Over the last few quarters, the Medical Products companies within the broader Medical sector put up an impressive show despite certain quarterly volatilities. However, we expect this earning season to witness a partially dented growth trend amid the ongoing Sino-US trade tiff and certain regulatory changes.
What to Worry About?
More precisely, the US-China trade war triggered a short-term downtrend in the Medical Product sector. Albeit a series of recent exemptions (the last one being in September) by the U.S. Trade Representative (USTR), the entire community is anxious about the impact that this downside might reflect on third-quarter results.
According to a survey conducted by the Medical Imaging & Technology Alliance (MITA), tariffs will cost Medical Instruments companies nearly $138 million every year. This is likely to get reflected in Medical Instruments companies’ third-quarter results.
Additionally, constant regulatory updates across the globe are escalating medical product market uncertainties. For example, earlier this year, the FDA came out with a proposed regulatory framework for AI/ML (machine learning)-based SaMD (software as a medical device), which is currently a focus area in MedTech. The framework, incorporating more documentation and oversight, is strictly thwarting the FDA approval process making the regulatory pathway slow. Apart from delaying the revenue generation process, this is elevating the R&D expenses of the industry players, thereby putting pressure on their bottom line. This too is expected to have affected the industry’s third-quarter performance.
Factors Likely to Drive Q3 Results
The past few months have been remarkable for the medical device space in terms of R&D. Riding high on the 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 device space has gone from strength to strength. In its recently reported third quarter, Johnson & Johnson’s (JNJ - Free Report) Medical Device business registered accelerated growth, banking on multiple product launches within Interventional Solutions. Abbott (ABT - Free Report) delivered strong top-line improvement in third-quarter release, backed by regulatory approvals for MitraClip, Alinity and FreeStyle Libre line.
Solid growth in the emerging markets is expected to be an added positive this reporting cycle. Boosted by the rising medical awareness and economic prosperity, emerging economies are witnessing sturdy demand for the medical products. Notably, an aging population, relaxed regulations, cheap skilled labor, increasing wealth and the government focus on healthcare infrastructure make these markets a happy hunting ground for the global medical device players. In this regard, Varian Medical Systems has also been leveraging its capability to treat cancer in the booming economies that are slightly under-equipped to address the prevalence of the same. In the third quarter, Varian Medical strengthened its presence in India by acquiring Cancer Treatment Services International for $283 million.
The latest Earnings Preview predicts the Medical sector to deliver positive surprises this time around but suffer a sequential decline at the same time. For the quarter under review, earnings growth rate is projected at 0.5% on 5.4% revenue increase, indicating a fall from second-quarter reported earnings growth of 9.8% on 6.6% revenue rise.
What Our Model Says
The proven Zacks model predicts an earnings beat for a company with a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). This combination increases the chances of beating estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Considering the above factors, we take a look at the following five Medical Products behemoths that are set to release earnings results on Oct 23.
Thermo Fisher Scientific Inc. (TMO - Free Report) : Robust performances of bioproduction, biosciences and clinical next-generation sequencing businesses are expected to have aided solid revenue growth for the life science solutions segment in the third quarter. We are also upbeat about the addition of three systems, namely Vanquish MD High Performance Liquid Chromatography (HPLC), TSQ Altis MD Series mass spectrometer and Quantis MD Series mass spectrometer (all three now listed as Class I medical devices with the FDA) in the analytical instruments segment. (read more: What's in Store for Thermo Fisher in Q3 Earnings?).
Thermo Fisher has an Earnings ESP of -0.59% and a Zacks Rank #3.
The above combination dims possibilities of an earnings beat this reporting cycle. You can see the complete list of today’s Zacks #1 Rank stocks here.
Boston Scientific Corporation (BSX - Free Report) : We are once again optimistic about Boston Scientific’s Interventional Cardiology business, which is likely to have helped the company sustain impressive global growth in the third quarter as well owing to innovative portfolio and robust commercial teams. Complex PCI (percutaneous coronary intervention) products within IC are gaining solid traction from successful global expansion efforts. (read more: Can Overall Growth Boost Boston Scientific Q3 Earnings?).
Boston Scientific has an Earnings ESP of 0.00% and a Zacks Rank of 3.
Edwards Lifesciences Corporation (EW - Free Report) : The company’s third-quarter results are expected to reflect strength in the Critical Care product group. The segment has been showing solid growth in all product categories over the last few quarters. Management is optimistic about a healthy customer adoption of the HemoSphere all-in-one monitoring platform, particularly in the United States and Europe. (read more: What's in Store for Edwards Lifesciences' Q3 Earnings?)
Edwards Lifesciences is Zacks #3 Ranked and has an Earnings ESP of +0.35%. This combination predicts an earnings beat for Edwards Lifesciences this time around.
Align Technology, Inc. (ALGN - Free Report) : Align Technology is expected to have gained from continued uptake of Invisalign system in the third quarter of 2019. Invisalign portfolio expansion, anticipated revenue improvement at the Clear Aligner segment on steady Invisalign case volume growth across customer channels and geographies, and estimated growth in the teen patient segment are likely to aid the company’s results. (read more: What's in Store for Align Technology's Q3 Earnings?)
Align Technology has an Earnings ESP of 0.00% and is a #3 Ranked stock.
Varian Medical Systems, Inc. (VAR - Free Report) : Varian witnessed some solid developments in its Proton Therapy platform of late, which are likely to reflect on fourth-quarter fiscal 2019 results. Meanwhile, the recent exclusion of Varian’s radiotherapy products from tariffs in China is expected to have bumped up sales in the fiscal fourth quarter. (read more: What's in Store for Varian Medical in Q4 Earnings?)
Varian Medical has an Earnings ESP of -1.45% and a Zacks Rank of 1.
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