewers would be limited to lower-risk products, with the FDA itself still responsible for higher-risk devices.

One wild card: foreign exchange rates. Over the last few years, about 50% of industry revenues have been generated overseas. The strength of the U.S. dollar relative to both the euro and the Japanese yen can impact revenues. The risk is muted, though, since most companies are hedging their currency, employing local labor forces and using local raw materials. Because of these safeguards, S&P expects medical-device earnings to rise by 17% in 2001.

The long-term outlook looks even better for those companies concentrated in cutting-edge fields such as cardiology, orthopedics and surgery, especially as the population ages.

S&P's only 5 STARS (buy) pick is Impath Inc. (IMPH ), a cancer-management company.

A handful of companies also are included in S&P's 4 STARS (accumulate) picks. These include surgical-instrument maker ArthroCare (ARTC), critical-therapy provider Baxter International (BAX), orthopedic-instrument maker Biomet (BMET), cardiac-device makers Guidant (GDT) and St. Jude Medical (STJ), as well as radiopharmaceutical company Syncor International (SCOR) and cancer-treating equipment maker Varian Medical Systems (VAR). Gold is a healthcare analyst for Standard & Poor's

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