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MedTech Long-Term Prospects Impress: Which Stocks to Buy?
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After a long wait, the Republican proposal to repeal the Affordable Care Act (ACA, or Obamacare) with a replacement plan is on the table. While we are fast approaching the day when President Trump will finally replace the ACA and implement his "insurance for everybody" strategy, the nation is clearly divided into “we need” and “don’t need” camps.
Given the current lack of clarity, let us concentrate on some powerful long-term tailwinds of the medical device industry including mergers & acquisitions (M&A), emerging market expansion, positive demographic trends and new product innovation. These have been a driving force behind the sector’s impressive performance even amid severe socio-economic and political instability.
Also worth mentioning are the recent changes in consumer demand and market dynamics, which led to a dramatic transformation in the healthcare system. This is evident from the growing number of minimally invasive surgeries, rising demand for liquid biopsy tests, use of IT for ensuring quick and improved patient care and the shift of the payment system to a value-based model among others.
Let us go through some of the major long-term tailwinds of the MedTech sector. These include M&A and Divestments, Emerging Market and R&D/Innovations.
Major M&As
It seems that the $43 billion Medtronic (MDT - Free Report) -Covidien merger and the subsequent reports of how the consolidated company knocked off Johnson & Johnson (JNJ - Free Report) from its indisputable position as the top firm in the medical devices space, inspired other industry leaders to come forward with mega M&A deals one after the other. Deals like Zimmer-Biomet ZBH, Johnson & Johnson-Synthes and Thermo Fisher (TMO - Free Report) -Life Technologies and others gave birth to unprecedented leaders in their respective niche markets.
Although, going by the last available EvaluateGroup data, the first half of 2016 witnessed a slump in mergers and acquisitions from the year-ago period, a number of sector-changing deals took place during the second half. Abbott Laboratories’ (ABT - Free Report) inked a number of deals last year, which include its $5.8 billion agreement to acquire Alere ALR. This should strengthen its presence and leadership in the global diagnostics market. As per EvaluateGroup data, following the completion of the deals the company will capture the third place in company rankings in 2022, with potential sales of around $22 billion.
The first month of 2017 saw Abbott’s consolidation with St. Jude Medical for a deal value of $25 billion. The consolidated company is working to form a leader in high-growth cardiovascular markets, including atrial fibrillation, structural heart and heart failure as well as earn a leading position in the high-growth neuromodulation market.
Also Zimmer Biomet’s impending acquisition of LDR Holding Corp. for a total deal value of $1 billion is expected to boost the former’s spine portfolio. The inclusion of LDR will not only bolster Zimmer Biomet’s presence in the $10 billion global spine market by significantly expanding its portfolio of innovative solutions, but will also provide it with a leading position in the fast growing cervical disc replacement (CDR) and MIS segments.
This apart, Varian Medical recently announced an agreement to take over the Medical Imaging business of PerkinElmer, Inc. PKI for $276 million. The buyout will be an addition to the Varian Imaging Components business. Baxter International (BAX - Free Report) on the other hand, has signed a definitive agreement to acquire Claris Lifesciences Limited’s subsidiary Claris Injectables Limited, an India-based global generic injectables pharmaceutical company for almost $625 million.
Other recently completed significant acquisitions are:
Thermo Fisher - Affimetrix: The acquisition of Affymetrix for $1.3 billion is expected to boost Thermo Fisher’s biosciences and genetic analysis portfolio.
Thermo Fisher - FEI Company: Thermo Fisher acquired FEI Company for $4.2 billion. FEI’s industry leading high-performance electron microscopy platform used for protein study will aid Thermo Fisher’s life-science research.
Medtronic – HeartWare: Recently, Medtronic acquired HeartWare for a total value of $1.1 billion. This acquisition is expected to significantly boost Medtronic’s cardiac rhythm and heart failure business besides providing it a strong foothold in the global niche.
Divestments
The medical device majors continue to offload their non-core business segments, specifically to focus on the main segments and also to divest assets that are similar to the ones acquired through mergers, as required by the U.S. Federal Trade Commission (FTC) and other international anti-trust regulators. This restricts the chances of monopoly in the market.
Let’s take a look at some of the significant divestments in recent times.
