MedTech Industry Stock Outlook - July 2016

Two full quarters of 2016 are behind us and, while we await second quarter results over the coming weeks, we hardly expect a change in trend in the bullish MedTech sector. This comes as no surprise, even in the face of severe economic instability, fierce competition and increasing cost-related hazards leading to regulatory complexities. This is because the medical device industry remains healthy on successful execution of some top strategic priorities, two of which are R&D and product development.

According to a survey by KPMG, the number of medical device companies that expect to spend more than 6% of revenue on R&D/innovation is rising and is fast exceeding the number of companies spending on R&Ds in other manufacturing industries. These innovations and breakthroughs can be of various forms – new products or surgical techniques or cost-effective products targeting the emerging markets. These innovations, however, have one thing in common: they are meant to transform the way MedTech reaches the consumer.

Edwards Lifesciences’ (EW) SAPIEN or its competitive product Medtronic’s (MDT) CoreValvetranscatheter heart valve or surgical aortic valves are good examples of such breakthrough innovations. As the global heart valves market is projected to grow at a CAGR of 14.28% during the period 2016–2020 (according to the latest Market Research Report), it is needless to say how impactful these breakthroughs are for the MedTech market to remain on its growth trajectory.

Other remarkable breakthroughs include 3D printing, minimally invasive surgical procedures involving both robotics and 3D visual systems, new materials like the preventive premature failure of hip implant coatings, and so forth. Information technology, utilization of smart devices cloud connectivity and personalized medicine are newfound fields which are pushing the medical device industry toward rapid and sustainable growth.

Impressive Prospects Ahead

R&D and product development are just the tip of the iceberg. The future of MedTech lies in other catalysts as well. According to economists, strategic partnerships and M&As are in fact the driving force behind breakthrough innovations compared to the singlehanded contribution of in-house efforts.

They asserted that strategic consolidations are very often seen as the gateway for new business models apt for a highly competitive and specialized industry leading to all new levels of R&D investments.

Let us now deliberate on what investors might gain from the MedTech world, a sector that is generally not in the limelight from an investment perspective. The primary fact which compels us to bet on MedTech, especially in this extremely volatile world market, is its fundamentally defensive nature. Products of this sector are mostly essential and hence less sensitive to business cycle fluctuations.

And we’ve found some pretty impressive data in this respect.

A recent EvaluateMedTech World Preview claims that the MedTech space is positioned for impressive growth in the near term. At a glance, MedTech sales worldwide are expected to grow at a CAGR of 4.1% to $477.5 billion by 2020.

Steering ahead of Cardiology and Diagnostics, In Vitro Diagnostics (IVD) is expected to emerge as the sector leader in 2020. Neurology, meanwhile, holds promise as the fastest growing division among the top 15 segments by 2020. On the other hand, Orthopedics, which is already on shaky legs, may prove to be one of the slowest growing segments in 2020 with a CAGR of 3.2% per year.

While Johnson & Johnson (NYSE:JNJ) (JNJ) was the largest device maker of 2014 with MedTech sales of $27.5 billion, the honor may go to Medtronic (NYSE:MDT) by 2020 with its business consolidated by the Covidien acquisition. Medtronic is expected to reach the top with revenues mounting to $34.9 billion in 2020.

While Medtronic’s growing Cardiac and Vascular portfolio lends it a sharp competitive edge, J&J’s forte lies in its orthopedic capability, which unfortunately is not gaining much traction among investors (CAGR of 2.4% between 2014 and 2020, lower than the expected market growth rate).

Zacks Industry Rank

Within the Zacks Industry classification, Medical Device is grouped under the Medical sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level: med instruments, med products, med/dental-supp and medical info systems.

We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank for medical info systems is #20, med instruments and med products both being #88, while the med/dental-supp is #34. Analyzing the Zacks Industry Rank for different Medical Device segments, it is obvious that the outlook for all these four medical device industries is positive.

Earnings Trend of the Sector

Of the S&P 500 members, the Medical companies have yet to report their second quarter results as of July 8. In the second quarter of 2016, only 6 among all the 16 Zacks sectors are expected to report positive year-over-year earnings growth, Medical being one of them (increase of 0.5%). With respect to the quarter’s revenues, year-over-year growth is expected to remain strong at 7.7% for Medical.

For more information about earnings for this sector and others, please read our ‘Earnings Trends’ report.