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Medical Services Outlook Bright Amid Coronavirus Crisis

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:
 

  • Amid the coronavirus-led worldwide sales disruption, while the economy is witnessing a bloodbath on all fronts, medical services is one of the few sectors witnessing industry-wide growth at this moment. Contactless services being the buzzword now, this sector is witnessing growing demand for telemedicine-focused online medical services. Telemedicine stocks received an impressive response, when in February, the Centers for Disease Control and Prevention asked healthcare service communities to increase the use of telemedicine in broader ways. Added to this, the House recently passed an emergency spending bill, allowing medicare reimbursement for telehealth during crisis. Apart from this, a few molecular diagnostics service providers are seeing good times amid COVID-19-induced economic downfall. These stocks have either received or are in process to receive the Emergency Use Authorization (EUA) by the FDA for their tests to be used for the diagnosis of SARS-CoV-2.

     
  • 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, treatments are becoming less invasive with shorter recovery times, thanks to the specialized skills and advanced techniques of surgical facility providers. In the future, concepts like ‘bed less hospitals’ are expected to gain popularity. Currently, third-party laboratory testing providers and contract research organizations are also seeing surging demand, owing 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 a 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 be high in the days ahead. Going by a studypublished 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 Medicalsector. It carries a Zacks Industry Rank #101, which places it in the top 40% 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 

However, the Medical Services Industry has underperformed the S&P 500, as well as its own sector over the past year. This primarily reflects the effect of the coronavirus pandemic, which has shattered business confidence, casting a pall over corporate earnings and global growth. The stocks in this industry have collectively lost 37.8% during the said time frame compared with the Medical Sector and the S&P 500 composite’s loss of 16.4% and 14.2%, 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 22.13X compared with the S&P 500’s 15.73X and the sector’s 18.01X.

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 the 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.

Meanwhile, 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 service companies, depend on the credit and capital markets. Given the unfavorable economic conditions, many of these are currently unable to properly access credit or equity funding. This is gradually reducing demand for third-party service providers.

Below are four 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), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Co-Diagnostics, Inc. (CODX): This molecular diagnostics company’s Logix Smart Coronavirus COVID-19 Test recently obtained the FDA’s EUA to be used for the diagnosis of SARS-CoV-2. This test can be used by clinical laboratories certified under Clinical Laboratory Improvement Amendments (CLIA) to detect the presence of the virus, and is available for purchase from the company’s Utah-based ISO-13485:2016 certified facility.

Price and Consensus: CODX

The company currently flaunts a Zacks Rank of 1. The Zacks Consensus Estimate for fiscal 2020 earnings indicates a year-over-year surge of 313.9%. The company delivered average positive earnings surprise of 9.6% in the trailing four quarters.

Establishment Labs Holdings Inc. (ESTA): This is a medical technology company focused on women’s health. It develops and markets an innovative portfolio of silicone gel-filled breast implants, branded as Motiva Implants, the centerpiece of the MotivaImagine platform.

Price and Consensus: ESTA

The company holds a Zacks Rank of 2, at present. The Zacks Consensus Estimate for 2021 earnings indicates year-over-year growth of 28.9%. The company has an expected five-year earnings growth rate of 30%.

NovoCure Limited (NVCR): This global oncology company is working to extend survival in some of the most aggressive forms of cancer through the development and commercialization of its advanced therapy, Tumor Treating Fields.

Price and Consensus: NVCR

Currently, the company carries a Zacks Rank of 2. The Zacks Consensus Estimate for ongoing-year earnings suggests a year-over-year jump of 30.4%. The company has a projected 2021 earnings growth rate of a whopping 180%.

OncoCyte Corporation (OCX): This molecular diagnostics company, working on cancer care continuum, recently completed the CLIA Validation for DetermaIO, previously the Insight Genetics IM Score Test. The company has also officially launched DetermaIO, making it available for research use within the biopharmaceutical and academic communities.

Price and Consensus: OCX

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