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 ortho and trauma products to imaging equipment.
The past few months have been remarkable for the Medical Instruments space in terms of research and development (R&D). Riding on path-breaking inventions like 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, the medical instruments space has gone from strength to strength.
Notably, some of the key players in this industry are Intuitive Surgical, Inc. (ISRG - Free Report) , IDEXX Laboratories, Inc. (IDXX - Free Report) , Hologic, Inc. (HOLX - Free Report) and Abiomed, Inc. (ABMD - Free Report) .
Here are the three major industry themes:
- 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 (BSX), Medtronic and 3M Co (MMM - Free Report) being the prime line acquirers. Boston Scientific's recently-completed $4.2 billion acquisition of BTG Plc and 3M’s $6.7 billion buyout of advanced wound care and specialty surgicalplayer Acelity aretwo major deals of 2019.
- 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 from 2018 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 Newsr report suggests that this market, valued at $123 billion in 2018, is witnessing CAGR of 25%. Various other 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. MedTech companies are currently collaborating with technology majors like Google, Apple and IBM to grow in this space.
Zacks Industry Rank Indicates Strong Prospects
The Zacks Medical Instruments industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #57, which places it in the top 23% 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 solid 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 10% over this period compared with the S&P 500’s 2.1% increase and the broader sector’s 3.5% 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 31.91X compared with the broader industry’s 19.57X and the S&P 500’s 17.43X.
Over the past five years, the industry has traded as high as 33.49X, as low as 23.32X and at the median of 27.30X, 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.
However, 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 #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.
Varian Medical Systems, Inc. (VAR - Free Report)
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 2020 sales is pegged at $3.57 billion, indicating 7% rise year over year. The same for adjusted earnings is pegged at $5.39 per share, indicating an increase of 16.4% from the year-ago period.
Year-to-date, the stock has returned 8.1%.
Edwards Lifesciences Corporation (EW - Free Report)
The company is a leading manufacturer of tissue heart valves and repair products used to replace or repair a patient's diseased or defective heart valve. Edwards is also a leading player in hemodynamic monitoring systems used to measure a patient's cardiovascular function in the hospital setting.
Price and Consensus: EW
The Zacks Consensus Estimate for the company’s 2019 sales is pegged at $4.33 billion, indicating 16.3% rise year over year. The same for adjusted earnings per share is pegged at $5.57, indicating an increase of 18.5% from the year-ago period. The company has returned 57.9% in a year’s time.
Thermo Fisher Scientific, Inc. (TMO - Free Report)
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 expanding inorganic growth profile. The company’s strong focus on emerging market is also encouraging.
Price and Consensus: TMO
The Zacks Consensus Estimate for the company’s 2019 sales is pegged at $25.49 billion, indicating 4.6% rise year over year. The same for adjusted earnings per share is pegged at $12.32, indicating an increase of 10.9% from the year-ago period. The company has returned 29.6% in a year’s time.