The global medical devices industry is fairly large, intensely
competitive and highly innovative. A regulated industry, MedTech is
spread across different segments including cardiology,
cardiovascular, neuro, orthopedic and aesthetic devices. The US
medical devices industry relies largely on an aging baby boomer
population, high unmet medical needs and increased incidence of
lifestyle diseases (including cardiovascular diseases, diabetes,
hypertension and obesity). Neuro, orthopedic and aesthetic
represent the fastest growing categories.
However, the MedTech industry is currently plagued by several
issues, including pricing concerns, hospital admission and
procedural volume pressures, Medicare reimbursement issues and
regulatory overhang. Percutaneous intervention volumes continue to
be relatively flat in the US, Japan and Europe with improvement not
expected anytime soon. Nevertheless, several catalysts for growth
exist such as new product cycles, an aging population, geographic
expansion, ongoing transition towards minimally invasive techniques
and emerging markets.
Given the maturing legacy markets, medical device companies are
looking to expand into lucrative, incipient markets. Expansion in
emerging markets, especially those with double-digit annual growth
rates, represents one of the best potential avenues for growth in
2012 and beyond. Also, the companies have been resorting to
cost-cutting and share buybacks to drive bottom-line growth.
Mergers & acquisitions (M&As), licensing deals,
restructuring and share buybacks have become common in the medical
device sector in recent quarters.
Another trend that we have been observing of late is the divestment
of non-core business segments. For example,
Smith & Nephew
), through an agreement with Essex Woodlands, completed the
disposal of its Clinical Therapies business, in May 2012, to the
newly formed Bioventus LLC, in which it will retain a 49%
investment. Healthcare products maker
) is on track to spin off its pharmaceuticals business into a
standalone public company by mid-2013.
Becton, Dickinson and Company
) is also in the process of divesting its Discovery Labware
sub-segment (excluding Advanced Bioprocessing capability) to
). The deal is expected to be completed by year end. Some other
significant divestments include that of the Neurovascular business
) (January 2011) to
) and the Physio-Control business to Bain Capital by
) (January 2012).
Wary of an uncertain economy, MedTech companies have resorted to
the acquisition route to harness their strengths and diversify
Major concluded deals include
Johnson & Johnson's
) acquisition of Synthes, which should help strengthen its medical
device portfolio. This is one the biggest deals (approximately $21
billion) inked in recent times in the MedTech space.
Boston Scientific has been looking to expand through acquisitions
to counter the challenges of its core segments. After strengthening
its Cardiac Rhythm Management (CRM) portfolio with a subcutaneous
implantable cardioverter defibrillator (ICD), the S-ICD system,
with the acquisition of Cameron Health, the company is in the
process of acquiring Minnesota-based BridgePoint Medical. This deal
would bring in a catheter-based system to treat coronary chronic
total occlusion, which has received both US Food and Drug
Administration (FDA) and CE Mark approvals.
Low global penetration and demand outstripping supply provide a
positive long-term thesis for investing in the blood processing and
supply chain management industry. With the acquisition of the
transfusion medicine business of
) will be able enter the $1.2 billion whole blood collection
market. Haemonetics is also in the process of acquiring Hemerus
Medical, a Minnesota-based company that develops technologies for
the collection of whole blood, and processing and storage of blood
Mediware Information Systems
) has strengthened its position in the blood management solutions
industry with the acquisition of Indianapolis-based Strategic
Healthcare Group, a leading provider of blood management
consulting, education and informatics solutions.
), spearheading noninvasive monitoring technologies, acquired
Sweden-based PHASEIN AB, a developer and manufacturer of
ultra-compact mainstream and sidestream capnography, multigas
analyzers and handheld capnometry solutions. Other acquisitions
announced include that of Viking Systems by
) and GenturaDx, a molecular diagnostics company by
), a global medical products player specializing in a wide range of
contact lenses and also targeting the women's health market,
acquired Denmark-based Origio to beef up its women's health
franchise. Origio develops, manufactures and distributes highly
specialized products targeting in-vitro fertilization treatment.
