A National Institutes of Health (NIH) funded 5-year long study recently concluded that bypass surgery is far more cost-effective over a period of time compared to stents in diabetic patients.^[1] This finding may add to the worries of medical devices manufacturers including Boston Scientific (NYSE:BSX) and Abbott Labs (NYSE:ABT) who continue to grapple with a weak business environment amid steep competition and a strong U.S. dollar.

We have a $6 price estimate for Boston Scientific, a 5% premium to the current market price. We are in process of revising our price estimate for Abbott Labs, which currently stands at $67, in-line with the current market price.

See our complete analysis for Boston Scientific | Abbott Labs

According to the study, diabetes patients with bypass surgery face a smaller risk of death, heart attack or stroke compared to patients with stents. Further, there are cost benefits over a long period even though the initial costs of bypass surgery are high. While the threat doesn’t look imminent at this stage, many believe the data was significant enough to change clinical practices which could hurt stent demand. Accordingly, any change in usage pattern could hurt revenues for these companies.

This comes at an inopportune time and does not bode well for medical device manufacturers, especially Boston Scientific, which has been grappling with declining sales in the interventional cardiology business. Also, a strong outlook for the U.S. dollar amid the dwindling global economy and pricing pressure following the healthcare reforms continue to pose concerns in the short term. We recently discussed the company’s business model to see the potential downside to the Trefis price estimate (read here) and the events that could trigger this downside.

To douse these concerns, medical devices makers may now be banking on pending wider Medicare coverage of carotid stents to prevent strokes in patients with no symptoms. The extension of the coverage could bring in millions of dollars in revenue each year to carotid stent manufacturers. But, an immediate reprieve may not come soon as doctors argued against wider Medicare coverage of carotid stents citing no significant difference between current prescription drugs and carotid stents at stroke prevention. And, the doctors’ opposition could weigh heavily on the Medicare decision as health payers seek cost-effective treatments in the wake of national health reforms. (Read Doctors’ Opposition To Expanded Carotid Stent Use Could Hurt Medical Devices Companies)

While Abbott is also exposed to the aforementioned events, there is another threat to it. Abbott is one of the leading manufacturers of drug-eluting stents (DES) and a separate study had earlier implied that DES are being overused in patients who are at low risk of restenosis (Read Abbott Could Feel Impact Of Studies Showing Overuse Of Drug-Eluting Stents). In our model, stents are part of the vascular division. By changing the trend-line below, you can see the impact of a loss in the company’s share in vascular market on its stock price.

However, we still believe that with continuous product launches, Abbott will overcome near-term headwinds in the vascular market and increase its market share 2013 onward. (Read Abbott’s Ready To Pump Up Vascular Market Share With New Launches)

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