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SUNRISE MEDICAL'S PRODUCT INNOVATION WHEELS STOCK AHEAD 42.8% IN 1992; "M-D-D-I" INDEX FALLS 16.5% AS INVESTORS RETREAT FROM MEDICAL TECHNOLOGY

This article was originally published in The Gray Sheet

Executive Summary

Sunrise Medical rolled smoothly on Wall Street in 1993 on the wheels of a steady stream of new products and expansion into new foreign markets. The stock advanced 43%, up 8-1/8 to 27-1/8 for the year. During calendar year 1993 (which straddles the firm's fiscal year ended July 2), Sunrise supplemented its line of custom wheelchairs and rehabilitation/recovery devices with the introduction of over 100 new products that pushed up the firm's bottom line. After releasing 62 new products in fiscal 1992, the firm reported that annual profits of $12 mil. were up 49% compared to the previous year, and that sales were up 20% to $243.9 mil. Sunrise commented that new products "contributed importantly to profits during the last half of [FY] 1992, after absorbing investment dollars in the first half." Sunrise maintained the momentum of new product launches during the first six months of FY 1993 (ended Dec. 31), introducing 37 products during the period. Sales for the first quarter of FY 1993 jumped 38% to $71.7 mil., while income soared 67% to $4 mil. The firm has not yet released figures for the second quarter of FY 1993. Also during 1992, Sunrise initiated a vigorous acquisitions strategy after focusing on internal growth for the previous five years. For an aggregate of $60 mil., the firm completed seven purchases during FY 1992 and two in the first half of FY 1993, adding $55 mil. to net revenues over the course of calendar 1992. For the firm's third quarter of FY 1992, acquisitions accounted for approximately 10% of sales growth of 21% to $62.2 mil. In the fourth quarter of FY 1992, purchases contributed 13% to sales growth of 35% to $76.7 mil. Sunrise's stock, which moved from the NASDAQ National Market system to the New York Stock Exchange in July, split two-for-one in September. At its year-end price, the stock is trading at 29 times FY 1992 earnings. The firm now carries a market valuation of $344.2 mil. Sunrise was one of only 11 stocks on the "M-D-D-I" Index to advance in 1992, a year in which previously high-flying device and medical technology issues performed poorly. As a group, the 32 New York/American Stock Exchange-traded medical device and diagnostic stocks followed on a quarterly basis by "The Gray Sheet" fell 16.5% (see box, p. 27). After outpacing broader market indicators in 1991 with a 51.2% rise, the "M-D-D-I" Index backpedalled in 1992. Its decline compared to a 4.2% gain by the Dow Jones Industrial Average and a 4.5% increase by the Standard & Poor's 500 Index. The NYSE composite advanced 4.7% for the year, while the AMEX was up 1.1%. The "M-D-D-I" Index was dragged down by the heavily weighted diversifieds, whose year-long slump was intensified by the spectra of drug price constraints under the Clinton Administration. For example, Lilly fell 27.2%, or 22-3/4, to 60-3/4; Bristol-Myers Squibb was off 23.7%, or 20-7/8, to 67-3/8; and American Home Products lost 20.2%, or 17-1/8, to close at 67-1/2. Pfizer declined 13.7%, or 11-1/2, to 72-1/2, while Johnson & Johnson lost 11.8%, or 6-3/4, to 50-1/2. While the weakness of the diversifieds can be traced to investors' uncertainty about the future of the drug businesses, pure-play device firms faced adversity specific to the medical technology industry. The most significant problem that developed in 1992 was a slowdown in the rate of approval of new devices by FDA. The agency's review system bogged down under the weight of close oversight of FDA device operations by Congress, particularly House Energy and Commerce oversight subcommittee Chairman John Dingell (D-Mich.). Under pressure from Capitol Hill, the agency undertook a restructuring of the device program. Congress stepped up supervision of device center affairs after several high visibility device safety issues seemed to call into question the quality of FDA's regulatory decisions. In 1992, FDA continued to feel the heat from Capitol Hill over silicone gel- filled breast implants, Pfizer's Bjork-Shiley heart valve and other products. Congressional scrutiny and the attempt at internal reorganization combined to sensitize agency staffers, whose cautious defensiveness resulted in an appreciable decline in the number of approvals. In light of the FDA slowdown, the ability of Sunrise and another strong stock performer in 1992, Becton Dickinson, to continue to deliver new products to the market stands out from the crowd. During FY 1992, Sunrise's new product parade was led by its custom wheelchairs, which are manufactured