Covidien is also on the acquisition bandwagon. The company recently
announced its decision to acquire privately held CNS Therapeutics,
a specialty pharmaceutical company dealing with products for
site-specific administration to the central nervous system to treat
neurological disorders and intractable chronic pain. Other recent
acquisitions by Covidien include Oridion Systems, expanding its
portfolio in respiratory monitoring equipment; superDimension,
which develops minimally invasive interventional pulmonology
devices; and ventilator maker Newport Medical Instruments.
Meanwhile, trends over the recent past reflect focus on the
diagnostics space. A prime example is women's health giant
) acquisition of Gen-Probe for approximately $3.7 billion in
August. In September,
) announced its decision to acquire
), a leading manufacturer of automated in-vitro diagnostics systems
and consumables, and a provider of high value personalized medicine
Thermo Fisher Scientific
) strengthened its Specialty Diagnostics business with the
acquisition of One Lambda, a leading player in the field of
) with two tuck-in acquisitions -- Navigenics and Pinpoint Genomics
-- is building its diagnostics franchise. Moreover, Life
Technologies has several agreements with pharmaceutical players
) to shore up its companion diagnostics franchise.
Going forward, we do not expect this M&A trend to slacken. We
also expect a significant pickup in in-licensing activities and
collaborations for the development of pipeline candidates. Several
MedTech majors, struggling with their core businesses, are looking
to explore potential emerging therapies.
Another avenue of growth for the MedTechs is the huge untapped
potential of emerging markets. An aging population, rise in wealth,
government focus on healthcare infrastructure and expansion of
medical insurance coverage make these markets a happy hunting
ground for the global medical device players.
The Indian government plans to spend 2.5% of its GDP (from the
previous level of 1.2%) on healthcare during the 12th Plan
(2012-2017) and raise it to at least 3% by 2022. China is also
increasing its expenditure to build hospitals and setting up proper
health insurance coverage that should boost the healthcare sector.
It is expected that within the next decade, China will be the
biggest healthcare market in the world, outpacing the US.
The focus on emerging markets is all the more significant amid
saturation in the developed markets of US, Europe and Japan in
addition to economic uncertainties restricting growth. Companies
like Medtronic, Boston Scientific, Thermo Fisher Scientific and
Life Technologies are all vying to expand their presence in India,
China, Brazil and other emerging markets. These companies are also
looking at establishing their manufacturing facility to serve the
While Johnson & Johnson has been doing business in China for
more than 25 years, it established a new innovation center in the
country in 2011 to design and develop medical devices and
diagnostic products specifically for Asia's emerging markets. Other
recent developments include the setting up of Medtronic's
Innovation Center in Shanghai in August 2012, the company's first
outside the US and Europe; Boston Scientific's plan to invest $150
million in China over the next 5 years to build a local
manufacturing operation; and ongoing expansion of Life
Technologies' distribution centers in both Singapore and China.
In the light of the investments made in the emerging space, the
MedTech companies are setting their targets for these markets.
While Medtronic is targeting 20% of its revenues from emerging
markets by fiscal 2015−16, Boston Scientific is aiming to increase
its below-average market share in the $700 million combined drug
eluting stent market in China and India, which is growing sharply
at 20%. Recently, Medtronic announced its decision to acquire
China Kanghui Holdings
) for $816 million in cash that would strengthen its orthopedic
franchise in the country.
Life Technologies expects this region to contribute $1.6 billion to
revenues in 2015, up from just $188 million in 2007, representing a
CAGR of 30%. Similarly, Thermo Fisher is leaving no stone unturned
to garner 25% of total revenues from the high-growth Asia-Pacific
and emerging markets by 2016 from 19% in 2011 (10% in 2006).
Healthcare Reform: Tax Fear Grips MedTech
The Government-mandated health care reform in the US -- the Patient
Protection & Affordable Care Act (aka "ObamaCare") -- will
impact the financial results of medical device companies. The
reform has led to a less flexible pricing environment for these
companies and may increase pricing pressure across the board.
Moreover, the highly controversial tax, representing a part of the
Act, will be a drag on device companies. When implemented, device
makers will have to pay 2.3% excise tax on sales of certain
products beginning 2013.
