To: Ron Luhmann who wrote (11083 ) 11/29/1998 9:54:00 AM From: Ace Respond to of 14328
Industry Outlook The Medical Products & Supplies Index increased in tandem with the general market rally in recent weeks, boosted by healthy third quarter earnings showings and investor movement to recession resistant medical stocks. Despite the effects of negative foreign exchange, the overall group should continue to post strong double-digit earnings growth over the next few quarters. Key positives include expanding global health care markets, new products and cost-streamlining measures. Takeover interest in the group is another plus as evidenced by several recent acquisitions made in this sector. Our investment outlook remains positive. We recommend investments in companies with dominant positions in growing markets, which also have proven track records in developing and marketing innovative, cost-effective products. While these companies should enjoy healthy earnings growth, the gains are expected to be tempered by the growth of managed care. With its emphasis on cost efficiency, managed care has prompted more conscientious buying patterns by hospitals and other purchasers, especially for "big ticket" items. Producers have also been impacted by tighter hospital budgets and consolidation in the hospital industry. Largely in response to a more competitive marketplace, merger activity has increased as producers seek business combinations to compete more effectively and reduce costs. After many years of lobbying by drug and medical devices companies, legislation designed to speed up and streamline the FDA approval process for new drugs and devices was signed into law by President Clinton in 1997. One important part of the legislation deals with having independent outside experts review safety and efficacy data on new device applications. However, the purview of the outside reviewers would be limited to lower-risk products, with the FDA itself still responsible for higher-risk devices. Other positive longer-term fundamentals include the nation's insistence on quality health care; the swelling ranks of the elderly (principal consumers of medical products); and rising R&D outlays, which should spawn a steady flow of new diagnostic and therapeutic products in the future. Niche-oriented companies focusing on successful specialty products, particularly in the high-technology segment, should outperform the industry average.