The Zacks Medical - Instruments industry is highly fragmented, with participants engaged in research and development of new devices for specific therapeutic areas. This FDA-regulated industry comprises an endless number of products, starting from transcatheter heart valves to ortho and trauma products to imaging equipment.
The past few months have been remarkable for the Medical Instruments space in terms of research and development (R&D). Riding on path-breaking inventions like wireless brain sensors, Bluetooth-enabled smart inhalers, artificial pancreas, human-brain pacemaker, electronic skin that displays vital signs of the body, needle-free injections, precision medicine and many more, the medical instruments space has gone from strength to strength.
However, complex regulatory hurdles come in the way of any infrastructural or technology growth within this space. According to a Cyber MDX article by Jon Rabinowitz, hospitals face significant bureaucracy burden and a general fear of change restricts progress. According to Rabinowitz, these facts lead to a situation in which healthcare organizations are deemed to be downright laggards when it comes to modern business practices and supporting technologies. No wonder, these act as impediments in the path of the industry’s progress.
Though the FDA has come up with a pre-certification program in order to speed up the entire R&D procedure and regulatory approval process, the chances of any progress in the near term are low.
Here are the three major industry themes:
- M&A Trend Continues: The medical instruments space has been benefiting from the ongoing merger and acquisition (M&A) trend. In fact, various reports suggest that M&A has been the key catalyst in the U.S. MedTech space of late. It is a known fact that smaller and mid-sized industry players attempt to compete with the bigshots through consolidation. The big players attempt to enter new markets through a niche product. According to a recent report by MedTech Dive, smaller tuck-in acquisitions dominated the M&A space in 2019 with Varian (VAR), Boston Scientific (BSX), Medtronic (MDT) and Smith & Nephew being the prime line acquirers. Boston Scientific's $4.2 billion acquisition of BTG Plc was last year’s largest deal.
- Focus on Emerging Markets: Growing medical awareness and economic prosperity have been increasing the uptake of medical instruments in emerging economies. An aging population, increasing wealth, government focus on healthcare infrastructure and expansion of medical insurance coverage make these markets a happy hunting ground for global medical instruments players. A Mercer Capital report from 2018 states that although Americas is still the largest medical device market in the world, Asia/Pacific and Western Europe are expected to expand at a quicker pace over the next several years. The MedTech market in China, in spite of the tariff battle with the United States, is projected to grow significantly through 2022. India’s MedTech market is currently growing at a rate of 15% annually (per Business Standard). If this continues, India may give tough competition to Japan and Germany by 2022.
- Digital Revolution: With an increase in the adoption of digital platforms within the medical device space, robotic surgeries, big-data analytics, bio printing, 3D printing, electronic health records (EHR), predictive analytics, real-time alerting and revenue cycle management services are gaining prominence in the United States. A June 2019 Healthcare News report suggests that this market, valued at $123 billion in 2018, is witnessing CAGR of 25%. Various other reports suggest that companies that adopted AI (Artificial Intelligence) technologies witnessed a 50% reduction in treatment costs and also experienced more than 50% improvement in patient outcome. This, along with a rise in minimally-invasive surgeries, higher demand for liquid biopsy tests, use of IT for quick and improved patient care, and the shift of the payment system to a value-based model has been driving profits at medical device companies of late.
Zacks Industry Rank Indicates Insipid Prospects
The Zacks Medical Instruments industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #147, which places it in the bottom 43% 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 dull 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’s Stock Market Performance
The industry has underperformed the Zacks S&P 500 composite but managed to outperform its own sector in the past year.
The industry has gained 1.8% over this period compared with the S&P 500’s 5% increase. The broader sector has declined 1.7% in a year’s time.
One Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 33.59X compared with the broader industry’s 20.50X and the S&P 500’s 16.92X.
Over the past five years, the industry has traded as high as 33.59X, as low as 21.80X and at the median of 27.05X, as the charts show below.
Price-to-Earnings Forward Twelve Months (F12M)
Price-to-Earnings Forward Twelve Months (F12M)
Apart from the trends discussed above, the bipartisan two-year suspension of a 2.3% excise tax on medical instruments and medical device manufacturers at the beginning of 2018 encouraged massive investments in the sector. The market is currently looking forward to the reintroduction of the controversial 2.3% medical device tax repeal bill by the Senate. The repeal of the tax is expected to boost hiring and investment among the 9,000 America-based medical device manufacturers, instilling investor’s optimism.
Here, we present three stocks that have a Zacks Rank #2 (Buy). These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
IDEXX Laboratories, Inc. (IDXX)
In recent times, this animal-health product maker has witnessed strong gains in CAG Diagnostics recurring revenues and global premium instrument installed base. The company’s innovation-based, multi-modality global strategy is driven by enhanced commercial capability and accelerated recurring CAG Diagnostics revenue growth. Companion animal market fundamentals remain solid with tremendous global runway for growth.
Price and Consensus: IDXX
The Zacks Consensus Estimate for 2019 EPS has moved up 2.8% in the past two months. The same for full-year sales is pegged at $2.41 billion, indicating an 8.9% rise from the year-ago period. IDEXX has returned 22.3% over the past year.
Masimo Corporation (MASI)
In order to streamline its operations and reduce cost of revenues, Hologic has adopted some significant strategies over the past few years. The company’s broad product spectrum, positive tidings on the regulatory front and considerable focus on innovation provide cushion to the company's stock.
Price and Consensus: MASI
The Zacks Consensus Estimate for the company’s fiscal 2019 sales is pegged at $919.4 billion, indicating 7.1% rise from the year-ago period. The same for adjusted earnings per share stands at $3.12, a 2.3% rise over the last couple of months. The company has returned 47% in a year’s time.
Penumbra, Inc. (PEN)
This global healthcare company is focused on innovative therapies. Penumbra has a broad portfolio of products that addresses challenging medical conditions and significant clinical needs across two major markets, neuro and vascular.
Price and Consensus: PEN
The Zacks Consensus Estimate for the company’s fiscal 2019 sales is pegged at $536.6 million, indicating 20.6% rise year over year. The same for adjusted earnings per share is pegged at 87 cents, indicating an increase of 70.6% from the year-ago period. The company has returned 9.6% in a year’s time.
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Varian Medical Systems, Inc. (VAR) : Free Stock Analysis Report
Penumbra, Inc. (PEN) : Free Stock Analysis Report
Medtronic PLC (MDT) : Free Stock Analysis Report
Masimo Corporation (MASI) : Free Stock Analysis Report
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Boston Scientific Corporation (BSX) : Free Stock Analysis Report
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