The outlay is expected to throttle innovation as it will impact
investment in R&D. Moreover, it will lead to job cuts and
higher prices for customers. The federal government expects to
raise $20 billion in taxes over a ten-year period. In response,
device makers are employing several initiatives, including
headcount reduction and other restructuring activities, to counter
costs associated with the implementation of the new tax.
We continue to have a Neutral outlook on large-cap medical device
stocks. While the companies will keep facing challenges like
pricing pressures, declines in procedural volume from economic
uncertainties and sluggish growth in the CRM business, increased
focus on emerging markets and product approvals in latent areas
could help reduce the impact. Better pipeline visibility and
appropriate utilization of cash should increase confidence in the
medical device sector.
With a slew of new products, the Big Three players [Medtronic,
Boston Scientific and
St. Jude Medical
)] in the ICD market are striving to gain market share, despite the
challenging business environment and several other barriers to
growth. These players are also exploring new avenues of growth
beyond the mature pacemaker and ICD markets. With gradual stability
in the ICD market, these players should be able to revive their top
In our universe, we see growth potential in companies dealing with
promising technologies. In this respect,
) represents a value proposition. Following the US approval of
Sapien (for the treatment of certain inoperable patients with
severe symptomatic aortic stenosis) in November 2011, sales of the
device have been quite encouraging so far.
The company is also progressing well with respect to imparting
training centers. Given a strong second quarter performance,
Edwards raised its 2012 outlook for Sapien sales in the US.
Moreover, with a favorable recommendation from the FDA's advisory
panel for Sapien in high-risk patients, the probability of final
approval is high.
Robotic surgery is another fledgling area and
) clearly leads the pack with its state-of-the-art technology.
Intuitive enjoys a virtual monopoly in robotic surgery and
continues to deliver forecast-topping earnings. Its sales are
growing at a torrid pace buoyed by the da Vinci surgical system.
With higher average selling price per system, which stood at $1.53
million in the second quarter of 2012 (up from $1.44 million in the
year-ago period and $1.47 million in the first quarter) and
upgraded revenue outlook for 2012 (growth now expected at 20−23%
versus earlier projection of 19−21%), this company is well placed
to traverse a higher trajectory.
We also believe that cardiac assist devices maker
) represents another attractive opportunity for investors. The
company reported the best quarter in its history with 42% growth in
revenues and 56% growth in its Impella device, which is
increasingly penetrating the percutaneous circulatory support
segment in the US. This is amply proved by the more than 30% growth
recorded by Impella for the 11th straight quarter. Given the strong
growth potential for both Intuitive Surgical and Abiomed, estimates
for these companies have been on the rise since the last reported
We are positive on
), which reported a strong third quarter of fiscal 2012, leading it
to raise guidance for the fiscal year. Additional factors such as
margin expansion, acquisitions expanding the product line and
geographical reach as well as share buybacks and an attractive
valuation are driving the stock. Moreover, this contact lens and
women's health focused company has delivered positive earnings
surprises in six of the last seven quarters with an average beat of
On the back of rising earnings estimates owing to strong fourth
quarter and fiscal 2012 results, and several strategic initiatives
to re-align its portfolio, we are bullish on
). Moreover, this global medical technology company has delivered
positive earnings surprises in six of the last seven quarters with
an average beat of 5.1%. While the company is dogged by product
recalls, it is continuously working on investing in quality
Banking on its core product, Invisalign Clear Aligner,
) has established itself as a strong player in the malocclusion
market. Based on the strength of this product, the company was able
to exceed consensus estimates for both revenues and earnings over
the past six quarters in a row.
Contribution from the acquisition of Cadent has helped Align to
entrench its presence in the malocclusion market. We are positive
on the company, which has immense growth potential in the
malocclusion market. Moreover, estimates of the company for both
2012 and 2013 have been on the rise over the last 90 days.
Cooper, CareFusion and Align Technology all carry Zacks #1 Ranks
(short-term Strong Buy rating).
