FDA's "approvable" letter to Mentor for the Memory Gel silicone breast implants drove the firm's stock up 32.6% to $55.01 for the quarter, but investor tunnel-vision could keep future stock movement tied to FDA's final decision.

The firm received the letter on July 28, three months after the agency's General & Plastic Surgery Devices Panel voted to approve the device with conditions.

News of the approval sent shares up 13% to $49.75 on July 29.

Investors were heartened by the possibility that Mentor could be the first firm to return to the silicone breast implant market since FDA banned the products in 1992.

To receive final approval from FDA, Mentor must meet certain conditions, which the firm says are consistent with those put forth by the FDA panel. The panel asked that Mentor follow its clinical trial patients for at least 10 years, and said that plastic surgeons should be trained with the Memory Gel implants before inserting the devices in patients.

Although the conditions may take time to implement and Mentor may have little control over final FDA sign-off, investors are wary of any delay.

"The investment thesis is all about silicone gel, and [Mentor] said nothing new of import on the pending FDA approval," Thomas Gunderson, Piper Jaffray, wrote of the firm in an Aug. 3 report.

The stock gained momentum on Aug. 2 when Mentor released fiscal 2006 first-quarter financials. For Q1, ended June 30, sales were up 11% to $135 mil. compared with the prior-year period. Breast implant sales were up 13% to $64.8 mil. (¹ Also see "Mentor Awaits Breast Implant Approval; Advocacy Groups Fight To Stop FDA" - Medtech Insight, 8 August, 2005., p. 18). Investors were pleased to see that earnings per share during the quarter rose 27% to $0.47 compared to the same: "² 'The Gray Sheet' Third Quarter Stock Index" period the prior year (see chart).

Even news that competitor Inamed received an "approvable" letter from the agency boosted Mentor's shares on Sept. 21. Inamed removed one implant with higher rupture rates from its PMA application in order to receive the letter and, like Mentor, Inamed must meet certain conditions, including training physicians and expanding rupture data, prior to approval.

Mentor's stock closed the quarter at $55.01, nearly 5% higher than shortly before Inamed's approvable announcement.

However, the strong earnings and approvable letter represent a double-edged sword for the firm. While they provided an early boost, the issue failed to move significantly when Mentor issued positive non-silicone product press releases during the quarter.

When the firm announced on Aug. 16 that Kristine Foss, VP-regulatory, quality and clinical at Vivant Medical, was being brought on as VP-clinical and regulatory affairs for Mentor, the stock dropped 1% to $53.70 on Aug. 17 and fell to $52.75 by the end of the week.

On Aug. 24, Mentor announced the launch of the Self-Cath Hydrogel intermittent urinary catheter to treat bladder control and urinary retention problems. The catheter originally was cleared in June.

The announcement seemed to have no effect on the stock, dropping its value by mere cents, despite the fact that disposable urinary care devices represent the firm's fourth largest sales group, behind breast implants, surgical urology and consumer sales.

Even the firm's Sept. 7 announcement that Mentor would launch the Moderate Plus Profile saline-filled breast implants in the U.S. did little to move the stock - the issue rose 2.5% to close at $55.03.

Though these releases did not stop Mentor's stock from rising nearly 33% during the quarter, they did slow its ascension.

The intense investor focus on Mentor's silicone breast implants reflects the fact that breast implants make up nearly half of the firm's revenue, a share likely to increase with entry into the potentially lucrative silicone market.

Overall, M-D-D-I gainers nearly matched decliners, 17 to 14. The overall Index fell 1.3% - the first quarter the Index has fallen this year. The loss reverses second-quarter gains when the Index was up 1.3%.

Both the S&P 500 and Dow Jones Industrial Average fared better, rising 3.15% and 2.86% during the third quarter, respectively.

Ophthalmic firms continued to fare well on Wall Street, following solid growth in previous quarters (³ Also see "Alcon Stock Gains From CMS Decision, New Products – MDDI Index" - Medtech Insight, 11 July, 2005., p. 9).

Cooper Companies was the second highest percentage gainer on the Index behind Mentor, with its stock surging 26% to close the quarter at $76.61. The issue rose nearly 7% after the firm reported Q3 results on Sept. 7 to close the week at $73.61. Cooper reported earnings of $37.4 mil., up 56% from the prior-year quarter.

Alcon's issue was up 16.9% to $127.88 due to both drug and device approvals during the quarter, as well as positive second quarter results.

The Nestle subsidiary announced FDA approval of its AcrySof Toric intraocular lens for cataract patients with pre-existing corneal astigmatism on Sept. 20, pushing the stock up 2.4% to close the week at $127.10. The firm officially will launch the lens in March 2006.

However, Bausch & Lomb's stock was down 2.8% to close at $80.68.

Orthopedic firms also fell during the quarter, with Zimmer and Smith & Nephew's stocks down 7% apiece to close at $68.89 and $42.46, respectively. In September, S&N lowered its 2005 revenue projection, citing increased competition in the marketplace. The firm says it could miss its sales estimates by 1%-17% (⁴ Also see "Smith & Nephew Blames Competition, Katrina For Low Orthopedic Sales" - Medtech Insight, 19 September, 2005., p. 7).

Both firms are also feeling the pinch of increased pricing pressure in the orthopedic market for hip and knee replacements.

One of the largest decliners during the quarter was Beckman Coulter. After the firm reported sub-par earnings on July 21 of $51.9 mil., down 11% from the prior-year quarter, the issue slid from a high of nearly $65 to $52.95 on Aug. 9. The firm reversed the downward momentum after revising its second quarter earnings upward.

In addition to the company's second quarter earnings falling below external sales projections, the firm announced job cuts and reduced earnings per share because of lowered profits. Beckman Coulter's sales for Q2 were up 3.6% to $619 mil. compared to the same period the prior year.

Mentor’s Stock Jumps In Q3 On Silicone Implant “Approvable” Letter

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