As the push for U.S. health-care reform increasingly looks like a long and difficult process, pressure may be lifting on medical-devices stocks battered by worries that reform efforts will damage business.

The sector also is benefiting from a weakened U.S. dollar, which helps overseas revenue, and tepid signs of economic recovery. Plenty of uncertainty remains, and shifting reform winds could quickly alter investor perceptions, but some observers believe the device sector's fortunes will improve as the year continues.

"I do think you could see these stocks become gradually more attractive," said Rick Wise, who covers device companies for Leerink Swann.

That process appears underway already, albeit modestly. Two Dow Jones Wilshire indexes tracking medical-device companies posted small gains last week while outperforming a declining Standard & Poor's 500 index. That improvement followed a long stretch, dating to the broader market's bottom in early March, in which device stocks didn't keep pace with the broader market's sharp rebound.

According to J.P. Morgan analyst Michael Weinstein, "investors have begun to appreciate the challenges facing Congress and the likelihood that any bill that comes out of Washington is watered down in compromises and potentially lacking in teeth."

Fear the device sector would be bitten triggered sharp stock declines over about a month between February and March. The plummet was exacerbated by the Obama administration's proposed fiscal 2010 budget that showed plans to clamp down on medical spending, even though there was no precise threat to device companies.

With sentiment now improved, Weinstein said he expects a second-half rally in health-care stocks in general and medical-technology stocks in particular.

"Suddenly people just realized, hey, this could be delayed, it's not going to be as bad as we feared, [and] there's probably going to be a more measured approach," said Matthew Loucks, a portfolio manager with Sit Investment Associates in Minneapolis, which owns shares of several health-care companies.

The ranks of major device companies include Medtronic Inc. (MDT), Boston Scientific Corp. (BSX), Zimmer Holdings Inc. (ZMH) and St. Jude Medical Inc. (STJ). Conglomerate Johnson & Johnson (JNJ) also has a huge devices business.

Despite recent hints of optimism, big unanswered questions leave reason for continued caution. Analyst Wise said he's reminding people "that there are still issues on the table that we have to be sensitive to."

Tax reform that could hurt overseas businesses is one major wild card, as is the long-term potential effect of funding more "comparative effectiveness" studies, which the White House has backed as a method of picking top treatments while saving money.

Many device companies' revenue growth depends in part on so-called mix upgrades that come from issuing newer devices that fetch premium prices based on expectations for patient benefits. But what if future research indicates souped-up models don't deliver benefits that justify their higher costs?

"In my view, that's arguably the most damaging for a business model long-term," Loucks said.

Heart-devices companies may have some shielding against this, because their products generally require substantial clinical evidence to win approval, giving the companies ammunition with which to prove their value. Major orthopedic devices, on the other hand, have long been approved through a less stringent system that doesn't require the same level of evidence.

Pressure on product prices - as the government looks to restrain spending - is also a threat, although an uncertain one. The government has little direct control but can indirectly influence prices by how it reimburses hospitals.

There is worry that a squeeze on payments to hospitals will lead hospitals to look for savings on product prices, and many top medical devices are geared toward older patients who are covered by the government-run Medicare system.

William A. Hawkins, Medtronic's chief executive, recently highlighted the broad issues that will determine how health reform affects device companies.

While covering millions of currently uninsured Americans "could be very good for us," he said during an investor and analyst conference, "the clear focus on cost containment could undoubtedly put pressure on the entire medtech industry."

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com