By Jon Kamp, Dow Jones Newswires
While the medical-devices industry faces regulatory and economic pressures that could weigh on product prices and boost costs, this is business as usual and not a major new problem, according to Medtronic's chief executive.
An industry veteran familiar with fallout from the Clinton-era health debate, the introduction of Medicare reimbursement codes that can influence device costs and ever-present pressure from hospitals, Chairman and CEO William Hawkins said the sector has been here before.
"These are cycles that we go through, but it's part of the business model," Hawkins said in an interview with Dow Jones Newswires.
The pressure seems amplified right now as the current health overhaul threatens to bring a new medical-devices tax and recession-scarred hospitals try to clamp down on device prices. Device makers also face the prospect of higher costs as the Food and Drug Administration hands out "warning letters" for issues at company facilities and reviews a fast-track approval process that has drawn criticism for leniency.
With an eye on these issues, St. Jude Medical Inc. (STJ) on Monday shifted away from a historic company goal of 15% growth in annual per-share earnings, and said it's targeting double-digit growth this year. The company's chief executive cautioned that this isn't official guidance.
Medtronic competes with St. Jude in the $11 billion market for implantable heart-rhythm devices such as defibrillators. From Hawkins' perspective, these issues are part of doing business in the medical-devices sector.
"There's no question that those things are happening, but this is what we've had to navigate through for years," he said.
His company has already made adjustments, and Hawkins reiterated Medtronic's long-term outlook for 5% to 8% annual sales growth and 10% or better earnings- per-share growth. He lowered the company's financial targets a year ago, and Medtronic also had layoffs last year as part of restructuring moves.
"We saw some of these trends and we reconfigured our business model early on," Hawkins said.
He noted that the FDA has a history of becoming more and less challenging for device makers depending on the administration and agency leadership in charge, and that with new leadership in place now, a tougher environment isn't unexpected. The FDA was very challenging in 1994, he noted.
As for hospitals trying to hold the line on device costs, this is a long- running trend Hawkins said.
"Hospitals have always been under pressure," he said.
The potential $2 billion-per-year industry tax is a new issue, and Medtronic believes the Senate version--which would start hitting the industry Jan. 1, 2011 rather than two years later, as in the House version--is more likely. Hawkins said he's worried in the short term about how the tax will affect some companies and device-sector jobs, but that it will be "manageable."