There is a useful backgrounder in today’s NY Times on why medical device maker Guidant, despite its troubles, is on the receiving end of a bidding war. It has a lot to do with the relative effectiveness of many current medical devices, as well as the age-induced Steve Austin-style remaking of baby boomers:
But since 2000, earnings growth has slowed for drug makers as blockbuster drugs of the 1990’s came off patent and successors proved hard to find. In the meantime, leading device companies have proved adept at racking up year after year of double-digit revenue and earnings growth. Unlike drug makers, device company can continually tinker with hit products to produce a steady stream of incremental improvements that can be used to justify price increases.
And unlike drugs, devices can be designed with electronic components that link them to computers and communications networks, allowing data from patients with implants to be monitored remotely. Guidant’s innovations in such patient monitoring and networking, marketed under the Latitude brand name, are among the enhancements it is counting on to help rebuild market share.
Stock activity in the last five years attests to the diverging fortunes of drug and device makers. From the beginning of 2000 to the end of 2005, the share price of Pfizer, the largest drug company, declined 10.7 percent, while the stock of Medtronic, the largest independent device company, was rising 63.2 percent.
Another useful reminder from the piece is this: Many of the drug makers used to own device companies, but they saw them as a drag on growth. Eli Lilly unloaded Guidant in 1994, and Bristol-Meyers sold off Zimmer (now the largest maker of artificial hips and joints) in 2001. Ouch.