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A survey report by Gallup Analytics last month revealed that U.S. adults cited healthcare, the wider industry of medical devices, as the second major problem faced by the country under the new presidential administration. Given the current lack of clarity, let’s concentrate on some powerful long-term tailwinds of the medical device industry like emerging market expansion, mergers & acquisitions (M&A), positive demographic trends and new product innovation. These have been driving the sector’s impressive performance despite severe socio-economic and political instability.

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

Emerging Market Openings

It has been seen that even considering the dull performance of the U.S. medical device market (that still holds the leading position with almost one-third of the world market share) on rising regulatory and legislative uncertainty, global growth has been strong. In 2016, this industry grew 5%, a pace last seen before the financial crisis.

And when along with the health policy debacle in the United States we also consider the worsening economic condition in Europe, we can conclude that this encouraging global growth comes mainly from the emerging markets like China, India, Latin America and others.

Going by a recent BCG report, the share of emerging markets, which is currently less than a quarter of global MedTech revenues, is likely to increase to nearly one-third of revenues by 2022. The MedTech market in China, currently the second largest in the world, is projected to grow about 13% annually from 2015 through 2022. India’s MedTech market, the fifth largest in the world, is currently demonstrating 17% annual growth. If this continues, India may give good competition to Japan and Germany by 2022.

Among other emerging geographical regions, Latin America, even in the face of general economic stagnation, holds enormous potential. Per a January 2017 report by MedTech Intelligence, the Central and South American nations significantly increased per capita spending on healthcare between 2008 and 2014.

Given the huge potential in these regions, long back, Johnson & Johnson (JNJ - Free Report) had set up manufacturing and R&D centers in Brazil, China and India. The company’s medical device segment of emerging markets is growing three to four times faster than the developed markets.

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

At Medtronic (MDT - Free Report) , in the last-reported first quarter of fiscal 2017, businesses in China, Latin America, and Southeast Asia showed sustained strength, growing in double digits. Overall, Medtronic remains confident about its long-term outlook on emerging markets. The company is focused on developing new public and private partnerships as well as executing channel optimization strategies.

Boston Scientific’s BSX emerging markets business registered 14% organic growth in second-quarter 2017, reflecting a significant increase from 8% growth in 2013. Business in China was once again remarkable (up 20% year over year). The company is currently looking forward to much better performance ahead in China, banking on the recent approval of SYNERGY in China.

Major M&As

Following the company’s colossal $25 billion consolidation with St. Jude Medical in January, Abbott recently closed its $5.3-billion acquisition of Alere. With the successful wrap up of this transaction, the combined company anticipates to emerge as a lead player in the $7-billion point-of-care diagnostic space.

Another path-breaking mega consolidation is on its way, 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 (expected in the fourth quarter of fiscal 2017), Becton, Dickinson promises to create a third business segment – BD Interventional.

In August, Fresenius Medical Care AG & Co. KGAA FMS signed a $2 billion deal to acquire NxStage Medical (NXTM - Free Report) . The takeover is expected to boost revenues at the Care Coordination segment Fresenius Medical Care.

Johnson & Johnson’s medical device arm, in a move to expand internationally, recently agreed to acquire Germany-based Surgical Process Institute, a specialist for the standardization and digitalization of surgical workflows in the operating theatre.

This apart, Boston Scientific’s acquisition of Switzerland-based Symetis SA in May 2017 should fortify its structural heart business in Europe. Also, the company’s recently-closed $300-million deal to acquire Campbell, CA-based Apama Medical should fortify the company’s position in the Electrophysiology market.

Among other notable bids, worth mentioning is Integra LifeSciences’ recent acquisition of Codman Neurosurgery business from Johnson & Johnson for $1.045 billion. This apart, in September, Cooper entered into an agreement with Teva Pharmaceutical Industries to acquire the global rights and business of Teva’s PARAGARD Intrauterine Device (IUD) in a $1.1-billion cash transaction.

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.

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 the 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 eyecare business, Abbott Medical Optics AMO, to Johnson & Johnson for about $4.33 billion to streamline its newly added business lines.

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

To sharpen its strategic focus on core businesses, Ecolab (ECL) recently decided to sell its Equipment Care business to Audax Private Equity, a Boston, MA-based private equity firm. Also Wright Medical’s (WMGI) recent divestiture of its large joints (hip/knee) business to CorinOrthopaedics 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 repay long-term debts, Community Health Systems, Inc. CYH divested Rockwood Health System and the associated assets to MultiCare Health System.

Key Picks from the Space

Among the medical product stocks, Terumo Corporation (TRUMY - Free Report) , sporting a Zacks Rank #1 (Strong Buy), looks attractive. Abbott, Neogen Corporation (NEOG - Free Report) and ResMed Inc. (RMD - Free Report) are also well poised with a Zacks Rank #2 (Buy).

In the medical instrument space, we are positive on Luminex Corporation (LMNX - Free Report) and Olympus Corporation (OCPNY - Free Report) , both carrying a Zacks Rank #1, among others. Also, we are optimistic about Thermo Fisher Scientific Inc. (TMO), Steris Plc (STE - Free Report) and Mesa Laboratories, Inc. (MLAB), all with a Zacks Rank #2.

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 NuVasive, Inc. (NUVA - Free Report) , Cardiovascular Systems, Inc. CSII, Stryker Corporation (SYK - Free Report) and Meridian Bioscience, Inc. (VIVO - Free Report) , each carrying a Zacks Rank #4 (Sell). Nxstage Medical, Inc. (NXTM - Free Report) and Dextera Surgical Inc. DXTR hold a Zacks Rank #5 (Strong Sell).



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