and marketed by its Quickie Designs subsidiary. Quickie launched five new products, including the 19-pound rigid Quickie Carbon wheelchair, the 21- pound Quickie 2HP Titanium -- described as the lightest folding chair on the market -- and the pediatric Zippie 3, which converts from a conventional wheelchair to a "stander." Quickie also introduced 23 product enhancements and eight new frame colors. Also in 1992, Sunrise entered the standard chrome-plated steel wheelchair market with the Hoyer series of chairs, which are designed for use in institutional settings. Available in seven models, the Hoyer chairs are being sold to home medical equipment dealers and hospital supply distributors by Sunrise's Guardian Products sales force, a 38-person team dedicated to selling patient aids such as walkers, crutches, commodes and lifters. Other product areas in which Sunrise made introductions through subsidiaries included therapeutic mattresses and nursing home furniture. The year also marked a bolstering of Sunrise's European presence. The firm, which already had a United Kingdom wheelchair and motorized stairlift subsidiary, acquired German racing wheelchair manufacturer Sopur in January ("The Gray Sheet" Jan. 27, p. 11). Besides providing Sunrise with its first racing wheelchairs, the Sopur purchase added distribution operations in Germany, Austria, The Netherlands, and Czechoslovakia. In February, Sunrise acquired Spanish manufacturing and distribution facilities through the purchase of Talleres Uribarri, which makes standard wheelchairs and patient aids. Sunrise is using Uribarri's network to distribute its own products and is exporting Uribarri's products outside Spain through its other European sales organizations ("The Gray Sheet" March 2, In Brief). Also last year, Sunrise established direct sales and distribution operations covering France, Belgium and Luxembourg. The firm recently announced plans for a secondary offering of 2.5 mil. shares of common stock ("The Gray Sheet" Jan. 4, p. 11). Proceeds from the offering -- which is being underwritten by Kidder, Peabody, Goldman, Sachs, and Smith Barney, Harris Upham -- will be used to repay $25 mil. in debt incurred from acquisitions. The remainder of the proceeds will be used for future purchases and general corporate purposes. Like Sunrise, Becton Dickinson was able to garner investor enthusiasm by offering a steady stream of innovative products throughout the year. Overall, B-D's stock added 14.8%, or 10-1/8, to 78-5/8. The stock gain reversed an 8.1% decline in 1991. Chief among B-D's new products were those addressing the increased concern over the risk of infection from blood-borne pathogens. These include the InterLink intravenous access system, to which B-D holds an exclusive worldwide manufacturing and marketing license from Baxter. InterLink replaces conventional steel needles with blunt plastic cannulas that cannot penetrate the skin. As a result, the system protects against accidental needlesticks when fluids and drugs are introduced into I.V. lines. In addition, B-D has begun to roll out the Insyte Saf-T-Cath, an intravenous catheter/needle unit whose needle-shielding mechanism locks over the sharp tip of the needle as it is withdrawn from the catheter. The system is intended to decrease the risk of accidental needlesticks during catherization. Fueled by growing concern over latex sensitivity, B-D developed and introduced the non-latex SensiCare synthetic medical glove. Tests of the glove material on more than 200 patients "have resulted in zero reactions, indicating that B-D SensiCare material is truly hypoallergenic," the firm says. B-D's infectious disease diagnosis product line was enhanced by the BACTEC 9240, a third-generation automated blood culture screening instrument designed to continuously and simultaneously test up to 240 blood samples. The firm also launched the lower- priced BACTEC 9120, which is based on the same technology as the 9240 and can test up to 120 samples. In the cellular analysis area, B-D brought to market three instruments for research use: the FACStrak automated cell analyzer, a low-priced system for small hospitals and laboratories; FACSort, a cell sorting instrument that "does not involve the formation of potentially biohazardous aerosols"; and the FACS Vantage, a flow cytometer that can speedily sort a range of cells and particles. In 1993, B-D expects to launch the FACSCount, an instrument capable of providing CD4, CD8 and CD3 counts for use in monitoring the status of HIV-positive patients ("The Gray Sheet" Sept. 14, I&W-3). Through the acquisition of Cell Analysis Systems, B-D brought to market the CAS 200, a research instrument that provides dual- color image analysis for use in the staging and monitoring