Following the announcement of its two colossal buyout decisions, Abbott divested its eye care business Abbott Medical Optics (AMO) to Johnson & Johnson for about $4.33 billion in order to better streamline its newly added businesses. The AMO product lines will now join JNJ’s ACUVUE Brand Contact Lenses business, and the combined organization will operate under the brand name Johnson & Johnson Vision.
A marketer of aesthetic treatment systems, Cynosure, Inc. (CYNO) recently decided to sell itself to Hologic, Inc. HOLX. Per the agreement, Hologic would acquire all outstanding Cynosure shares for approximately $1.65 billion.
Wright Medical’s recent divestment of its large joints (hip/knee) business to Corin Orthopaedics is an example of the company’s focus on its core businesses.
On the other hand, in its bid to reduce and refine its portfolio and to repay long-term debts, Community Health Systems, Inc. CYH has decided to divest Rockwood Health System and associated assets to MultiCare Health System. This apart, recently it struck an agreement with Pinnacle Health System to sell four Pennsylvania hospitals and their associated assets. Earlier, it had also announced its plan to sell a majority ownership interest in the company’s Home Health division to a subsidiary of Almost Family (AFAM).
Emerging Market Openings
According to a report by Visiongain, the global medical devices market will reach $398 billion in 2017 from $321 billion in 2012. This trend will continue to grow stronger through 2023.
While the traditional market continues to be plagued by difficulties due to growing regulatory scrutiny and pricing pressure and the emerging markets of Latin America and Eastern Europe show no signs of turnaround, as per a recent data from Euromonitor International, it’s the Asia Pacific region on which all the bets are placed this year.
China and India’s healthcare service revenues are expected to grow at massive rate resulting in a large number of new hospital construction projects and soaring demand for medical and surgical equipment.
Abbott continues to lead the emerging market investment trend with about 50% of sales from this region. In the fourth quarter of 2016, sales in key emerging markets climbed in double digits driven by growth in BRIC as well as strong growth in several countries throughout Latin America, including Colombia, Mexico, Peru and Argentina.
At Medtronic, the emerging markets demonstrated strong double-digit growth in its third quarter of fiscal 2017, which contributed 14% to the company’s overall revenue growth.
Boston Scientific Corporation (BSX - Free Report) achieved 17% organic growth in emerging markets in the fourth quarter of 2016, driven by 21% growth in China.
R&D/Innovations
According to a survey by KPMG, the number of medical device companies that expect to spend more than 6% of revenues on R&D/innovation is rising and fast exceeding the number of companies spending on R&D in other manufacturing industries. These innovations span new products, surgical techniques, and cost-effective products targeting the emerging markets. These innovations however have one thing in common, they are meant to transform the way MedTech reaches the consumer.
Edwards Lifesciences’ EW SAPIEN or its competitive product Medtronic’s (MDT - Free Report) CoreValve transcatheter heart valve or surgical aortic valves are one of the most appropriate examples of such breakthrough innovations. As the global heart valves market is projected to grow at a CAGR of 14.28% during the period 2016–2020 (according to the latest Market Research Report), it is needless to say how impactful these breakthroughs are for the Medtech market.
Key Picks from the Space
Among the medical product stocks, Quidel Corporation QDEL looks attractive sporting a Zacks Rank #1 (Strong Buy). Bovie Medical Corporation BVX, OraSure Technologies, Inc. OSUR and ResMed Inc. RMD are also well positioned with a Zacks Rank #2 (Buy).
In the medical instrument space, we are positive on Inogen, Inc. INGN among others, carrying a Zacks Rank #1. Masimo Corporation MASI, IDEXX Laboratories, Inc. IDXX and Teleflex Inc. TFX, all with a Zacks Rank #2, are also expected to do well.
The Weak Links
We advise investors to stay away from companies that offer little growth/opportunity in the near term. These include companies for which estimate revision trends reflect a bearish sentiment.
Stocks which do not look inspiring are Cerner Corporation , Cynosure, Inc. CYNO, Allscripts Healthcare Solutions, Inc. (MDRX - Free Report) and Orthofix International N.V. (OFIX - Free Report) , all carrying a Zacks Rank #4 (Sell). Smith & Nephew plc (SNN - Free Report) and Bio-Rad Laboratories, Inc. BIO hold a Zacks Rank #5 (Strong Sell).