Beyond the MedTech majors, we are optimistic about scientific
Thermo Fisher Scientific
). This leading, diversified scientific instrument maker has been
successfully expanding operating margins over the past few quarters
on the back of operational efficiency. Its focus on keeping the
cost structure lean has helped the company to achieve this end. It
has strong international exposure and is focusing on acquisitions
and emerging markets for growth though the academic/government
market is still fettered by constraints.
Coming to the weakest link in the MedTech sector, we recommend
avoiding names that offer little growth/opportunity over the near
term. These include companies which reported disappointing earnings
in the last reported quarter.
) carries a Zacks #5 Rank (short-term Strong Sell rating). The
company reported a disappointing second quarter with both revenues
and earnings missing the Zacks Consensus Estimates.
Moreover, revenue guidance for 2012 was lowered by $10 million to
$765−$775 million due to lower-than-expected capital product sales
on the back of economic headwinds in the first half though earnings
guidance was maintained. With earnings estimates for 2013 declining
significantly and limited visibility for the near future, it is
better to avoid this stock.
) began fiscal 2013 on a disappointing note with both sales and
earnings lagging the respective Zacks Consensus Estimates. Despite
18% year-over-year growth in sales, the company was adversely
affected by lower-than-expected revenue from large, higher-margin
software system sales. In addition, declining margins remain
another challenge for the company.
) also exited fiscal 2012 on a disappointing note with revenues and
loss per share lagging the Zacks Consensus Estimates. The worst
part was the double-digit decline in Cyberknife revenues in fiscal
2012 primarily due to shipment delays in Europe and lower demand in
The company is also facing challenges in combining the direct sales
teams following the TomoTherapy acquisition in the US. A
challenging outlook and slashed estimates for the upcoming two
fiscals make this stock unappealing for investors.
Another company we remain concerned about is
), a world leader in mechanical circulatory support with a product
portfolio to treat heart failure patients. However, its dominance
in the bridge-to-transplant ('BTT') indication will be challenged
following the prospective approval of HeartWare International's
Ventricular Assist System later this year. Apprehending increased
competition in the BTT indication for Thoratec, 2013 estimates have
been on a downtrend over the last 90 days.
Several pressing issues currently at play in the MedTech sector are
One of the biggest challenges of the MedTech industry is the
current economic uncertainty. While the debt crisis in Europe
remains unabated, economies throughout the world are trying to come
to terms with myriad challenges. Consequently, procedural volumes
in the US have been hit by a high unemployment rate, which has
resulted in the expiry of health insurance as well as a decline in
enrollment in private health plans. Governments across several
European countries have taken up measures to curb spending on
devices, which is taking a toll on utilization. Volume headwind is
likely to linger as unemployment continues to influence procedure
Players in the medical device space are experiencing pricing
pressure of varying degrees. Companies are witnessing global
pricing pressure in the CRM business and in some cases in stents.
Although data from the recently reported quarter signal some relief
in the rate of pricing erosion, we believe pricing will continue to
bother given global budget constraints amidst deteriorating
Adding to the risk is the foreign exchange headwind (stemming from
the strengthening of the US dollar) as medical device companies
derive a chunk of revenues from overseas markets. Factoring in the
negative currency impact and economic uncertainty, several
companies have already lowered their forecasts for 2012. Medical
device makers are also expected to contend with margin pressure
given the sustained pricing headwind.
Still Clouded Orthopedic Space
Orthopedics is one of the largest medical device market segments
worldwide. However, this market, valued at approximately $30
billion in 2011, is still struggling as patients defer elective
procedures given the lingering economic softness. Lukewarm demand
is exacerbated by sustained pricing pressure. In particular, the
reconstructive market fundamentals (pricing and volume) have
languished over the recent past with little signs of stability. The
joint replacement market has been hit by patient deferral of
elective procedures, leading to weak demand for hip and knee
Pricing compressions on hips, knees and spine products, which
impaired the performances of several orthopedic companies, remain a
key concern, at the macro level. We remain skeptical about
Wright Medical Group
Smith & Nephew
) given the sustained price/volume pressure. Moreover, these
players have been subject to downward estimate revisions for 2013
over the last 90 days.
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