of solid tumors ("The Gray Sheet" March 23, p. 11). The CAS 200 system supplements B-D's Discovery image analysis instrument, which is being sold in Europe and is expected to reach the U.S. in 1993. B-D also bolstered its position in the manual blood culturing arena with the purchase of Hoffmann-La Roche's microbiology business for approximately $70 mil. ("The Gray Sheet" April 13, I&W-2). The purchase provided B-D with such products as the Septi- Chek blood culture system for the diagnosis of septicemia, the Septi-Chek AFB for the detection of mycobacteria related to tuberculosis and systems for the diagnosis of urinary tract infection. B-D's plans for 1993 call for the consolidation of its European warehousing and distribution operations. In its annual report, B-D says the consolidation, which is expected to cost $7 mil., will enable it to provide "enhanced customer service and more efficient inventory management." Bard was able to inspire investor confidence with further evidence that it is capable of effecting a full-force re-entry in the U.S. coronary balloon angioplasty market. For the year, the stock moved forward 8.2%, or 2-1/2, to 33-1/8. After stumbling through a series of FDA regulatory woes that forced Bard to completely withdraw from the U.S. angioplasty market in mid-1990, the firm now offers four balloon catheters in the U.S.: the Probe III fixed-wire balloon catheter, which received FDA approval in April 1991; the Force and Sprint over- the-wire catheters, which reached the market in late 1991; and the Solo over-the-wire device, approved by FDA this past October. About a dozen Bard angioplasty products are pending at FDA. Among the anticipated new devices are the Xprt over-the-wire catheter, currently available in international markets, the Agil over-the-wire device and the Probe Quattro, a next-generation version of the Probe III. The Agil and Probe Quattro both are expected to be rolled out internationally in the first quarter of 1993 ("The Gray Sheet" Dec. 14, p. 33). Also in 1993, Bard expects to introduce in the U.S. at least one rapid-exchange balloon catheter product. Overseas, Bard currently is selling the Solitaire rapid-exchange device and is preparing for a launch of the Pronto rapid-exchange catheter. Another product Bard expects to come to market in 1993 is Contigen, a collagen implant for the treatment of urinary incontinence developed by Collagen Corp. Bard holds a license for exclusive worldwide marketing of the product. A premarket approval application for Contigen was submitted to FDA in March 1989 and recommended for approval by FDA's gastroenterology-urology devices panel in October 1990. Collagen submitted an update to the PMA's clinical data in August 1991 following a March 1991 request for further information from the agency. This past September, FDA made a second request for data related to Contigen, asking for information including documentation of the pretreatment incontinence conditions of patients in the PMA studies ("The Gray Sheet" Oct. 26, I&W-6). Collagen has said it does not believe it will need to conduct further studies to address FDA's questions. If Contigen is approved in 1993, Bard is likely to have a corner on the market. Approval of Contigen's chief competitor, Mentor's Urethrin urinary stress incontinence product, has likely been delayed at least two years by a November request from FDA for additional safety and effectiveness data ("The Gray Sheet" Nov. 16, p. 9). A wild card in Bard's future is the Urolase side-firing laser catheter, which the firm licenses from Trimedyne for urology, gynecology, and gastroenterology applications. At FDA's request, Bard in October halted surgeon training courses and marketing efforts aimed at use of the device in the treatment of benign prostatic hyperplasia ("The Gray Sheet" Nov. 9, I&W-11). Although BPH is the most touted market for Urolase, the device continues to be marketed by Bard for other indications. Medtronic also was able to hold onto investor interest with its pipeline of innovative products. The stock closed the year at 95-1/4, up 1.3%, or 1-1/4. Currently poised for U.S. market entry is the PCD pacer- cardioverter-defibrillator, an implantable device for the staged treatment of ventricular tachycardia. Medtronic received an "approvable" letter for the PCD from FDA in September; the PMA was recommended for approval by FDA's circulatory system devices panel in February. Also awaiting FDA approval is Medtronic's Transvene lead system, designed for use with the PCD. The lead system eliminates the need to use an open chest thoracotomy procedure to implant the PCD. In addition, the firm has developed two new generations of the PCD that will begin European clinicals in 1993: a lighter weight PCD device