RPT-Medtech stocks benefit as drug-pricing scrutiny intensifies

(Repeats to additional subscribers)
By Lewis Krauskopf
NEW YORK, Dec 2 (Reuters) - Investors have been moving into
medical device shares as a safer play in the healthcare sector
amid concerns that intensifying scrutiny over high U.S.
prescription drug prices will continue to weigh on
pharmaceutical and biotech stocks.
Shares of medtech companies such as Edwards Lifesciences (N:EW)
EW.N , Boston Scientific (N:BSX) BSX.N and Becton Dickinson BDX.N
have outperformed the broad healthcare sector, and especially
pharmaceutical and biotech shares, over the past two months
since U.S. presidential candidate Hillary Clinton tweeted she
planned to address specialty drug "price gouging."
Clinton's tweet was a watershed moment that shook the
sector. Many on Wall Street expect the political and media
scrutiny on pricing and healthcare costs to stick through the
November 2016 election. Just on Tuesday, a U.S. senate report
zeroed in on the costs of Gilead Sciences' GILD.O blockbuster
hepatitis C drug.
While some investors may flee healthcare altogether to avoid
any political risk, others see medtech as a preferred
alternative to those seeking exposure to the sector.
"They may not be completely safe, but I think there is less
risk with the device companies than with the big biotech and
pharma companies," said George Strietmann, a portfolio manager
with Cincinnati investment advisory firm Bahl & Gaynor.
He said he likes Medtronic (N:MDT) MDT.N , Stryker SYK.N and
Becton Dickinson and his firm is underweight biotech and pharma
stocks in its growth portfolios, but overweight medical
technology stocks.
Since Clinton's tweet, the S&P 500 Health Care Equipment
index .SPLRCMED , which includes large medical device
companies, has climbed more than 5 percent, against a
1.5-percent increase for the S&P 500 healthcare index .SPXHC .
Medtronic, Baxter International (N:BAX) BAX.N and Abbott
Laboratories ABT.N have also gained at least 4 percent.
Diagnostic equipment companies such as Thermo Fisher Scientific (N:TMO)
TMO.N and PerkinElmer (N:PKI) PKI.N climbed sharply over that time.
Conversely, the Nasdaq Biotechnology index .NBI has fallen
more than 5 percent since Clinton's tweet. The NYSE Arca
Pharmaceutical index .DRG is down more than 2 percent, dragged
down by poor performance of specialty drugmakers such as Valeant
Pharmaceuticals VRX.TO VRX.N and Mallinckrodt (N:MNK) MNK.N that
have been criticized for pricing practices and targeted by short
sellers.
Other factors could be driving the diverging stock
performances beyond the political pressures, and Morningstar
analyst Debbie Wang pointed to a solid third-quarter earnings
season as helping device companies.
But RBC Capital Markets analyst Glenn Novarro said his phone
has been ringing in the wake of the drug pricing publicity.
"Based on the incoming call volume, there's greater interest
in medtech today than earlier in the year," Novarro said.
Prices for commonly used branded drugs more than doubled
from 2008-2014, according to benefit manager Express Scripts
ESRX.O . Price tags of $100,000 or more for new therapies for
cancer and other conditions, as well as recent massive increases
on old medicines put the industry in the spotlight.
Meanwhile, prices for medical devices such as stents,
pacemakers and knee replacements have fallen 2 percent to 3
percent annually over the past five years, according to RBC's
Novarro, as hospitals seek to cut their costs.
Investors and analysts pointed to several favorable factors
for investing in medtech, including an aging U.S. population and
increased demand from growing middle classes in emerging
markets. Recent acquisitions, by companies such as Medtronic and
Zimmer Biomet Holdings ZMH.N , stand to benefit those companies
and could be a prelude to further consolidation, Novarro said.

But the lack of pricing power also could be seen as a
negative sign for the medical device industry, potentially
reflecting a lack of significant innovations.
"I really don't see a whole lot of product differentiation"
in areas such orthopedics and interventional cardiology, said
John Fraunces, co-manager for the Turner Investments medical
sciences fund in Berwyn, Pennsylvania.
Any bump that medtech shares get on worries about a
clampdown on drug pricing may not last - and the worst fears of
pharma pricing limits may never be realized.
"It's more of a headline risk than a real risk," said Jason
Ware, chief investment officer at Albion Financial Group in Salt
Lake City. He said his company remains overweight in biotech,
preferring the growth outlook for companies such as Gilead, with
its revolutionary but expensive hepatitis C treatment, over the
medtech sector.