Medtechs At JP Morgan Take Different Tacks

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Includes: BSX, ILMN, MDT, STJ, SYK
by: EP Vantage

Pharma companies often grab the headlines at the JP Morgan conference, but this year there was plenty of activity from those in the medtech sector, and the biggest player drew the biggest crowd.

It has been almost a year since Medtronic’s (NYSE:MDT) purchase of Covidien, and the group's chief executive, Omar Ishrak, used his platform at JP Morgan to argue that the deal had transformed Medtronic. One plus is the $9.3bn that has been released thanks to Covidien’s Irish domicile, and the extra cash will allow the company to invest more in early-stage technology.

Medtronic spent around $1bn on bolt-on deals in the past year. And there could be more to come, with Mr Ishrak saying during the breakout session that there was “some capacity to do more transformative acquisitions”. 2016 could see another spending spree for Medtronic.

Meanwhile, $5bn will be given back to shareholders through stock repurchases before the end of fiscal 2018, on top of Medtronic's current goal of giving back 50% of free cash to investors.

Holy Grail?

Illumina timed the announcement of its liquid biopsy spin-off with the start of JP Morgan and, if the throng to get into its breakout session was anything to go by, attendees’ interest was piqued. The new company, called Grail, aims to enable cancer screening using a blood test, by detecting circulating nucleic acids.

Grail, majority owned by Illumina (NASDAQ:ILMN), has reeled in an impressive $100m in series A funding, with money coming from Arch Venture Partners and Bill Gates, among others.

The idea that cancers shed DNA into the bloodstream is not new, but while other companies are developing liquid biopsies it is hoped that Grail will benefit from Illumina’s sequencing expertise- the bigger company will provide all necessary instruments and consumables, which will keep costs down and help Grail comduct the large-scale trials needed.

Clinical work is to start in 2017, and a test could be available by 2019. However, Deutsche Bank analysts wrote that, while Grail represented “an exciting long-term opportunity”, it would have no real impact on Illumina’s topline growth for several years, and would be a near-term earnings drag.

Liquid biopsy is certainly a hot area for investment right now, with recent fundraisings from Guardant Health and Exosome Diagnostics (VCs rush to liquid biopsy, but only if tech doesn't need approval, January 8, 2016).

Boston Scientific (NYSE:BSX) was one of last year’s big cap medtech success stories thanks to new products, and was keen to highlight the likes of its Synergy stent and Watchman left atrial appendage closure device during its breakout session.

Watchman’s launch has been going well, says Boston's chief exec, Mike Mahoney, despite the device getting a preliminary thumbs-down from the US Centers for Medicare & Medicaid Services in November, which contraindicated it in patients receiving warfarin.

Boston expects more details from CMS on February 8, but still reckons that Watchman will address a $500m market opportunity, assuming 2% penetration, whichever way the decision goes.

Ups and downs

Meanwhile, Stryker (NYSE:SYK) and St. Jude Medical (NYSE:STJ) went through preliminary financials at JP Morgan, and this was a tale of two companies.

Stryker’s fiscal 2015 sales came in at the high end of expectations, and it increased earnings guidance. Chief executive Kevin Lobo highlighted specialisation as a growth driver- this could be important with many medtech companies moving in the opposite direction.

He added that the group would pursue acquisitions as its first use of free cash, a turnaround from 2015 when it only bought two companies, both hospital bed makers. Perhaps some more exciting deals could be on the cards in 2016. Stryker will focus on core and adjacent sectors, and does not need “to wander into new areas of medtech”, Mr Lobo said.

But St. Jude’s stock sank on Wednesday as the problems with its cardiac rhythm management unit continued – and they do not look like going away any time soon.

Its new chief executive, Mike Rousseau, admitted that pressure on this part of the business would continue into the second or third quarter, until the group could launch MRI-compatible devices in the US to plug the portfolio gaps.

Reimbursement is also a sticking point for the company, this time for its Cardiomems heart failure monitoring system. Mr Rousseau is confident this can be resolved, pointing to a 48% decrease in hospitalisations in a recent study.

Elsewhere, Orthofix is bucking the trend of consolidation in the orthopaedics market – its chief executive, Brad Mason, said the company had no intention of doing any big acquisitions in the near future.

And Intuitive Surgical's chief executive, Gary Guthart, was sanguine about competition in the robotic surgery market from Medtronic and Verb, the joint venture between Google and Johnson & Johnson. “Competition is natural and inevitable,” he said during a breakout session. “It’s taken longer than I thought it would.”

He believes that Intuitive is well positioned, with a diverse product line and good understanding of its customers. As for its rivals: “They will deliver what they’ll deliver, and I’ve no idea what their timelines are.”

To contact the writer of this story email Madeleine Armstrong in San Francisco at madeleinea@epvantage.com or follow @medtech_ma on Twitter