and a version that offers enhanced capabilities ("The Gray Sheet" Dec. 7, I&W-9). Medtronic could face immediate competition in marketing the PCD from Ventritex, which recently received an approvable letter for its PMA for the Cadence pacer-cardioverter-defibrillator ("The Gray Sheet" Jan. 4, In Brief). However, Ventritex is behind Medtronic with a transvenous lead system for its device. The firm currently is preparing to submit an investigational device exemption to begin U.S. studies of its transvenous lead system ("The Gray Sheet" Dec. 7, I&W-8). The best performance on the "M-D-D-I" Index was by Enzo Biochem, which was one of only two companies to surpass its 1991 results. The stock followed up on a 76.5% advance in 1991 with a gain of 96.7%, increasing 3-5/8 to 7-3/8. During the year, the biotechnology and diagnostic services company began offering for research use a non-radioactive DNA probe-based test for the rapid detection of tuberculosis-causing bacteria. Enzo also introduced a research diagnostic kit "to systematically detect any DNA target." In addition, the firm improved its financial status, reducing its losses during FY 1992 (year ended July 31) and increasing equity. The firm reported a loss of $646,200 on sales of $20.5 mil. in FY 1992, compared to a loss of $11.6 mil. on revenues of $19.8 mil. in FY 1991. The company eliminated debt of $572,300 and boosted equity to $33 mil. following the conversion of its previously outstanding 9% convertible subordinated debentures ("The Gray Sheet" Feb. 17, p. 25). Coming off two stellar years of stock growth, U.S. Surgical underwent a market correction in 1992. The stock depreciated 38.1%, or 42-1/4, to 68-3/4 after surging 212% in 1991 and 162% in 1990. The stock is selling at a more attractive price-earnings ratio than it has in recent years: at its year-end close, U.S. Surgical's stock was trading at 44 times FY 1991 earnings and 29 times estimated FY 1992 earnings. By comparison, the stock at its closing at the end of 1991 traded for 70 times FY 1991 earnings. Investors' giddy enthusiasm for U.S. Surgical in prior years stemmed from the company's pioneering role in the exploding laparoscopic surgical instrument field. The firm was first to market with a disposable trocar and a disposable surgical clip applier, which fomented a movement toward the routine use of laparoscopic procedures for gall bladder removal. During 1992, the firm retained its position as the dominant player in the laparoscopic market. However, U.S. Surgical has faced skepticism from the investment community over the speed at which physicians are adopting laparoscopic technique for procedures other than gallbladder removal. In a September report on U.S. Surgical, Shearson Lehman analyst Mimi Willard expressed concern that conversion to laparoscopic hernia repair, hysterectomies and lung surgery "is going more slowly than generally recognized." She also worried about "an unfolding backlash against disposables in favor of reusables." In addition, growing anxiety over the adequacy of surgeon training caused at least one state, New York, to adopt guidelines that require certification of surgeons for laparoscopic cholecystectomy ("The Gray Sheet" June 22, I&W-12). The laparoscopic instrument field also is increasingly competitive. Johnson & Johnson underscored its corporate commitment to laparoscopy in 1992 by creating a separate company, Ethicon Endo-Surgery, to house its mechanical wound closure and endoscopy products ("The Gray Sheet" Feb. 3, p. 10). American Home Products also entered the field through the September acquisition of privately held OEM supplier Symbiosis ("The Gray Sheet" Sept. 28, p. 3). Other "Index" players in the field include Lilly's Origin Medsystems subsidiary. Acuson and Diasonics saw their stock prices roughly halved during 1992, reflecting the continued softness in the ultrasound market. For the year, Acuson dropped 51% (losing 16-3/8 to 15- 3/4), while Diasonics was off 48.1% (down 12-7/8 to 13-7/8). A principal portion of Acuson's decline occurred in February, when the firm predicted its first quarter earnings would be flat. The stock, which lost 40%, or 8, to 22-7/8 following the announcement, never recovered and drifted down to the mid-to-high teens range by the middle of the year. In the fall, Acuson initiated a cost-control plan that included three to four weeks of plant shutdowns ("The Gray Sheet" Oct. 12, In Brief). In a December report, ValueLine analyst Phillip Seligman rated Acuson's stock "untimely" and noted that its "near-term prospects don't look appealing." However, he predicted that Acuson's bottom line could get a boost in 1993 from the Aegis ultrasound management system, which digitally captures and stores ultrasound images, allows "unattended" image printing and enables physicians to review cases from remote locations. The product is expected to reach the market in mid-1993 ("The Gray Sheet" Oct. 19, p. 7). Diasonics' stock also was hit early in the year when it released flat sales and earnings results for the fourth quarter of FY 1991. Results continued to be negatively affected during the first half of 1992 due to costs associated with launching an upgrade to the Spectra ultrasound imaging system, known as Variable Summation Technology. Since shipments of the VST package began in June, however, Diasonics has reported that it is "cautiously optimistic" about the product's acceptance. Lilly (off 27.2%, or 22-3/4, to 60-3/4) experienced the biggest percentage loss among the Index' diversifieds. Besides being subject to investors' drug pricing concerns, the issue was hampered by regulatory problems in several of its device subsidiaries. Since July, Lilly's external defibrillator products subsidiary, Physio-Control, has been barred by FDA from manufacturing and selling the devices due to violations of good manufacturing practices and medical device reporting requirements. Physio-Control failed a followup inspection late in the year. Lilly's Advanced Cardiovascular Systems subsidiary was forced to temporarily suspend marketing of two rapid-exchange balloon angioplasty catheters in August after it failed to receive FDA approval of design changes. Shipments of one of the catheters, the ACS RX Streak .014, were resumed in October after FDA approved a PMA supplement covering the changes. Most recently, Lilly's Cardiac Pacemaker, Inc. subsidiary received an FDA warning letter stating that its Vista pacemakers require PMA supplements to cover modifications made to the devices. The halt in Physio-Control's operations and the temporary suspension of shipments of the ACS RX Streak .014 catheter caused sales at Lilly's medical device and diagnostics division to decline "slightly" during the third quarter, according to the company. The firm also took a loss of $268.5 mil. for the three months as a result of the device unit problems and certain "strategic actions." For the nine months, Lilly's earnings declined 60.4% to $397.5 mil. Baxter's stock (off 19.1%, or 7-5/8, to 32-3/8) showed minimal effect from the firm's spinoff late in the year of its high-growth alternate site care businesses as a separate company, Caremark. The spinoff was designed to eliminate "competitive conflict" between Baxter's hospital products customers and those of its alternate site businesses, which included home infusion therapy, physical therapy/rehabilitation services, and prescription drug benefit management services. Baxter plans to firm up its remaining hospital products operations with the proposed acquisition of Stuart Medical's medical products distribution business, which was expected to have sales of approximately $900 mil. in 1992. The deal is expected to close during the first quarter of 1993. Taking the hardest knock among the "Index" stocks was Mountain Medical (off 1-3/8, or 64.7%, to 3/4). The respiratory therapy equipment manufacturer has been on shaky financial ground throughout the year, reporting second quarter (ended Sept. 30) sales of $3.8 mil., down 6% from the year-ago period. Sales of the firm's primary product line, oxygen concentrators, were off 14% during the second quarter, while sales of medication nebulizers declined 31%. Mountain Medical's loss for the period was $4.1 mil., compared to a loss of $6.8 mil. in the same period last year. To conserve cash, Mountain Medical announced Jan. 8 that it is permanently reducing its workforce by approximately 35 persons. In December, the firm effected what it described as a "temporary" production cessation ("The Gray Sheet" Dec. 21, In Brief). The firm intends to develop plans for increasing its operating efficiencies under a consulting agreement with liquid oxygen systems supplier Cryogenic Associates. The consulting agreement also will allow Cryogenic Associates to "assess the feasibility" of a "business combination" between the two firms, according to Mountain Medical. Cooper Companies, which ended the year at 1-1/4, down 63%, or 2-1/8, has undergone a series of highly public management woes. In May, the firm suspended co-Chairman Bruce Sturman after he filed a suit charging Cooper's board and co-Chairman Gary Singer with breach of fiduciary duties. Singer, who took a voluntary leave of absence the same day Sturman was suspended, was charged in November in a criminal suit filed by the U.S. Attorney for the Southern District of New York and in a Securities and Exchange Commission civil injunction suit ("The Gray Sheet" Nov. 16, p. 16).
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