1 Big Long-Term Risk for Medical Devices

Transcript:

Brenton Flynn: I want to move away from pharma stocks, which we've talked at length about, and I want to move to medical devices; particularly more of a broader issue that we're seeing, and that's the impact of Obamacare, as well as overall scrutiny around the true value that certain medical devices are offering.

One more recent event that we saw was, one of the most notable short sellers who actually has an incredible track record, which you really can't defeat, is Andrew Left at Citron Research. He came out actually going after Intuitive Surgical, of all companies.

We're typically used to seeing him going after the more sketchy players in pharma, or some Chinese Internet stocks, but this is a well-established $20 billion market cap company, and he has some very compelling arguments as to what the real long-term sustainability of their growth rates are.

A lot of it has to do with the comparative effectiveness, really, of a da Vinci Machine, of medical robotics, these very high-priced equipment and high-priced procedures, relative to the alternatives.

He bases his argument on, "Well, there's really not meaningful clinical data suggesting that procedures done on these robots are any better than manual laparoscopic procedures," as well as the insurance coverage component, "Hey, if there's not the data to back it up, why should insurance companies be paying more for these types of procedures?"

With Obamacare coming into play, and more and more pressures on all these players -- hospital providers, insurance companies -- are we going to see a trickle-down effect to medical devices?

Medical robotics has always been a big question mark. Do you really see the return on investment from that investment, or is it more of a "bells and whistles," nice thing to have at your hospital, to attract patients?

I don't really know where I fall on the argument. Specifically for a MAKO Surgical, you can see this huge pathway to growth. There obviously are a lot of secular trends that are in their favor. It really just comes down to, is the market able to bear something that costs so much?

Then turning to, even, other areas such as cardiac rhythm management, for instance; Boston Scientific, Medtronic, and St. Jude basically built huge, billion-dollar companies on various medical devices for certain heart ailments. They've built this industry, and now we're seeing, "Are these really effective? Do patients really need stents, or is drug therapy more effective?"

David Williamson: Yeah. Less invasive.

Brenton: I think Obamacare and this regulation, it might take a while to play out, but I think that there's going to be certain players that fail, and that are really hit hard by this. It's just a matter of when, I think, not if.

David: If we're talking overhangs in the Affordable Care Act, the 2.3% excise tax -- and that's on sales. That's not on income. Everyone has to pay that. That's a serious issue for the medical device industry.

I know they're trying to get that lowered, but given Congress' ineffectiveness at agreeing on anything, I wonder whether they'll actually be successful with that.

Brenton: Yeah, and I know a lot of notable Democrats, even, have come out -- particularly in states like Massachusetts, where medical device is a significant player in those local economies -- have even come out saying, "You guys need to change this, because this is going to absolutely destroy this industry."

In any case, I really think that this is going to be a story that we're hearing more about, and we might see providers opting for drugs, as opposed to a medical device. Who that ends up impacting; like I said, this is a huge overhang for the Boston Scientific, Medtronics and St. Judes of the world.

Medtronic, a little more diversified in some other areas, more so than St. Jude and Boston Scientific, but I don't know if the new innovations in their pipeline are going to be enough to offset what appear to be pretty strong secular pressures on this market.

David: For a company like Intuitive Surgical... We were talking about Amarin as a one-trick pony -- Intuitive Surgical is essentially a one-trick pony. They have different indications, I guess, you can use their machine for, but that's what they do. That's what they sell, so if there are significant reimbursement issues with that, the company could go under pressure.

Another thing to look at with these robotic companies is procedures. We want to see procedure growth, because if you see procedure declines, it often precedes sales declines as well. That was the case at Hansen. It's been something people have been really watching with MAKO Surgical, which has actually fallen on hard times lately, although they had a pretty good quarter most recently.

Brenton: Yeah, it seemed to show signs of improvement. Obviously, we'll have to wait to see any consistency out of them. I think that's the key with MAKO Surgical.

Max is notably silent on this because he's kind of a drug guy, himself, as a former chemist. I think he's rooting for the drug therapy side, as opposed to medical devices.

Max Macaluso: Yeah. I think also the patent cliff plays into that. You have a lot cheaper generics coming on the market, so sometimes insurance companies and hospitals favor to try to prescribe low-cost drugs first, before they do an expensive, invasive procedure.

Brenton: Cool. Thanks for running through that with us, guys. Thanks for watching, and Fool on!

David: Fool on!