MedTech Industry Stock Outlook - July/Aug 2015 - Zacks Analyst Interviews

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Will the 2016 Election Decide the Future of MedTech?

The fight over Obamacare is not over yet. While Republicans are vociferously campaigning for getting their own President in the office to get rid of the health care law, the Supreme Court has once again been a savior of the Affordable Care Act (ACA).

The recent Supreme Court ruling has helped clear the air to a large extent for Obamacare. While there is still room for challengers to oppose the verdict, this decision undoubtedly has given a firm basis to the ACA. "Five years ago, after nearly a century of talk, decades of trying, a year of bipartisan debate, we finally declared that in America, health care is not a privilege for a few but a right for all," Obama said from the White House following the Supreme Court verdict.

In this conflicting political climate, it's important to dwell on some of the key facts under Obama's proposed agenda for the 2016 budget declared in early February. The President wished to repeal the long-debated automatic and harmful spending cuts known as sequestration by cutting inefficient spending and closing tax loopholes. He also put forward his idea of a more sustainable growth path by achieving $1.8 trillion in deficit reduction, primarily from reforms in health programs, tax code and immigration.

The President's budget 2016 proposed robust investments in research and development (R&D) to encourage the creation of new products, capabilities and industries needed for sustainable economic growth. The budget has allotted $31.3 billion to the National Institutes of Health (NIH) to support biomedical research, a $1 billion increase over 2015 funding.

According to a report by FASEB (the Federation of American Societies for Experimental Biology), this is a 3.3% ($1 billion) year-over-year increase from the enacted fiscal 2015 level. Overall, the budget provides $146 billion for R&D, a 5.5% increase from fiscal 2015.

The 'Balanced Budget' by the Republicans, on the other hand, demanded the repeal of the ACA (Obamacare) in its entirety, including all of its taxes, regulations and mandates. As the proposal says, "we end the over $700 billion Obamacare raid on Medicare and ensure Medicare savings go toward improving Medicare solvency, not to pay for a new entitlement." The proposed budget also repeals Obamacare's Medicaid expansion plan, which they believe will help them to focus on their core mission of serving the neediest.

Although the Republican's proposed budget has raised questions about Obamacare, recently released government data showed that about 16.4 million uninsured people have gained health insurance coverage since the enactment of the Affordable Care Act five years back. This led to the largest decline in the uninsured rate since 2012. As per a CNN article, Health and Human Services Secretary Sylvia Burwell said the numbers prove "the Affordable Care Act is working, and families, businesses and taxpayers are better off as a result."

What's the Global Scenario?

Despite the socio-economic and political disorder prevailing in most of the geographic markets, the overall MedTech industry has so far been positive in 2015. Besides existing factors like longer life expectancies, mergers and acquisitions, emerging markets, increased regulatory scrutiny and health care reform, we can observe some newer trends emerging in the latter half of the year.

Med Device Online has in a research report outlined four most important trends that are gradually transforming the global medical device industry. Three-dimensional (3-D) printing will revolutionize personalized medicine; mobile health applications will become pivotal instruments in patient care; reimbursement approval will secure venture funding while a stronger focus will be brought to cybersecurity in medical devices.

Which Market Has the Strongest Growth in 2015?

According to the Med Device Online report referred above, companies located in Asia continue to be quite optimistic about 2015 industry prospects, accompanied by those in the Americas (mostly the U.S.). The study showed that firms based in the Americas have expressed more positive individual outlooks (45%) than their Asian (38%) or Europe, Mid-East and Africa (EMEA) (36%) counterparts.

The strong projection is backed by a positive outlook for the U.S. economy, where GDP is expected to grow around 3% by most estimates. This is about two points higher than projections for GDP growth in Europe. Economists are of the opinion that even though U.S. health care spending growth has slowed down and pricing pressures continue to affect the companies, there is good potential for revenue growth.

Based on annualized revenues, volume and average price, the stocks which are going to consistently add value to the medical device space are Medtronic plc ( MDT ), St Jude Medical Inc. ( STJ ) and Boston Scientific Corp. ( BSX ) (in Cardiology); Roche Holding AG ( RHHBY ) and Becton, Dickinson and Co. ( BDX ) (In Vitro Diagnostics); Siemens, General Electric ( GE ), Philips (Diagnostic Imaging); and Johnson & Johnson ( JNJ ), Stryker Corp. ( SYK ), Zimmer Biomet Holdings, Inc. ( ZBH ) (Orthopedics).

Zacks Industry Rank

Within the Zacks Industry classification, Medical Device is broadly grouped into the Medical sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level: med instruments, med products, med/dental-supp and medical info systems.

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank .

As a guideline, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for med products is #49, med/dental-supp is #52, med instruments is #81 while the medical info systems is #115. Analyzing the Zacks Industry Rank for different Medical Device segments, it is obvious that the outlook for med products, med instruments, med/dental-supp is positive, while that of the medical info systems is neutral.

Earnings Trend of the Sector

Of the S&P 500 members in the Medical Device space, 11.5% have reported second quarter results so far which have been fairly good with respect to beat ratios (percentage of companies coming out with positive surprises).

The earnings "beat ratio" was 100%, while the revenue "beat ratio" was 50% in the second quarter. So far, the sector has witnessed 3.1% year over year growth in earnings on 2.5% revenue growth. With this, the sector is expected to register earnings growth of 7.6% in the second quarter and 10.3% in 2015. In terms of revenue expectation, the sector is expected to register 7.7% year-over-year growth in the second quarter, resulting in an annual growth rate of 7.9%.

For more information about earnings for this sector and others, please read our 'Earnings Trends' report.

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ZIMMER BIOMET (ZBH): Free Stock Analysis Report

STRYKER CORP (SYK): Free Stock Analysis Report

ST JUDE MEDICAL (STJ): Free Stock Analysis Report

ROCHE HLDG LTD (RHHBY): Free Stock Analysis Report

MEDTRONIC (MDT): Free Stock Analysis Report

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

GENL ELECTRIC (GE): Free Stock Analysis Report

BOSTON SCIENTIF (BSX): Free Stock Analysis Report

BECTON DICKINSO (BDX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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