The Key To Healthy Growth
Victor Reklaitis
On Friday September 4, 2009, 5:53 pm EDT
Many medical equipment companies have taken a hit during the recession as hospitals cut capital spending.

"If you look at capital equipment budgets, there's been a huge decrease in overall capital outlays for the laboratory by the hospital," Stephens analyst Scott Gleason said. "That's been a big challenge."

About 77% of U.S. hospitals have slashed their capital spending on clinical technology, facility upgrades or information technology since early 2008, according to a survey by the American Hospital Association.

The mix of companies in the medical systems and equipment group is diverse. It ranges from medical robotics to heart instruments to radiation therapy products to patient monitoring systems.

The strongest performers are device and gear makers with business models tied to cheaper disposable products, rather than big-ticket items, or to critical procedures rather than elective surgeries.

Case in point: Abaxis (NasdaqGS:ABAX - News), which makes portable machines that can rapidly test blood. Other top performers include wound-care firm Kinetic Concepts (NYSE:KCI - News), Sirona Dental Systems (NasdaqGS:SIRO - News) and Idexx Laboratories (NasdaqGS:IDXX - News), which competes with Abaxis.

As of Friday, the group of 80 companies ranked No. 70 among IBD's 197 industry groups.

1. Business

Susquehanna analyst David Turkaly has a straightforward explanation for how many medical equipment companies are staying alive and even thriving.

"Drugs work for a lot of things, but they haven't figured it all out. There's not a pill for everything yet," he said. Medical gear and systems firms are often "targeting an area that a drug by itself, at least in this day, can't handle," Turkaly said.

It's a competitive field, with leading companies putting a big emphasis on research and development spending and new products. Big companies are also constantly on the prowl for innovative small firms.

"The 'buy 'em up and consolidate' theme is always an important one in the space," Turkaly told IBD. "You're seeing deals even in a tough economy."

Kinetic Concepts bought tissue grafts provider LifeCell for $1.7 billion last year. And in 2007, mammography products firm Hologic (NasdaqGS:HOLX - News) merged with Pap smear test maker Cytyc in a deal worth $6 billion.

During the recession, firms whose main offerings are tied to critical care have fared better than those linked to procedures that can be put off...part 1