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Zacks details top med-tech picks

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Wall St. Roundup

Analysts at Zacks Investment Research see sunnier days ahead for the medical device sector during the second half of 2011, despite lingering economic softness and ongoing pressure on the orthopedic market.

Estimating worldwide sales of roughly $300 billion this year, the researchers peg the U.S. market’s share at about $95 billion in 2010.

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Although 2011 looks brighter than last year, thanks to factors including new product cycles, geographic expansion and the uptake of minimally invasive devices, the impact of 2010’s economic woes and the uncertain health care environment will linger for the rest of the year.

The Japanese earthquake led to global disruptions in supply chains, causing delays in shipments, elective surgical procedures and regulatory clearance for new products. Those could still hit several med-tech makers with significant market exposure in the Land of the Rising Sun.

The Japan Federation of Medical Device Assns. had to fight for priority access to electricity during the rolling blackouts following the disaster to ensure adequate supplies of life-saving and sustaining devices. By June, the FDA was warning of potentially contaminated or water-damaged devices and product shortages for Japanese-made products and components.

Medtronic Inc. (NYSE:MDT), Boston Scientific Corp. (NYSE:BSX) and Johnson & Johnson’s (NYSE:JNJ) DePuy Orthopaedics "have been concerned over the long-term effect of the Japan crisis, which is hard to gauge at this moment,” the analysts wrote.

The researchers also forecast continued headwinds for the orthopedics sector and warned against putting further faith – or dollars – into that market.

"We continue to advise investors to spurn companies in the orthopedic domain," the analysts wrote. "Companies in this space continue to struggle as patients defer their elective procedures given the lingering economic softness, exacerbated by sustained pricing pressure."

Add to that controversies over metal-on-metal hip implants for JNJ/Depuy and Wright Medical Group (NSDQ:WMGI) and bone-growth proteins for Stryker (NYSE:SYK) and Medtronic. Take DePuy, the focal point of a series of lawsuits (over 350 in August alone) filed after its recall of one of its hip replacement lines and evidence that they shed minute metal particles into patients’ bloodstreams.

For life-sustaining products there’s calmer weather ahead, according to Zacks.

"We see growth potential in companies dealing with cardiovascular devices, neuro and radiation oncology products," the analysts wrote. "Also, the radiation oncology market is benefiting from improving trends and technology advancements, providing a compelling growth opportunity."

Zacks named Medtronic, Boston Scientific, St. Jude Medical Inc. (NYSE:STJ), Edwards Lifesciences Corp. (NYSE:EW), Zoll Medical Corp. (NSDQ:ZOLL), Abiomed Inc. (NSDQ:ABMD
and Varian Medical Systems Inc. (NYSE:VAR) as companies poised to do well, thanks to portfolios of life-sustaining products that are less subject to economic instability.

Also supporting the market is a recovery in hospital spending in the U.S., where worn-out equipment is being replaced by newer models, providing another potential driver for the industry.

Here are Zacks’ med-tech companies to watch for the second half of 2011:

  • Medtronic: As the "undisputed leader in the MedTech space," the world’s largest pure-play device maker is buoyed by a diversified portfolio of cardiovascular, neuro, spinal and diabetes products and a healthy pipeline. The Minneapolis-based company resolved FDA warnings regarding a manufacturing facility in Puerto Rico earlier this year, potentially clearing the way for a spate of new FDA clearances, according to the research firm.

  • Boston Scientific: Natick, Mass.-based Boston Scientific remains the top dog in the drug-eluting stent arena and raised its guidance for the second quarter despite its stake in a lagging CRM market.

  • St. Jude: St. Paul, Minn.-based St. Jude "is poised for incremental opportunities in CRM on the back of strong product momentum," with its Fortify and Unify devices gaining ground despite sluggish CRM market growth.

  • Edwards Lifesciences: Irvine, Calif.-based Edwards saw strong growth in heart valve therapy sales in the second quarter; the Zacks analysts see further promise in its critical care segment. Final FDA approval of its Sapien transcatheter valve, expected this fall, also positions Edwards for a boost – not to mention enough cash for acquisitions.

  • Zoll Medical: Chelmsford, Mass.-based resuscitation devices maker Zoll is a leading player in the global market for external defibrillators, valued at about $1 billion. Its LifeVest wearable defibrillator is poised for growth.

  • Abiomed: Danvers, Mass.-based Abiomed boasts a broad portfolio of life-sustaining products and has managed growth in a tough economy, driven by double-digit increases in sales of its Impella cardiac pump.

  • Varian: Palo Alto, Calif.-based radiotherapy device maker Varian is likely to see increased market share thanks to growing demand for its RapidArc systems and "healthy momentum" for its X-ray products.

  • Intuitive Surgical: Sunnyvale, Calif.-based Intuitive Surgical Inc. (NSDQ:ISRG) has delivered a growing revenue stream with its da Vinci robot-assisted surgery system. The device has a virtual corner on the robotic surgery market; the Zacks team predicts it will replace a number of in-person procedures on its way to becoming the standard of care.

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