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MedTech Long-Term Prospects Impress: Which Stocks to Buy?
After a long wait, the Republican proposal to repeal the Affordable Care Act (ACA, or Obamacare) with a replacement plan is on the table. While we are fast approaching the day when President Trump will finally replace the ACA and implement his "insurance for everybody" strategy, the nation is clearly divided into “we need” and “don’t need” camps.
Given the current lack of clarity, let us concentrate on some powerful long-term tailwinds of the medical device industry including mergers & acquisitions (M&A), emerging market expansion, positive demographic trends and new product innovation. These have been a driving force behind the sector’s impressive performance even amid severe socio-economic and political instability.
Also worth mentioning are the recent changes in consumer demand and market dynamics, which led to a dramatic transformation in the healthcare system. This is evident from the growing number of minimally invasive surgeries, rising demand for liquid biopsy tests, use of IT for ensuring quick and improved patient care and the shift of the payment system to a value-based model among others.
Let us go through some of the major long-term tailwinds of the MedTech sector. These include M&A and Divestments, Emerging Market and R&D/Innovations.
Major M&As
It seems that the $43 billion Medtronic (MDT - Free Report) -Covidien merger and the subsequent reports of how the consolidated company knocked off Johnson & Johnson (JNJ - Free Report) from its indisputable position as the top firm in the medical devices space, inspired other industry leaders to come forward with mega M&A deals one after the other. Deals like Zimmer-Biomet ZBH, Johnson & Johnson-Synthes and Thermo Fisher (TMO - Free Report) -Life Technologies and others gave birth to unprecedented leaders in their respective niche markets.
Although, going by the last available EvaluateGroup data, the first half of 2016 witnessed a slump in mergers and acquisitions from the year-ago period, a number of sector-changing deals took place during the second half. Abbott Laboratories’ (ABT - Free Report) inked a number of deals last year, which include its $5.8 billion agreement to acquire Alere ALR. This should strengthen its presence and leadership in the global diagnostics market. As per EvaluateGroup data, following the completion of the deals the company will capture the third place in company rankings in 2022, with potential sales of around $22 billion.
The first month of 2017 saw Abbott’s consolidation with St. Jude Medical for a deal value of $25 billion. The consolidated company is working to form a leader in high-growth cardiovascular markets, including atrial fibrillation, structural heart and heart failure as well as earn a leading position in the high-growth neuromodulation market.
Also Zimmer Biomet’s impending acquisition of LDR Holding Corp. for a total deal value of $1 billion is expected to boost the former’s spine portfolio. The inclusion of LDR will not only bolster Zimmer Biomet’s presence in the $10 billion global spine market by significantly expanding its portfolio of innovative solutions, but will also provide it with a leading position in the fast growing cervical disc replacement (CDR) and MIS segments.
This apart, Varian Medical recently announced an agreement to take over the Medical Imaging business of PerkinElmer, Inc. PKI for $276 million. The buyout will be an addition to the Varian Imaging Components business. Baxter International (BAX - Free Report) on the other hand, has signed a definitive agreement to acquire Claris Lifesciences Limited’s subsidiary Claris Injectables Limited, an India-based global generic injectables pharmaceutical company for almost $625 million.
Other recently completed significant acquisitions are:
Thermo Fisher - Affimetrix: The acquisition of Affymetrix for $1.3 billion is expected to boost Thermo Fisher’s biosciences and genetic analysis portfolio.
Thermo Fisher - FEI Company: Thermo Fisher acquired FEI Company for $4.2 billion. FEI’s industry leading high-performance electron microscopy platform used for protein study will aid Thermo Fisher’s life-science research.
Medtronic – HeartWare: Recently, Medtronic acquired HeartWare for a total value of $1.1 billion. This acquisition is expected to significantly boost Medtronic’s cardiac rhythm and heart failure business besides providing it a strong foothold in the global niche.
Divestments
The medical device majors continue to offload their non-core business segments, specifically to focus on the main segments and also to divest assets that are similar to the ones acquired through mergers, as required by the U.S. Federal Trade Commission (FTC) and other international anti-trust regulators. This restricts the chances of monopoly in the market.
Let’s take a look at some of the significant divestments in recent times.
