‘Medical Minefield’ May Be Boost for Smallcap Medical Device Stocks

Headline writers at the New York Times call it a “medical minefield,” referring to the Obama administration plan to spend $1.1 billion on studies to compare the effectiveness of competing treatments for common conditions such as back pain, heart disease and prostate cancer. The Times story noted that medical researchers, consumer groups and insurers are supporters of the plan, which they say will curb the widespread use of ineffective treatments and help control health care costs. Opponents, including some large medical products companies, doctors and their political allies and commentators including Rush Limbaugh, argue that this is the first step toward rationing health care and socialized medicine. A similar effort in the mid-1990s was fought back by Republicans (http://www.nytimes.com/2009/05/07/business/07compare.html?_r=1&scp=3&sq=barry%20meier&st=Search)

Government health experts are currently holding public hearings on possible medical conditions that could be the focus of comparative effectiveness reviews and final recommendations will be made by late June.

This bill could be an important boost to many smallcap medical device companies that don’t have the marketing muscle to compete with the larger medical products companies like Medtronic and Johnson & Johnson, among others. One might be Irvine, CA-based Endocare (Nasdaq: ENDO, http://www.endocare.com), which makes an ablation device that freezes and destroys tumors in the prostate (as well as in the kidneys, lungs and other parts of the body) called cryoablation. Endocare executives and urologists who champion cryoablation have been frustrated by physicians who do not include it as an option for prostate cancer patients.

Other potential beneficiaries include Irvine, CA-based CardioGenesis (CGCP.PK, http://www.cardiogenesis.com) which manufactures and sells laser-based surgical products for treating advanced cardiovascular disease. While the company has been hampered by government regulators who have been slow to clear its products for market, many patients who have undergone the laser treatment for angina pain are among the company’s most ardent supporters. A new effectivness study could help Tewksbury, MA-based Cambridge Heart (OTCBB: CAMH.OB, http://www.cambridgeheart.com) which develops a test that can help determine a patient’s risk of sudden cardiac arrest. The company stock cratered when data from a study challenged the effectiveness of the Cambridge Heart test, but Cambridge Heart produced a number of new studies that indicate the data in question was seriously flawed.

Irvine, CA-based Endologix (Nasdaq: ELGX, http://www.endologix.com), which makes a stent for the treatment of abdominal aortic aneurysm, is typical of a small company competing with much larger companies such as Medtronic. If a new, objective study showed its stent system was as effective as its competitors, its stockholders and patients could be the biggest beneficiaries. Poway, CA-based Digirad (Nasdaq: DRAD, http://www.digirad.com), a provider of cardiac imaging and nuclear medicine imaging products to physician offices, has very effective imaging technologies but is going up against much larger competitors, including Siemens and GE, with a much smaller marketing engine. Finally, Montgomeryville, PA-based PhotoMedex (Nasdaq: PHMD, http://www.photomedex.com), a medical device and specialty pharmaceutical company, has a laser-based psoriasis treatment that stands up very well to its competitors clinically but, like the other smallcaps on our list, struggles to get traction in a crowded market.


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