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 orthopaedic and trauma products to imaging equipment.
Before the outbreak of COVID-19, the Medical Instruments space was advancing well in terms of research and development (R&D). Among the path-breaking inventions of recent times, 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 are worth mentioning.
However, over the past six months, the pandemic has put a brake on the flow of seamless R&D operations. Many non-coronavirus and non-emergency-line innovations have been stuck or delayed due to the lockdowns.
Notably, some of the key players in this industry are Varian Medical Systems, Inc. (VAR), IDEXX Laboratories, Inc. (IDXX), Intutive Surgical, Inc., Hologic, Inc., Edwards Lifesciences (EW) and Abiomed, Inc. (ABMD) .
Here are the four major industry themes:
- Growth Disruption Due to the Pandemic: Amid the coronavirus-led worldwide economic downturn, many sub domains within the medical instrument space have been among the hardest hit due to the imposition of widespread stay-at-home orders. These orders led to customers deferring their non-essential and elective procedures, thus affecting the companies and pulling down their revenues. The uncertainties about the financial impacts were such that the companies could not provide guidance for the upcoming quarters. However, medical instrument companies focusing on critical care equipment were in the limelight. ViewRay (VRAY), a radiation therapy system provider in the field of oncology, has been one of the top gainers as the pandemic did not hinder its critical care operations. Further, molecular diagnostic testing companies, which are dealing with rising testing requirements for COVID-19 across the world, are also prospering. A notable player in this business is Thermo Fisher Scientific.
- 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 Thermo Fisher, Boston Scientific, Medtronic and 3M Co being the prime line acquirers. At present, Thermo Fisher is in the process of buying molecular diagnostics and sample preparation technologies major QIAGEN for a deal value of $11.5 billion.
- 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 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, bioprinting, 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 Health care 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 artificial intelligence technologies witnessed a 50% reduction in treatment costs and also experienced more than 50% improvement in patient outcome. Amid the pandemic, this line of healthcare is becoming a major choice for contactless healthcare services. Telemedicine stocks received an impressive response, when in February, the Centers for Disease Control and Prevention asked healthcare service communities to broaden the use of telemedicine. Further, the FDA has approved the expanded use of remote patient monitoring technologies with the aim of minimizing hospital visits, thereby reducing the risk of exposure to the virus. MedTech companies are currently collaborating with technology majors like Google, Apple and IBM to grow in this space.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Medical Instruments industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #148, which places it in the bottom 41% 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 gloomy 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 & Sector
The industry has outperformed the Zacks S&P 500 composite as well as its own sector in the past year.
The industry has gained 8.4% compared with the S&P 500’s 6.5% increase and the broader sector’s 2.6% rally 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 41.04X compared with the broader industry’s 22.64X and the S&P 500’s 22.69X.
Over the past five years, the industry has traded as high as 41.50X, as low as 23.23X and at the median of 28.04X, as the charts show below.
Price-to-Earnings Forward Twelve Months (F12M)
Price-to-Earnings Forward Twelve Months (F12M)
Amid the coronavirus-led economic crisis, worldwide production and supply disruption have put many smaller players’ businesses at stake right now. Many of these are currently unable to properly access credit or equity funding. If the situation persists, it can lead to a severe survival crisis going forward.
Among the long-term trends, apart from the ones discussed above, 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 lead to a situation in which healthcare organizations are deemed to be downright laggards when it comes to adopting modern business practices and supporting technologies.
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, we present three stocks that have a Zacks Rank #1 (Strong Buy) or #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 stocks here.
Thermo Fisher Scientific, Inc. (TMO)
The company is a scientific instrument maker and a world leader in serving science. With several takeovers including Advanced Bioprocessing buyout from Becton, Dickinson and Company and Patheon, Thermo Fisher is moving steadily on the inorganic growth path. The company’s strong focus on emerging market is also encouraging.
Price and Consensus: TMO
The Zacks Consensus Estimate for this Zacks Rank #1 company’s 2020 sales is pegged at $25.87 billion, indicating 1.3% rise year over year. The same for adjusted earnings per share is pegged at $12.73, indicating an increase of 3.1% from the year-ago period. The company has returned 31.2% in a year’s time.
Integra LifeSciences (IART)
It is one of the world leaders in regenerative medicine. The company develops, manufactures and markets cost-effective surgical implants and medical instruments. A series of product introductions, particularly in Extremities franchise and strong overseas expansion are expected to add value in the long run.
Price and Consensus: IART
The Zacks Consensus Estimate for this Zacks Rank #2 company’s 2021 sales is pegged at $1.53 billion, indicating 16.6% rise year over year. The same for adjusted earnings is pegged at $2.73 per share, indicating an increase of 54.3% from the year-ago period.
ViewRay, Inc. (VRAY)
The company designs, manufactures, and markets the MRIdian MR-Guided Radiation Therapy System. This is built upon a proprietary high-definition MR imaging system designed from the ground to address the unique challenges and clinical workflow of advanced radiation oncology.
Price and Consensus: VRAY
The Zacks Consensus Estimate for this Zacks Rank #1 company’s 2021 sales is pegged at $84.9 billion, indicating 67% rise year over year. The same for adjusted loss per share is pegged at 66 cents, indicating 1.2% improvement from the year-ago period figure.
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ViewRay, Inc. (VRAY): Free Stock Analysis Report
Varian Medical Systems, Inc. (VAR): Free Stock Analysis Report
Thermo Fisher Scientific Inc. (TMO): Free Stock Analysis Report
IDEXX Laboratories, Inc. (IDXX): Free Stock Analysis Report
Integra LifeSciences Holdings Corporation (IART): Free Stock Analysis Report
Edwards Lifesciences Corporation (EW): Free Stock Analysis Report
ABIOMED, Inc. (ABMD): Free Stock Analysis Report
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