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Encouraging Near-Term Outlook for Medical Services Industry

Urmimala Biswas

The Zacks Medical Services industry comprises third-party service providers and caregivers appointed by core healthcare companies for economies of scale. The industry includes pharmacy benefit managers, contract research organizations (CRO), mobile and wireless medical technology companies, third-party testing labs, surgical facility providers and healthcare workforce solutions providers among others.

Over the past few years, the healthcare industry has strategically moved from volume to value-based care. This changing pattern of care calls for efficient and better-quality facilities, thus gradually increasing the need to appoint specialized external service providers.

In recent times, biotechnology and pharmaceutical companies have often been seen outsourcing clinical development and data solution services to improve quality of medical care at competitive costs. With growing importance of effective healthcare management, the medical service industry has become an integral part of the modern healthcare mechanism.

Here are the industry’s three major themes:

  • With a significant reduction in regulatory and tax burden on U.S. healthcare companies, the space is finally making progress in terms of technology adoption. This is creating opportunities for mobile and wireless medical technology companies. This apart, thanks to the specialized skills and advanced techniques of surgical facility providers, treatments are becoming less invasive with shorter recovery times. In the future, concepts like ‘bed less hospitals’ are expected to become popular. Currently, third-party laboratory testing providers and contract research organizations are also experiencing increasing demand, thanks to the growing need for complex tests, services and clinical research.
     
  • For the conventional biotechnology and pharmaceutical firms, clinical trials account for the majority of their drug development costs. These firms are right now looking to outsource clinical trials to control escalating costs related to therapeutic complexities, regulatory demands, and timelines. Going by a report published in Contract Pharma, outsourcing to CROs is anticipated to witness 7.4% CAGR through 2019, with a market penetration rate of 72% by 2020. Overall, the global market for clinical trial services is forecast to grow 12% year on year to 2021 (The Business Research Company).
     
  • With rising cognizance about the benefits of specialized medical caregiving, the need for healthcare workforce/staffing service providers has increased significantly. For example, the demand for nurses has increased manifold and is expected to remain high. Going by a study published by Georgetown University, the economy will create 1.6 million job openings for nurses through 2020.  

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical Services industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #82, which places it in the top 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms S&P 500 and Sector 

The Medical Services Industry has outperformed the S&P 500 as well as its own sector over the past year. The stocks in this industry have collectively gained 15.7% in the said time frame compared with the Medical Sector and the Zacks S&P 500 composite’s rise of 6.4% and 2.4%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 31.88X compared with the S&P 500’s 16.73X and the sector’s 16.17X.

Price-to-Earnings Forward Twelve Months (F12M)

Over the last five years, the industry has traded as high as 45.17X, as low as 24.85X, and at the median of 31.13X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

Bottom Line

Over the past five years, the third-party medical services industry has expanded rapidly, creating huge scope for companies within this niche as well as for those in the broader healthcare value chain. This industry is gaining prominence on a rising number of healthcare applications and services that can help core healthcare companies run their operations in an optimal way. Going by a 2018 McKinsey report, this industry is currently working to address half a trillion dollars of annual medical spending resulting from low productivity and waste.

On the flip side, third-party medical service providers face issues related to a tough capital spending environment. These issues lengthen the core healthcare companies’ decision-making process related to investment and purchase of services. Also, smaller biotechnology companies, which are customers of these medical services companies, depend on the credit and capital markets. Given unfavorable economic conditions, many of them are currently unable to properly access credit or equity funding. This is gradually reducing demand for third-party service providers.

Below are three stocks within the Medical Services industry that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Charles River Laboratories International, Inc. (CRL): The company provides essential products and services to pharmaceutical and biotechnology companies, government agencies and leading academic institutions globally to accelerate their research and drug development efforts.

Price and Consensus: CRL

The company has a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 earnings indicates year-over-year growth of 7.5%. The company delivered average positive earnings surprise of 9.6% in the trailing four quarters.

BioTelemetry, Inc. (BEAT): This is a mobile and wireless medical technology company, providing cardiac and mobile blood glucose monitoring (BGM), centralized medical imaging, and original equipment manufacturing services for the healthcare and clinical research industries.

Price and Consensus: BEAT

The company has a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year growth of 12.7%. The company delivered average positive earnings surprise of 50.8% in the trailing four quarters.

PRA Health Sciences, Inc. (PRAH): Headquartered in Raleigh, NC, PRA Health Sciences is a renowned global Contract Research Organization (CRO). The company provides outsourced clinical development services to biotechnology and pharmaceutical industries.

Price and Consensus: PRAH

The company has a Zacks Rank #2. The Zacks Consensus Estimate for 2020 earnings indicates year-over-year growth of 14.5%. The company has an estimated long-term earnings growth rate of 15%. The company delivered average positive earnings surprise of 3.7% for the trailing four quarters.

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