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It’s been more than six months since President Trump’s election and the medical device industry, which was earlier hopeful about the change of power in White House, is currently fussing over the inability of Republicans to come up with any healthcare policy. As of now, any reform in this respect seems a far cry. Per the latest New Republic article, “The Republican push to repeal and replace Obamacare is currently stalled in the Senate, where Majority Leader Mitch McConnell has delayed a vote until after the July 4 recess because his bill doesn’t have the necessary GOP support.”

Given the current lack of clarity, let’s concentrate on some powerful long-term tailwinds of the medical device industry like mergers & acquisitions (M&A), emerging market expansion, positive demographic trends and new product innovation. These have been driving the sector’s impressive performance despite severe socio-economic and political instability.

Also worth mentioning are the recent changes in consumer demand and market dynamics, which have led to a dramatic transformation in the healthcare system. This is evident from the growing number of minimally invasive surgeries, rising demand for liquid biopsy tests, use of IT for ensuring quick and improved patient care, and the shift of the payment system to a value-based model among others.

Let’s elaborate some of the major long-term drivers of the MedTech sector.

Major M&As

The year has started off with two MedTech mammoths joining forces. We are talking about Abbott’s colossal $25 billion consolidation with St. Jude Medical in January. The consolidated is currently on track to form a leader in high-growth cardiovascular markets, including atrial fibrillation, structural heart and heart failure as well as earn a leading position in the high-growth neuromodulation market.

The same month, another big merger took place, that of the acquisition of Israel-based Valtech Cardio by Edwards Lifesciences for a total deal value of $690 million. The acquisition allows Edwards Lifesciences to expand its services in the huge heart valve repair and replacement market in the emerging geographical regions.

A $1 billion merger deal was executed in February, through which Teleflex Inc. (TFX - Free Report) acquired Vascular Solutions that develops clinical solutions for minimally invasive coronary and peripheral vascular procedures. The combination is expected to meaningfully accelerate the growth of Teleflex’s vascular and interventional businesses.

Another path-breaking mega consolidation is the one between medical device major Becton, Dickinson and Co. BDX and medical, surgical, diagnostic, and patient care devices provider C. R. Bard Inc. BCR for $24 billion. After the completion of the deal in the fourth quarter of fiscal 2017, Becton, Dickinson promises to create a third business segment – BD Interventional.

This apart, Boston Scientific’s acquisition of Switzerland-based Symetis SA in May 2017 should fortify its structural heart business in Europe. Also worth mentioning is Integra LifeSciences’ plans to acquire the Johnson & Johnson Codman Neurosurgery business for $1.045 billion in cash.

It seems that the $43-billion Medtronic (MDT - Free Report) Covidien merger and the subsequent reports of how the consolidated company knocked off Johnson & Johnson (JNJ - Free Report) from its indisputable position as the top firm in the medical devices space, inspired other industry leaders to come forward with mega M&A deals.

Divestments

Medical device majors continue to offload their non-core business lines, specifically to focus on the main segments and to divest assets that are similar to the ones acquired through mergers. These divestures have been mandated by the U.S. Federal Trade Commission (FTC) and other international anti-trust regulators. This restricts chances of monopoly in the market.

Let’s take a look at some of the significant divestments in recent times.

In order to focus on a portfolio that delivers on global strategic priorities, Medtronic decided to divest part of its PMR (patient monitoring and recovery) division within MITG (Minimally Invasive Therapies Group) business to Cardinal Health for a deal value of $6.1 billion.

Following the announcement of its two major buyouts, Abbott divested its eye care business Abbott Medical Optics AMO to Johnson & Johnson for about $4.33 billion to streamline its newly added business lines. The AMO product lines have joined JNJ’s ACUVUE Brand Contact Lenses business, and the combined organization will operate under the brand name Johnson & Johnson Vision.

A marketer of aesthetic treatment systems, Cynosure, recently sold itself to Hologic, Inc. (HOLX - Free Report) . Notably, Hologic acquired all outstanding Cynosure shares for approximately $1.65 billion.

Wright Medical’s (WMGI - Free Report) recent divestiture of its large joints (hip/knee) business to Corin Orthopaedics is an example of the focus that the former puts on its core businesses.

In another development, in its bid to reduce and refine its portfolio and to repay long-term debts, Community Health Systems, Inc. CYH has decided to divest Rockwood Health System and the associated assets to MultiCare Health System.

Emerging Market Openings

According to a report by Visiongain, the global medical devices market will reach $398 billion in 2017 from $321 billion in 2012. This trend will continue to grow stronger through 2023.

The traditional market remains plagued by growing regulatory scrutiny, pricing pressure and no sign of a turnaround in the emerging markets of Latin America and Eastern Europe as per recent data from Euromonitor International. So, it’s the Asia Pacific region on which all the bets are being placed this year.

China and India’s healthcare service revenues are expected to grow at a massive rate, resulting in a large number of new hospital construction projects and soaring demand for medical and surgical equipment.

Abbott continues to lead the emerging market investment trend with about 50% of sales from this region. In recent quarters, sales in key emerging markets climbed in double digits driven by growth in BRIC as well as strong growth in several countries throughout Latin America, including Colombia, Mexico, Peru and Argentina.

At Medtronic, in the fourth quarter of fiscal 2017, business in China, Latin America and Southeast Asia showed sustained strength, growing by strong double digits. Eastern Europe on the other hand grew high single digits.

Boston Scientific Corp. BSX achieved 12% organic growth in emerging markets in the first quarter of 2017, driven by 20% growth in China.

Key Picks from the Space

Among the medical product stocks, Bio-Rad Laboratories, Inc. (BIO), sporting a Zacks Rank #1 (Strong Buy), looks attractive. Abbott Laboratories ABT, Baxter International Inc. BAX and Phibro Animal Health Corp. (PAHC - Free Report) are also well poised with a Zacks Rank #2 (Buy).

In the medical instrument space, we are positive on Inogen, Inc. (INGN - Free Report) and Glaukos Corp. (GKOS - Free Report) both carrying a Zacks Rank #1, among others. Also, we are optimistic about Varian Medical Systems, Inc. (VAR - Free Report) , ABIOMED, Inc. ABMD and Edwards Lifesciences Corp. EW, all with a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Weak Links

We advise investors to stay away from companies that offer little growth/opportunity for the near term. These include companies for which estimate revision trends reflect a bearish sentiment.

Stocks that do not look inspiring are Accuray Inc. ARAY, DexCom, Inc. DXCM, Masimo Corp. (MASI - Free Report) and Opko Health, Inc. (OPK - Free Report) , all carrying a Zacks Rank #4 (Sell). Eagle Pharmaceuticals, Inc. EGRX and Nevro Corp. (NVRO - Free Report) hold a Zacks Rank #5 (Strong Sell).



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