DRUGMAKERS EYEING DEVICES FOR GROWTH, ANALYST SAYS

Drugmakers are showing renewed interest in diversifying into the medical device industry, given the growing volatility in the pharmaceutical business, an analyst says.

Recently, the CEOs of drug giants Merck and Bristol-Myers Squibb (BMS) have discussed their interests in medical diagnostics and devices, said David Risinger, a research analyst for Merrill Lynch.

Merck CEO Dick Clark told analysts in late October that he is considering diversifying into devices and diagnostics businesses that are synergistic with the company's current operations, Risinger said in a recent research note. Meanwhile, BMS CEO Peter Dolan told a Reuters Health conference that he was "looking to further expand the company into areas outside the volatile pharmaceuticals business, including medical devices," Risinger said, citing Reuters.

The drug industry's newfound interest in devices is based on three key reasons, Risinger said: to diversify their earnings base given the growing earnings volatility in the pharmaceutical business; to develop businesses that are complementary to pharmaceuticals; and to prepare for the evolution of genomics and the advent of personalized medicine over the next decade.

Big pharma's interest in medical devices, however, is nothing new. Many pharmaceutical firms divested their device companies over the past decade, Risinger said, pointing to the examples of Eli Lilly spinning off Guidant and BMS divesting Zimmer. The businesses were divested to focus on "core pharmaceutical operations" and to enhance growth, because the device businesses were viewed as slower growth businesses, Risinger said.