Medical Devices: Bad News Could Lead To Good Buys

After two hale and hearty years, medical-devices stocks have taken ill in 1992. But some analysts argue that the sector's sickbed may also be a hotbed of investment opportunities.

The high-flying medical-devices stocks are sliding partly because investors are rushing back into cyclicals, such as banks and autos, which should pick up along with the economy. The sector also suffers from uncertainty over health care reform and fear that requirements for Food & Drug Administration approval will stiffen. After outperforming Standard & Poor's 500-stock index for two years, the S&P medical-supplies index fell almost 20% so far in 1992, compared with a 2% dip in the S&P 500.

But all the bad news could lead to some good buys. "Patient investors will be very pleased with the returns," says Cowen & Co. analyst Michael Mullen, who likes Medtronic and Ventritex. FDA approval for their implantable defibrillators--devices that regulate the heartbeat--is pending, and these companies are likely to grab sizable shares of a market Mullen expects to grow to $1 billion by 1996. The new products treat certain heart ailments more effectively than anything now available.

HEART BALLOONS. Mullen's top picks also include U.S. Surgical, which makes equipment for the laparoscopy market, and Westmark International, which has a new imaging system for the $1.9 billion ultrasound market.

Mullen thinks investors also should keep an eye on Datascope, which manufactures patient-monitoring devices and balloons to support weak hearts after surgery. Datascope's new, first-of-its-kind product, VasoSeal, is a plug to seal arteries after angioplasties. It could lift earnings per share 40% to 50% over the next three to five years, says Mullen.

Some recent initial public offerings also show promise. "You'll wait a long time to see big companies like Medtronic double," says Piper Jaffray general manager Edward Mutsch. "In a smaller company, it will happen a lot quicker." For example, Mutsch likes Target Therapeutics, which makes catheters for arteries in the brain. Bob Czepiel, who manages Robertson Stephens Emerging Growth Fund, concurs: "No one else is doing what Target is." Another pick is Heart Technologies. Some analysts think it's overvalued, but it has a promising device that destroys plaque in arteries.

Company         Stock    Price-to-
                      price*   earnings
      DATASCOPE       $22 3/4   32.9
      HEART            17 3/4    NA**
      MEDTRONIC        74 1/8   28.5
      TARGET           20      45.4
      U.S. SURGICAL  105 7/8  59.8
      VENTRITEX        19 5/8  NA**
      WESTMARK         52 1/2  24.8
      *May 26, 1992
      **Not applicable
Before it's here, it's on the Bloomberg Terminal.