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Trade War May Pull MedTech Down: 3 Stocks to Defy the Odds

Urmimala Biswas
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There is no sign of respite from the ongoing market uncertainty due to apprehensions of a trade war. On the one hand, Asian stocks have started to revive on improvement in U.S-North Korea relationship while on the other hand, investors are restraining themselves on possibilities of trade loss due to the proposed China trade restrictions.

Medical Device Caught in the Trade War Storm

Going by data provided in an article by Christian B. Jones in Mondaq, MedTech firms in the United States currently sell $4.7 billion annually to China, while the nation imports from China a total of $5 billionin medical device. U.S. exports of medical devices last year totaled $52 billion, creating a $1 billion worldwide trade surplus.

Needless to say, the medical device lobby is extremely apprehensive about the proposed tariffs on Chinese products as it could significantly affect international trade. MedTech trade group AdvaMed made a more specific comment claiming that the Chinese tariffs account for more than half of all MedTech imports from the region (in a MassDevice article). The trade group stated that, “for our industry, the proposed additional tariff of 25% on imports of nearly $3bn of medical technology products is the wrong action at the wrong time."

AdvaMed countered United States Trade Representative’s (USTR) claim of China’s unfair trade practices in medical devices harming U.S. exports significantly. The group argued that the U.S. trades with China on medical devices on the USTR list are in fact in slight surplus. Accordingly, if the proposed tariffs on diagnostic products and other medical devices made in both the United States and China are not dropped, it may result in trade imbalance.

Per RBC Capital Markets estimates, if the proposed 25% tariffs get implemented, this could cost the medical device industry up to $1.5 billion each year.

Going by the latest update, per a Financial Express report, a bipartisan group of 40 lawmakers has urged US Trade Representative, Robert Lighthizer to remove $3 billion worth of medical devices from the list of Chinese products proposed by the Trump administration for additional tariff.

Investors in Trouble?

With the risk of a trade war between the two largest economies heightening, investment in medical device stocks is taking a backseat.

The proposed imposition of additional tariff on Chinese products and China’s retaliatory efforts have resulted in widespread share losses so far in the Medical device sector. Bearish emerging market trade outlook has dealt severe blows to the bigwigs. We note that the sector has gained significantly from profits earned by a number of medical device companies from the BRIC nations.

In this regard, we note that stocks like Medtronic plc MDT, GE Healthcare GE and others are witnessing considerable weakness since Mar 23, when talks of a U.S.-China trade war started doing the rounds. We note that Medtronic earlier bought orthopedic devices maker, China Kanghui Holdings and since then has been consistently shipping products to the United States from this operation. If these shipments are now subject to additional tariff, it will definitely hamper the company’s China business.

GE Healthcare has also urged the administration to remove certain parts from the list of Chinese products for additional tariff. Going by a Mass Device report, China produced parts are essential for a number of GE’s devices, including ultrasound machines, patient monitors, MRI machines, CT machines and X-ray machines, some of which are produced by GE owned facilities in China while others are produced by local Chinese companies.

3 MedTech Stocks to Counter the Trade Restriction Hazard

Concerns about the implementation of the trade tariffs on MedTech products have been weighing on stocks lately. Even though the market has not yet shown any steady plunge, such fears are likely to dampen investor sentiment going forward.

We have shortlisted three MedTech stocks, which, in spite of the tumultuous market conditions, are well poised on strong fundamentals and timely strategic developments. Our selection is also backed by a good Zacks Growth Score and Zacks Rank.

We have narrowed down our choices with the help of our new Style Score system.

Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 (Strong Buy) and #2 (Buy) offer the best investment opportunities in the value investing space. You can see the complete list of today's Zacks #1 Rank stocks here.

Baxter International Inc. BAX: Although, the company has a strong presence in overseas markets, it has no such business relation with China. Hence, in spite of considering international diversification as a core component of the company’s strategy, the company can very well sidestep the volatility of the U.S.-China trade war and continue to enjoy the bountiful scope offered by emerging markets. The company, in fact, is benefiting from developing countries' incremental investments in health care systems.

Baxter has a Growth Score of A and a Zacks Rank #2. The company has an impressive long-term expected growth rate of 16.3%, higher than the industry’s 10.3%.

Varian Medical Systems Inc. VAR: In the second quarter of fiscal 2018, Varian Medical’s global market share growth was driven by orders-based share gains in EMEA. In fact, Varian Medical was awarded a contract for eight TrueBeam systems in Stockholm, Sweden. Further, the company signed an agreement to acquire Australia-based, Sirtex, which focused on interventional oncology therapies. This apart, Varian Medical has recently announced the opening of a new facility in Jundiaí, Brazil, which extends its global manufacturing and training footprint in the region. Although Varian Medical has business in Greater China, the company’s huge global base outside the country shields it from severe damage that may occur as a result of the trade restriction.

Varian Medical has a Growth Score of B and a Zacks Rank #2.

ABIOMED, Inc. ABMD: Just like Baxter, despite having strong international foothold, ABIOMED does not have any significant presence in China. In the fourth quarter of fiscal 2018, Germany and Japan witnessed strong adoption of the exclusive Impella product line. In Germany, revenues grew 95% in the fourth quarter and 70% in fiscal 2018. In Japan, Abiomed exceeded expectations and expects to add $10 million in revenues in fiscal 2019.

ABIOMED has a Growth Score of B and a Zacks Rank #1.

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