By Jon Kamp
Of DOW JONES NEWSWIRES
BOSTON -(Dow Jones)- While hospitals grapple with the economic downturn and the potential effects of health-care reform, they are pushing their financial troubles onto big medical-device companies.
It's having an effect, according to executives at Johnson & Johnson (JNJ), Boston Scientific Corp. (BSX) and St. Jude Medical Inc. (STJ), all of which have reported signs of mounting pressure. It is not a brand-new phenomenon, but it is one that may worsen as hospitals battle to control costs.
"I think it's the new reality," said Jan Wald, a devices analyst with Noble Financial. "I think all the companies are going to be facing stiffer pricing pressure."
St. Jude discussed the issue Wednesday when it reviewed details behind soft third-quarter results. While international sales surged, U.S. growth was weak due to about 50 hospitals either straying from normal quarter-end buying patterns for heart-rhythm devices or pushing St. Jude for price cuts.
The company walked away from discounts, and Chief Executive Daniel J. Starks said average selling prices for St. Jude's heart-rhythm devices were "very stable." But he also acknowledged that pressure is growing, and said "maybe over time we need to be more flexible."
"Nobody has enough money in their budgets, and everybody wants to cut costs," he said.
Boston Scientific may have taken the bait. St. Jude's rival in the $11 billion market for heart-rhythm implants saw its gross profit margin decline between the second and third quarters due to ongoing price pressure in several key markets.
That includes the heart-rhythm market, which includes pacemakers and defibrillators, or ICDs. Chief Executive Ray Elliott said Tuesday that pricing in that market "did worsen a little bit." Top heart-rhythm devices can cost more than $30,000 in the U.S.
According to Lazard Capital Markets analyst Sean Lavin, "it is clear that a number of hospitals are pushing on ICD pricing." Market trends will be come clearer next month when heart-rhythm heavyweight Medtronic Inc. (MDT) reports.
Meantime, Boston Scientific continued to report erosion in the market for drug-coated stents, which are tiny scaffolds for heart arteries that often cost around $2,000 domestically. Price declines more than offset some positive unit trends and caused the market to contract last quarter, the company said.
"We have seen some improvements in cardiac implant pricing; specifically, stents," said John Merriwether, spokesman for hospital operator Health Management Associates Inc. (HMA). The company has been evaluating all opportunities to boost efficiency, "and medical device and implant costs are no exception," he said.
Conglomerate J&J has a huge medical devices and diagnostics business that recently became the company's biggest division. "I think clearly we're feeling increasing pricing pressure," Alex Gorsky, the division's worldwide chairman, said last week, "and I think that's part of what's going on in the economy."
This heightens the importance of rolling out new products, Gorsky said. New devices or upgrades for old ones can help manufacturers fetch price increases--this "mix" benefit can, in turn, help pad sales growth.
The recent pricing pressure issue isn't universal. Orthopedic device-maker Stryker Corp. (SYK), for example, said Tuesday that pricing trends appear stable and haven't changed since the second quarter. Analyst Wald noted, however, that orthopedic companies in particular have already been feeling price pressure for years.
Pricing for devices, which range from disposable syringes and gauze to high-tech imaging machines, can be very complex. Hospitals often use group purchasing organizations to consolidate buying power and drive down prices on cheaper, commodity products, but bargain on their own for high-priced items like heart and orthopedic implants.
These are often called "physician preference" devices because doctors decide what to use, and their decisions carry clout. Meanwhile, the cost of such devices--which can be tough to discern across the market because manufacturers shield price data with confidentiality clauses--are frequently recouped through Medicare based on codes tied to procedures.
John C. Heinmiller, St. Jude's chief financial officer, noted that procedures with heart-rhythm devices remain profitable for hospitals. But hospitals have to look at the big picture, and raising margins on devices may help them close gaps elsewhere, analyst Wald said.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com
(Dinah Wisenberg Brin contributed to this article.)