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 different products, starting from transcatheter heart valves to ortho and trauma products to imaging equipment.
Over the past few years, the scope in the Medical Instruments space has expanded exponentially. In fact, the past 12 months was remarkable in terms of research and development (R&D). Riding on path-breaking inventions like artificial pancreas, human-brain pacemaker, electronic skin that displays vital signs of the body, needle-free injections and many more, the medical instruments space went from strength to strength.
Per the latest available KPMG forecast, global medical instruments sector’s annual sales will rise more than 5% a year to reach nearly $800 billion by 2030. A CISION report states that the United States is the largest medical device market in the world at present, raking in more than $180 billion in revenues.
Here are the three major industry themes:
- M&A Trend Continues: The medical instruments fraternity has been benefiting fromongoing 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 stalwarts through consolidation. The bigshots 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 2018 with Stryker (SYK – Free Report) , Boston Scientific and Medtronic being the prime line acquirers. Boston Scientific’s (BSX – Free Report) $4.2 billion acquisition of BTG Plc was the year’s largest deal. The agency expects consolidation to continue at the same pace this year.
- Focus on Emerging Markets: Growing medical awareness and economic prosperity have been increasing the uptake of medical instruments in the 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 from 2018 states that, although the Americas still hold the position of the world’s largest medical device market, the Asia/Pacific and Western Europe markets are expected to expand at a quicker pace over the next several years.
The MedTech market in China, despite its unsettled tariff battle with the United States, is projected to grow significantly through 2022. India’s MedTech market is currently demonstrating 15% annual growth (As per Business Standard). If this continues, India may give competition to Japan and Germany by 2022.
- Digital Revolution: Digital trends like robotic surgeries, big-data analytics, bio printing, 3D printing, electronic health records (EHR), predictive analytics, real-time alerting and revenue cycle management services in the U.S. MedTech space are gaining prominence.
Various reports suggest that companies that adopted AI (Artificial Intelligence) technologies witnessed a 50% reduction in treatment costs and also experienced more than 50% improvement in patient outcome. This, along with a rise in minimally-invasive surgeries, higher demand for liquid biopsy tests, use of IT for quick and improved patient care, and the shift of the payment system to a value-based model has been driving profits at medical device companies of late.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Medical Instruments industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #60, which places it in the top 24% 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 bright 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’s Stock Market Performance
The industry has outperformed the Zacks S&P 500 composite as well as its own sector in the past year.
The industry has gained 10% over this period compared with the S&P 500’s 2.1% increase. The broader sector has rallied 3.5% 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) ratio, which is commonly used for valuing medical stocks, the industry is currently trading at 29.81X compared with the broader industry’s 21.49X and the S&P 500’s 16.15X.
Over the past five years, the industry has traded as high as 32.58X, as low as 21.22X and at the median of 26.29X, as the charts show below.
Price-to-Earnings Forward Twelve Months (F12M)
Price-to-Earnings Forward Twelve Months (F12M)
Apart from the trends discussed above, the bipartisan two-year suspension of a 2.3% excise tax on medical instruments and medical device manufacturers at the beginning of 2018 encouraged massive investments in the sector.
Per a CISION report, the United States remains the largest medical instruments market in the world, raking in more than $180 billion a year owing to rising research and development activities and growing exposure to AI.
Here, we present three stocks that have a Zacks Rank #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 (Strong Buy) stocks here.
In recent times, this animal-health product maker has witnessed strong gains in CAG Diagnostics recurring revenues and global premium instrument installed base. The company’s innovation-based, multi-modality global strategy, enabled by enhanced commercial capability, accelerated recurring CAG Diagnostics revenue growth. Companion animal market fundamentals remain solid with tremendous global runway for growth.
Price and Consensus: IDXX
The Zacks Consensus Estimate for 2019 EPS has moved up 0.4% in the past seven days. The same for full-year sales is pegged at $2.42 billion, indicating a 9.3% rise from the year-ago period. IDEXX has returned 43.7% over the past year.
In order to streamline its operations and reduce cost of revenues, Hologic has been adopting a few significant strategies over the past few years. The company has invested deliberately and opportunistically in commercial areas with potential solid returns. These include Hologic’s Genius marketing campaign in Breast Health, cervical cancer co-testing initiatives in Diagnostics, along with efforts to gain competitive market share with NovaSure.
Price and Consensus: HOLX
Per management, these strategic initiatives are already paying off through increased brand awareness, market share gains, and price stability, all of which will contribute to the company’s higher sales.
The Zacks Consensus Estimate for the company’s fiscal 2019 sales is pegged at $3.32 billion, indicating 3.2% rise year over year. The same for adjusted earnings stands at $2.41 per share, indicating an increase of 8.1% year over year.
The company has returned 17.7% in a year’s time.
Varian operates in a technology-driven environment where success depends on innovation and frequent product updates. The company has been successful on the R&D front as evident from year-over-year expansion of its top line.
Its varied offerings include TrueBeam and Edge platforms, HyperArc, Halcyon, InSightive Analytics, Qumulate QA and RapidPlan knowledge-based treatment planning. We believe that Varian’s innovative product pipeline will drive growth over the long term.
Price and Consensus: VAR
The Zacks Consensus Estimate for the company’s fiscal 2019 sales is pegged at $3.12 billion, indicating 7% rise year over year. The same for adjusted earnings is pegged at $4.70 per share, indicating an increase of 6.3% year over year.
The company has returned 27.3% in a year’s time.
Zacks’ Top 10 Stocks for 2019
In addition to the stocks discussed above, wouldn’t you like to know about our 10 finest buy-and-holds for the year?
From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 – 2017, they soared far above the market’s +126.3%, reaching +181.9%.
This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.