In the past few years, the U.S. medical device market has undergone substantial transformation. While there are a number of regulatory and financial issues unlikely to be resolved soon, powerful long-term tailwinds, including mergers & acquisitions (M&As), emerging market expansion, positive demographic trends and product innovation, have been contributing to the continued growth of the sector.
In addition, the recent change in consumer demand and market dynamics led to a dramatic transformation in the healthcare system. This is evident from the growing prevalence 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 us go through some of the major long-term tailwinds for the MedTech sector.
M&A Boom Continues
Going by the last available EvaluateGroup data, the first half of 2017 saw a massive 178% surge in the total value of M&A deals within MedTech. Although the next report is yet to be released, the pace of M&A activity is said to have been the same in the rest of the year. The trend is likely to continue in 2018.
Following the company’s colossal $25 billion consolidation with St. Jude Medical in January, Abbott ABT recently closed the $5.3 billion acquisition of Alere. With the successful wrap-up of this transaction, the combined company is anticipated to emerge as a lead player in the $7 billion point-of-care diagnostic space.
Another mega consolidation was that of medical device major Becton, Dickinson and Co. BDX and medical, surgical, diagnostic and patient care devices provider C. R. Bard, for $24 billion. After the completion of the deal in December 2017, Becton, Dickinson is on its way to expand to new areas like vascular access segments – PICCs (peripherally inserted central catheters), midlines and drug delivery ports.
Stryker (SYK - Free Report) is also on an M&A spree. The company is going to buy Entellus Medical for $662 million to strengthen its position in the ENT space. The company is also on track to close the €183 million acquisition of VEXIM, which specializes in the development and sale of vertebral compression fracture solutions.
Varian Medical (VAR - Free Report) also inked a major M&A deal of late. In January 2018, the company signed an agreement to acquire Australia-based global life sciences company, Sirtex Medical Limited for a total deal value of $1.28 billion. The investment will strengthen the company’s position in the interventional oncology therapies.
This apart, Boston Scientific’s BSX major $90 million investment in Santa Rosa, CA-based Millipede is expected to boost its position in the growing field of mitral regurgitation (MR), which falls under the company’s structural heart business. We note that the company’s acquisition of Switzerland-based Symetis SA in mid-2017 has already started to strengthen its structural heart business in Europe.
In December 2017, PerkinElmer (PKI) acquired EUROIMMUN Medical Laboratory Diagnostics AG for approximately $1.3 billion. The acquisition expanded PerkinElmer’s reach in the autoimmune and allergy diagnostic markets.
Medical device majors continue to offload their non-core business lines and assets that are similar to the ones acquired through mergers to focus on the main segments. 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.
Earlier this month, BD divested its soft tissue core needle biopsy line and Aspira product line to Merit Medical for $100 million. The divestment is related to its acquisition of C.R. Bard.
Orthopedic implant device maker Exactech recently sold itself off to TPG Capital for $737 million. The alliance with TPG will enable the consolidated company to invest in growth so as to compete with larger competitors in the orthopedic industry.
Apprehending that China’s drug distribution reform may slow down the company’s growth in the region (according to a Reuters report), Cardinal Health completed the sale of its China business to Shanghai Pharmaceuticals Holding for $1.2 billion.
In order to focus on a portfolio that delivers on global strategic priorities, Medtronic (MDT - Free Report) divested 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, sold itself to Hologic. Notably, Hologic acquired all outstanding Cynosure shares for approximately $1.65 billion.
Emerging Market Openings
Though the performance of the U.S. medical device market has been dull (though it still holds the leading position, with almost one-third of the world market share) due to rising regulatory and legislative uncertainty, global growth has been strong. In 2016, the emerging market grew 5%, a pace last seen before the financial crisis.
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, the fifth largest MedTech market in the world, currently records 17% annual growth. At this pace, India may soon pose stiff competition for 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, a while back, Johnson & Johnson (JNJ - Free Report) had set up manufacturing and R&D centers in Brazil, China and India. The company’s emerging markets medical device segment continues to grow three to four times faster than the developed markets.
Abbott ABT continues to lead the emerging market investment trend, with about 50% of sales from this region. In the 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 second quarter of fiscal 2018, businesses in China, Latin America, and Southeast Asia showed sustained strength, growing in double digits. Overall, Medtronic long-term outlook on emerging markets is encouraging.
Boston Scientific’s BSX emerging markets’ business registered 13% organic growth in fourth-quarter 2017, reflecting a significant increase from 8% growth in 2013. Business in China was once again remarkable (up 19% year over year).
Key Picks from the Space
Among the medical product stocks, Haemonetics Corporation HAE and Surmodics, Inc. (SRDX - Free Report) , sporting a Zacks Rank #1 (Strong Buy), look attractive. ResMed Inc. (RMD - Free Report) , Hill-Rom Holdings, Inc. (HRC - Free Report) and ICU Medical, Inc. (ICUI - Free Report) are also well poised with a Zacks Rank #2 (Buy).
In the medical instrument space, we are positive on IDEXX Laboratories, Inc. (IDXX), Hologic, Inc. (HOLX) and Edwards Lifesciences Corporation (EW), all carrying a Zacks Rank #1. 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 Entellus Medical, Inc. ENTL, Tandem Diabetes Care, Inc. (TNDM - Free Report) , Wright Medical Group N.V. (WMGI - Free Report) and Mesa Laboratories, Inc. (MLAB - Free Report) , each carrying a Zacks Rank #4 (Sell). Natus Medical Inc. BABY and LivaNova PLC (LIVN - Free Report) hold a Zacks Rank #5 (Strong Sell).