Euro Weakness Is Expected to Hurt Results at Medical-Device Companies
By JOHANNA BENNETT
Dow Jones Newswires
NEW YORK -- Medical-device companies won't post many upside surprises in their fourth-quarter financial results as weak foreign currencies continued to constrain revenue and earnings growth.
Fourth-quarter sales growth is pegged to remain in the high single digits, due largely to the ill effects of the weak euro. Profits are expected to jump about 13%, a slight sequential decline and well below the 20% growth rate the medical device and products industry experienced during the first half of last year, analysts said.
Still, the sector's biggest names are generally expected to match analysts' expectations. But some of those estimates were cut in the wake of earnings warnings.
"I don't see too many companies beating estimates," said SG Cowen analyst Matt Dodds.
Over the past few weeks, a number of well-known industry players warned investors that financial results will miss Wall Street's mark.
Last week, heart-device company Guidant Corp. said its profits would fall short by two cents or three cents a share due to foreign currency issues and weaker-than-expected sales of its new implantable electronic defibrillator. Vision care companies Bausch & Lomb Inc. and Visx Inc. expect to miss forecasts because of declining demand for vision-correcting surgical lasers and a loss in royalty revenue due to a decline in surgical procedures. MiniMed Inc., which develops and sells products for diabetics, expects profits to miss consensus estimates by as much as two cents a share because of a shortfall in insulin pump sales.
Normally, this many warnings would indicate a fundamental problem in the medical device sector. But analysts contend that isn't so.
Foreign currency pressures weren't unexpected in the fourth quarter and were built into most estimates, especially for medical products companies such as Johnson & Johnson, C.R. Bard Inc. and Becton, Dickinson & Co. Toward the end of the year, however, the euro gained strength and, while too late to bolster fourth-quarter results, the change should benefit first- and second-quarter performance, said Merrill Lynch & Co. analyst Daniel Lemaitre.
"There is nothing here that a little currency tail wind won't fix," Mr. Lemaitre said.
Meanwhile, new disclosure requirements passed by the Securities and Exchange Commission late last year have opened the door to more earnings warnings.
The SEC passed Regulation FD, for fair disclosure, to level the information playing field for all investors. The new rules, which took effect in October, bar companies from sharing important information with a select audience, such as industry analysts or institutional investors. Under the rule, material information intentionally released to a small group must be simultaneously released to the public.
"Regulation FD, I think, has made it harder for people to make changes [in estimates] proactively," Mr. Dodds said. "It's a reflection of no longer being able to give intraquarter guidance so the numbers slide down at the end of the quarter."
But new disclosure regulations and foreign currency pressures weren't a problem for everyone.
Novoste Corp., which markets a device that uses radiation to prevent blockages from forming in coronary blood vessels, announced recently that it will post higher-than-expected fourth-quarter revenue.
Meanwhile, some analysts have been bullish about fourth-quarter prospects for St. Jude Medical Inc.'s new dual-chamber implantable defibrillator, the Photon, and predict the new device could help the company beat Wall Street's views. Some on Wall Street hold out similar hopes for Baxter International Inc. The medical products company stands to benefit from the expansion of the California and European facilities where it manufacturers Recombinant Factor 8, a therapy for hemophiliacs.
Guidant's earnings warning didn't come as a surprise to many Wall Street pundits. The company is best known for making implantable electronic devices that are used to regulate irregular heart beats, as well as stents, wire mesh tubes used to prop open blocked blood vessels. Some analysts were concerned about the continued contraction of the stent industry and growing competition in the defibrillator market.
Guidant is expected to post profits of 40 cents a share compared with 36 cents a share, excluding charges, that the company earned a year ago, according to First Call/Thomson Financial. Previously, First Call projected profits of 43 cents a share.
Rival heart-device company St. Jude launched its first dual-chamber implantable defibrillator, the Photon, sooner-than-expected in the fall. And some analysts predicted an upside to the company's defibrillator sales.
"All eyes are going to be on the Photon," said Lehman Brothers Inc. analyst David Gruber.
St. Jude is expected to report earnings of 47 cents a share compared with 43 cents a share reported last year, according to First Call.
Meanwhile, prospects for Boston Scientific Corp., the nation's largest maker of stents, remain dim in the face of continued erosion in its stent business.
The company's next-generation coronary stent, the Nir Elite, wasn't launched during the quarter, as expected, analysts said. Total sales are expected to fall 6% to 7%, while profits are seen dropping to 23 cents a share from 26 cents a share last year, according to estimates.
Medical-products company Johnson & Johnson is expected to report profits of 64 cents a share -- up from 56 cents a share -- despite what some predict will be sluggish revenue growth.
SG Cowen's Mr. Dodds predicted 4% top-line growth. Lehman Brothers' Mr. Gruber predicted sales growth of more than 6%.
C.R. Bard advised Wall Street last month that it remains comfortable with expectations of 69 cents to 72 cents a share with a revenue increase of 6% to 8% on a constant currency basis.
First Call consensus estimates project profits of 70 cents a share, up from 63 cents a share in the year-earlier period.
Baxter is expected to post a profit of 90 cents a share compared with 78 cents a share, according to First Call. Sales could see an upside as a result of the expanded manufacturing facilities for its Recombinant Factor 8.
Becton, Dickinson is expected to see revenue decline and profits fall from a year earlier after its restructuring plan.
The company is expected to report a profit of 23 cents a share, compared with 29 cents a share.
Write to Johanna Bennett at johanna.bennett@dowjones.com |