Following the announcement of its two colossal buyout decisions, Abbott divested its eye care business Abbott Medical Optics (AMO) to Johnson & Johnson for about $4.33 billion in order to better streamline its newly added businesses. The AMO product lines will now join JNJ’s ACUVUE Brand Contact Lenses business, and the combined organization will operate under the brand name Johnson & Johnson Vision.
A marketer of aesthetic treatment systems, Cynosure, Inc. (CYNO) recently decided to sell itself to Hologic, Inc. HOLX. Per the agreement, Hologic would acquire all outstanding Cynosure shares for approximately $1.65 billion.
Wright Medical’s recent divestment of its large joints (hip/knee) business to Corin Orthopaedics is an example of the company’s focus on its core businesses.
On the other hand, in its bid to reduce and refine its portfolio and to repay long-term debts, Community Health Systems, Inc. CYH has decided to divest Rockwood Health System and associated assets to MultiCare Health System. This apart, recently it struck an agreement with Pinnacle Health System to sell four Pennsylvania hospitals and their associated assets. Earlier, it had also announced its plan to sell a majority ownership interest in the company’s Home Health division to a subsidiary of Almost Family (AFAM).
Emerging Market Openings
According to a report by Visiongain, the global medical devices market will reach $398 billion in 2017 from $321 billion in 2012. This trend will continue to grow stronger through 2023.
While the traditional market continues to be plagued by difficulties due to growing regulatory scrutiny and pricing pressure and the emerging markets of Latin America and Eastern Europe show no signs of turnaround, as per a recent data from Euromonitor International, it’s the Asia Pacific region on which all the bets are placed this year.
China and India’s healthcare service revenues are expected to grow at massive rate resulting in a large number of new hospital construction projects and soaring demand for medical and surgical equipment.
Abbott continues to lead the emerging market investment trend with about 50% of sales from this region. In the fourth quarter of 2016, sales in key emerging markets climbed in double digits driven by growth in BRIC as well as strong growth in several countries throughout Latin America, including Colombia, Mexico, Peru and Argentina.
At Medtronic, the emerging markets demonstrated strong double-digit growth in its third quarter of fiscal 2017, which contributed 14% to the company’s overall revenue growth.
Boston Scientific Corporation (BSX - Free Report) achieved 17% organic growth in emerging markets in the fourth quarter of 2016, driven by 21% growth in China.
R&D/Innovations
According to a survey by KPMG, the number of medical device companies that expect to spend more than 6% of revenues on R&D/innovation is rising and fast exceeding the number of companies spending on R&D in other manufacturing industries. These innovations span new products, surgical techniques, and cost-effective products targeting the emerging markets. These innovations however have one thing in common, they are meant to transform the way MedTech reaches the consumer.
Edwards Lifesciences’ EW SAPIEN or its competitive product Medtronic’s (MDT - Free Report) CoreValve transcatheter heart valve or surgical aortic valves are one of the most appropriate examples of such breakthrough innovations. As the global heart valves market is projected to grow at a CAGR of 14.28% during the period 2016–2020 (according to the latest Market Research Report), it is needless to say how impactful these breakthroughs are for the Medtech market.
Key Picks from the Space
Among the medical product stocks, Quidel Corporation QDEL looks attractive sporting a Zacks Rank #1 (Strong Buy). Bovie Medical Corporation BVX, OraSure Technologies, Inc. OSUR and ResMed Inc. RMD are also well positioned with a Zacks Rank #2 (Buy).
In the medical instrument space, we are positive on Inogen, Inc. INGN among others, carrying a Zacks Rank #1. Masimo Corporation MASI, IDEXX Laboratories, Inc. IDXX and Teleflex Inc. TFX, all with a Zacks Rank #2, are also expected to do well.
The Weak Links
We advise investors to stay away from companies that offer little growth/opportunity in the near term. These include companies for which estimate revision trends reflect a bearish sentiment.
Stocks which do not look inspiring are Cerner Corporation , Cynosure, Inc. CYNO, Allscripts Healthcare Solutions, Inc. (MDRX - Free Report) and Orthofix International N.V. (OFIX - Free Report) , all carrying a Zacks Rank #4 (Sell). Smith & Nephew plc (SNN - Free Report) and Bio-Rad Laboratories, Inc. BIO hold a Zacks Rank #5 (Strong Sell).