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Rush in Medical Device Investments: Should You Buy These Stocks?

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The investment world has been in a state of unrest over the past few months. The reasons for this have been many, ranging from geopolitical uncertainty resulting from terrorist attacks and civil wars to macroeconomic uncertainties. Although the markets have shown remarkable stoicism in the face of these incidents, the general enthusiasm about investing seems to be a little muted.

Meanwhile, presidential hopefuls in the U.S., from both camps, are not missing a chance to get a dig at each other. Though their comments and tweets on key issues are mostly nothing more than political grandstanding, they do have temporary repercussions on the markets.

M&A Continues

This uncertain backdrop has failed to bring about a slowdown in the medical device space as far as mergers and acquisitions (M&As) are concerned. In fact, to our surprise, we observe that the U.S. government's pushback on tax-dodging deals has hardly made any difference to M&A activity. Instead, according to a recent EvaluateGroup report, 86 mergers and acquisitions took place in the MedTech industry, in the first half of 2015, with a total valuation of $83 billion, already an all-time record for acquisition values. The full-year M&A valuation (based on closed deals) is expected to reach $100 billion.

The most striking M&A in recent times in medical devices was Medtronic plc's ( MDT ) $42.9 billion takeover of Irish rival Covidien in Jan 2015. This acquisition, the biggest in the medical devices space, is expected to strengthen the enlarged company's long-term market competitiveness.

One of the next two most notable M&A deals, which constitutes a big portion of 2015 M&A valuation, was between Zimmer Holdings and Biomet ($14 billion; completed in Jun 2015), leading to the formation of a new combined entity in the musculoskeletal industry - Zimmer Biomet ( ZMB ). The other was the $12.2 billion merger between Becton, Dickinson and Company ( BDX ) and CareFusion.

On the same path, in Feb 2015, Laboratory Corporation of America Holdings ( LH ) acquired drug development major Covance for $5.7 billion. Also worth mentioning was the $3.3 billion merger between the global orthopedic device maker Wright Medical ( WMGI ) and the Netherlands based medical device company, Tornier (closed in Oct 2015). In the same month, St Jude Medical completed its $3.3 billion acquisition of Thoratec Corporation, a prominent player in mechanical circulatory support (MCS) technology for the treatment of advanced heart failure (HF).

In November, Steris Corp. ( STE ) closed its M&A deal with U.K.-based outsourced sterilization services provider Synergy Health executing its plans to move its corporate headquarters to the U.K., reportedly to lower its tax burden.

Finally, the recently completed $2.7 billion merger between Cyberonics and Italy-based Sorin SpA is expected to create a global leader in heart surgery, with primary focus on heart failure, sleep apnea and heart valves.

Rush for Divestments

While the trend continues for medical device majors to offload their non-core business segments, largely to gain greater operational focus and clarity, they are also forced by the U.S. Federal Trade Commission (FTC) and other international anti-trust regulators to divest assets that are similar to the ones acquired through mergers. This restricts the chance of monopoly practice in the market.

Let's take a look at some of the latest significant divestments.

In Nov 2015, Mindray Medical International Limited ( MR ) declared that its shareholders have recently agreed to sell the company to Excelsior Union Limited for $28 per American Depositary Share (ADS).

In the same month, in order to seek greater value for its BBI Diagnostics business, Alere Inc. ( ALR ) sold off the unit to U.K.-based Exponent Private Equity. The company believes the divestment will strengthen its core business and balance sheet. In June, Bayer decided to shed its diabetes devices unit to Japan-based Panasonic Healthcare Holdings Co., for $1.13 billion. According to the company, the sale of this unit, which was suffering from reimbursement related issues, will enable it to focus more on its profitable life-sciences operations.

As a part of its disciplined portfolio management approach, in Oct 2015, Johnson & Johnson ( JNJ ) divested its Cordis business to Cardinal Health for a total value of $1.99 billion.

Zimmer, on the other hand, sold out certain assets of its Unicompartmental High-Flex Knee System, Biomet Discovery Elbow System and Cobalt bone cement businesses in the U.S. to get the European anti-trust regulators' approval for the Biomet merger. Abbott Laboratories ( ABT ) has also divested a portion of its generics pharmaceuticals business to Mylan (MYL).

Huge Emerging Market Openings

Investors interested in the MedTech sector can also look for companies largely investing in the fastest growing and still to be fully tapped emerging markets. Economists point out that although the U.S. holds the leading position with almost one-third of global market share, a gradual slowdown in the mature markets due to a number of lingering headwinds is forcing MedTech companies to look for opportunities in the developing world.

