MedTech Analyzer
SECTOR REVIEW
Jan 2009: Valuations Look Attractive, But Near
Term News Flow and Fundamentals Do Not
■  For most of the year, the S&P 500 Healthcare Equipment & Supply stocks
outperformed the S&P 500. However, beginning in September, MedTech
underperformed the market as concerns regarding foreign exchange and
macro economy spillover weighed on the group. Nevertheless, MedTech
(down 28.3%) ended 2008 ahead of the S&P 500 (down 38.5%).
■  We don’t see many near-term positive performance drivers for MedTech.
o Utilization under pressure. There are signs to suggest elective
procedure volumes are under pressure due to the broader macro issues.
Within our universe, we believe orthopedics are most exposed, but lower
volumes across the board will impact all companies.
o Hospital capex is not a place to be. We believe we are only seeing the
tip of the iceberg and trends are likely to deteriorate in 2009.
o No major new products. With the exception of transcatheter valves, we
don’t see any major new product cycles to drive sector growth/interest.
o Pricing and mix could be more difficult. Hospital financial strains are
likely to lead to intensifying pressure to control costs. A lack of new
products is also likely to lead to less favorable mix.
■  While we believe sentiment toward the group is low, as reflected by the
valuations, it could get worse in the near term as companies report 4Q08
results and provide 2009 guidance. In most cases, the confidence level in
guidance will be low given the lack of visibility on all the moving parts (e.g.
FX, elective volumes, capex, pension costs).
■  We think investors should be defensively positioned within the group early in
the year. We feel most comfortable with EW (Outperform), which we select
as our top pick for the year. Given the valuation, we also like COV
(Outperform). While we rate BAX and BDX Neutral, we do see some
defensive appeal, limited downside with potential near-term upside as both
stocks have pulled back. We are most cautious on SYK (Neutral) and
believe there’s still near-term downside risk (we’ve lowered our 2009 EPS
estimate to $3.06 from $3.15 and our target price is $36). We’re also
somewhat cautious on ZMH (Neutral) and STJ (Neutral) in the near-term.
When the dust settles post-4Q results, we think there could be some more
opportunities on the horizon. Stay tuned.

Table of contents
Outlook 2009: Our View On The Sector 3
Our Views On The Stocks 4
A Look Back at 2008 8
Sector Performance Review 9
Macro Environment Drove Relative Outperformance in 2008 10
MedTech Performance By Market Cap 11
MedTech’s Performance Versus the Rest of Healthcare 12
Healthcare’s Performance Versus the S&P 500 13
What Drove MedTech Stocks In 2008 14
MedTech Valuations 18
Sector Screens “Cheap” (But Don’t They All?) 19
Event Calendar 2009 22
Hot Topics 27
Foreign Exchange Rate Movements Adds Volatility To Forecasts 28
Macro Economic Spill Over Effects Evident 32
The M&A Environment: Bye Bye In-Process R&D Charges 37
The Political Environment 38
Company Profiles and Earnings Previews 39
Bard (BCR-Neutral) 40
Baxter International (BAX-Neutral) 52
Becton Dickinson (BDX-Neutral) 70
Boston Scientific (BSX-Neutral) 86
Covidien (COV-Outperform) 100
Edwards Lifesciences (EW-Outperform) 114
Medtronic (MDT-Neutral) 126
Nanosphere (NSPH-Outperform) 142
St. Jude Medical (STJ-Neutral) 148
Stryker (SYK-Neutral) 161
Zimmer Holdings (ZMH-Neutral) 173
Major Product Categories 187
Cardiac Rhythm Management (CRM) 188
Coronary Stents 194
Heart Valves 201
Orthopedics 207
Blood Plasma Market 210
Glossary 211

Outlook 2009: Our View On The Sector 
Valuations Look Attractive, But Near Term News Flow and Fundamentals Do Not
Our Thoughts On The Group
In our view, the macro environment was the main performance driver in 2008
and it will likely be the case in 2009. To the extent the market recovers, we
believe the group will underperform on a relative basis but as the market
struggles, the group does offer some (emphasis on some) defensive appeal.
There is a fair amount of debate on where the S&P 500 will ultimately go this
year. Credit Suisse.s macro view is that we are in the biggest economic and
financial crisis since 1945 and that it will take two to three years for GDP
growth to revert to trend. Our global strategist has a year-end S&P 500 target
of 1,050. Under this scenario, we believe the rising tide lifts all boats theory will
help the group.s absolute performance, but relative performance may be more
challenging.
Our earlier comment on .some. defensive appeal was based on our view that
MedTech is not immune to the macro economic environment. Sure its not as
exposed as some other areas like consumer discretionary, but the group
nevertheless has exposure. There.s a growing amount of data points
suggesting that individuals are holding back on healthcare utilization. An
American Hospital Association survey showed many institutions were seeing a
slowdown in elective procedure volumes. Many hospitals are in financial
distress (slowing admissions, rising bad debt, and higher cost--if they can get
it--of capital) and are reconsidering capital equipment purchases. We.ve
already seen some companies preannouncing citing pullbacks in capex
spending trends with Stryker, ConMed, and Intuitive being the more recent
examples. We believe we.re still in the third inning when it comes to seeing the
flow through of the broader macro issues on procedures and capex.
When companies present at investor conferences in the coming weeks and
host their 4Q conference calls, we don.t see how most managements can
provide an optimistic view or convey a high degree of conviction on guidance
for 2009 given all the moving parts. To name a few, there.s foreign exchange
rate volatility, concerns on the slowing utilization, questions on the pricing and
mix environment, and no visibility in hospital capex spending.
When the dust settles post-4Q results, we think there could be some more
opportunities on the horizon when one considers valuations in the group. Stay
tuned.
Positives for the Group
■ Relative macro exposure: MedTech is not immune from the macro
factors, but not as exposed as some other economic sectors.
■ Valuation: the stocks are trading at or near lows made during the Clinton
Healthcare reform era (though in most cases still above valuation levels
during the DRG implementation period in the 1980s).
Unclear/mixed:
■ Healthcare reform environment: The economy is clearly the top priority
of the new Administration. However, healthcare reform and expansion of
coverage is far from being off the table.
■ Foreign exchange rates: The weaker dollar was a positive contributor
through much of 2008 and will be a drag in 2009. That said, we do believe
that the FX impact has been discounted into the stocks.
Negatives:
■ Near-term news flow: We expect management teams to be more
cautious on the outlook given all the moving parts with the economic
spillover potential and foreign exchange rate movements.
■ Product cycles: With the exception of transcatheter valves for Edwards,
we don.t see any major new product cycles to drive sector growth.
■ Utilization: There are signs to suggest elective procedure volumes are
under pressure due to the broader macro issues. Within our universe, we
believe orthopedics are most exposed, but lower volumes across the
board will impact all companies in some form. For capital equipment, we
believe we are only seeing the tip of the iceberg and trends are likely to
get worse, not better, through 2009.
■ Pricing/mix environment: We think hospital financial strains are likely to
lead to intensifying pressure to control costs vis-à-vis pricing and mix. A
lack of new products is also likely to lead to less favorable mix.
■ The political environment: The longer term reimbursement environment
is also unclear. Fixing the economy is top priority for the new
Administration, though healthcare reform is still on the agenda. An
expansion in healthcare coverage could lead to near-term utilization
benefits, but the devil is always in the details and we think lower
reimbursement and more government control is negative.