However, the so called developing and improving world is also bifurcating itself. While economists not so long ago were enthusiastic about the expected gold rush in the BRIC (Brazil, Russia, India and China) nations, the situation has taken an unfortunate turn with slowing economic growth in China, Brazil on the edge of a recession and political turbulence in Russia. On the positive side, the outlook for India and Indonesia remains favorable as it is for Mexico, Columbia, Poland and Kenya.

Abbott continues to lead the emerging market investment trend with about 50% of sales from this region. Sales in key emerging markets climbed 18.9% driven by growth in India, Russia, Brazil, China, and certain markets in Latin America. At Medtronic, while growth in the rest of the world was low to declining, the emerging markets demonstrated strong growth in the last reported quarter, which contributed nearly 190 basis points (bps) to the company's overall revenue growth. Post Covidien integration, the combined entity is likely to generate about $27 billion in total revenue, including $3.7 billion from emerging markets.

Boston Scientific Corporation ( BSX ) achieved 13% emerging market growth in the third quarter of 2015, well on track with the company's target of reaching 15% of sales in 2017 from 8% in 2013. Stryker, despite the difficult macroeconomic situation in China and Brazil, is working on further expansion in key geographies like India, Russia and Turkey.

Strongest Links

Among the medical product stocks, companies like GW Pharmaceuticals plc ( GWPH ), ICU Medical, Inc. ( ICUI ), INSYS Therapeutics, Inc. ( INSY ) and Nxstage Medical, Inc. ( NXTM ) look attractive, with all carrying a Zacks Rank #1 (Strong Buy). Abaxis, Inc. ( ABAX ), NuVasive, Inc. ( NUVA ) and LeMaitre Vascular, Inc. ( LMAT ) are also well positioned with a Zacks Rank #1 (Buy).

In the medical instrument space, we are positive on Masimo Corporation (MASI) and Natus Medical Inc. ( BABY ) among others, all carrying a Zacks Rank #1. Besides, Thermo Fisher Scientific, Inc. ( TMO ), Steris and Intuitive Surgical, Inc. ( ISRG ), all with a Zacks Rank #2 are also expected to do well.

Some of the other important MedTech stocks worth looking into are Bayer AG ( BAYRY ), Cardinal Health, Inc. ( CAH ), Align Technology Inc. ( ALGN ) and Amedisys Inc. ( AMED ), all carrying a Zacks Rank #2.

Weaknesses

Coming to the weakest links in the MedTech sector, we advise investors against names that offer little growth/opportunity in the near term. These include companies for which estimate revision trends reflect a bearish sentiment.

Stocks which do not look inspiring are Alere Inc., The Cooper Companies Inc. ( COO ) and Illumina Inc. ( ILMN ), all carrying a bearish Zacks Rank #4 (Sell). Community Health Systems, Inc. ( CYH ) and Haemonetics Corporation ( HAE ) bears a Zacks Rank #5 (Strong Sell).

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WRIGHT MED GRP (WMGI): Free Stock Analysis Report

THERMO FISHER (TMO): Free Stock Analysis Report

STERIS PLC (STE): Free Stock Analysis Report

NXSTAGE MEDICAL (NXTM): Free Stock Analysis Report

NUVASIVE INC (NUVA): Free Stock Analysis Report

MYLAN NV (MYL): Free Stock Analysis Report

MINDRAY MEDICAL (MR): Free Stock Analysis Report

MEDTRONIC (MDT): Free Stock Analysis Report

MASIMO CORP (MASI): Free Stock Analysis Report

LEMAITRE VASCLR (LMAT): Free Stock Analysis Report

LABORATORY CP (LH): Free Stock Analysis Report

JOHNSON & JOHNS (JNJ): Free Stock Analysis Report

INTUITIVE SURG (ISRG): Free Stock Analysis Report

INSYS THERAP (INSY): Free Stock Analysis Report

ILLUMINA INC (ILMN): Free Stock Analysis Report

ICU MEDICAL INC (ICUI): Free Stock Analysis Report

HAEMONETICS CP (HAE): Free Stock Analysis Report

GW PHARMA-ADR (GWPH): Free Stock Analysis Report

COMMNTY HLTH SY (CYH): Free Stock Analysis Report

COOPER COS (COO): Free Stock Analysis Report

CARDINAL HEALTH (CAH): Free Stock Analysis Report

BECTON DICKINSO (BDX): Free Stock Analysis Report

BAYER A G -ADR (BAYRY): Free Stock Analysis Report

NATUS MEDICAL (BABY): Free Stock Analysis Report

AMEDISYS INC (AMED): Free Stock Analysis Report

ALERE INC (ALR): Free Stock Analysis Report

ALIGN TECH INC (ALGN): Free Stock Analysis Report

ABBOTT LABS (ABT): Free Stock Analysis Report

ABAXIS INC (ABAX): 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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