3 medical device stocks to buy despite industry headwinds

The medical device industry has recently experienced a significant transformation in the nature of its business, leading to an increase in R&D investment for the development of advanced technologies. The dynamic nature of the COVID-19 crisis has further altered the industry landscape, bringing robotic and remote services into the limelight. Meanwhile, despite the ongoing reopening of the economy, deteriorating international trade conditions, with global inflationary pressures leading to an extremely difficult situation related to the cost of raw materials and labor as well as transport costs, again put the industry in a difficult situation. Additionally, industry watchers are still unable to gauge the extent of the economic recovery due to the emergence of new strains of COVID in several parts of the world, including the United States and China. .

A number of medical device companies, which had confirmed a gradual rebound in their core business in the first months of 2022, again witnessed staff shortages and supply chain risks in the second quarter of 2022. Meanwhile, industry players like Medical ShockWave after-sales service, Scientist Semler SMLR and Asensus surgery ASXC which has adapted well to changing consumer preferences continues to experience an upward trend in its share price.

Description of the industry

The Zacks Medical – Instruments industry is highly fragmented, with participants engaged in research and development (R&D) in therapeutic areas. This FDA-regulated industry includes an endless number of products, ranging from transcatheter valves to orthopedic products to imaging equipment. Before the pandemic, the medical device space was doing well in terms of R&D. Among recent revolutionary inventions, bone growth stimulators, 3D mapping of CT scans, wireless brain sensors and human pacemakers are worth mentioning. However, over the past few months, many non-COVID and hotline innovations have been stalled or delayed. Edwards Lifesciences is among the companies whose R&D has taken a hit.

3 trends shaping the future of the medical device industry

Disruption of trade trends: In view of the current inflationary situation in the form of rising freight, raw material and labor costs, the IMF has released its outlook update for the global economy of July 2022. The update noted that a tentative recovery in 2021 was followed by increasingly bleak developments in 2022. The IMF specifically noted that the worse than expected slowdown in China, the difficult trade situation in Russia , as well as the significant slowdown in US consumer spending in the inflationary phase led to a contraction in production in the second quarter. The IMF update noted that global growth is expected to slow from 6.1% in 2021 to 3.2% in 2022, 0.4 percentage points lower than in the April World Economic Outlook. 2022. This deterioration in the economic outlook is evident in the sequential slowdown in activity in the MedTech sector in the second quarter. Industry players who had witnessed a strong rebound in product demand across major business segments in the early months of 2022 are collectively expected to face a setback in terms of reduced consumer spending and shortages. of staff.

Mergers and acquisitions trend continues: The medical device space has benefited from the current trend of mergers and acquisitions (M&A). In fact, various reports suggest that mergers and acquisitions have been the main catalyst for the US MedTech space lately. It is a known fact that small and medium players in the industry try to compete with the bigwigs through consolidation. Big players try to enter new markets with a niche product. Among recent significant transactions, in August 2022, Bostin Scientific announced the acquisition of privately held Obsidio, Inc. to expand Boston Scientific’s interventional oncology and embolization portfolio. Additionally, in March 2022, Owens & Minor acquired Apria for a total transaction value of approximately $1.60 billion. The acquisition will allow Owens & Minor to better serve the entire patient journey and position the company as a leader in the home healthcare market.

Numerical revolution: With an increase in the adoption of digital platforms in the medical device space, robotic surgeries, big data analytics, bio-printing, 3D printing, electronic health records (EHR), l Predictive analytics, real-time alerting and revenue cycle management services are gaining notoriety in the United States. A June 2019 report on healthcare suggested that this market, valued at $123 billion in 2018, saw a CAGR of 25%. Various other reports suggest that companies that have adopted AI technologies have seen a 50% reduction in treatment costs and have also seen more than a 50% improvement in patient outcomes. Amid the pandemic, this healthcare line has become a major choice for contactless healthcare services. Telemedicine stocks received an impressive response when, in 2021, the Centers for Disease Control and Prevention asked health service communities to expand the use of telemedicine. Additionally, the FDA has approved the expanded use of remote patient monitoring technologies in an effort to minimize hospital visits, thereby reducing the risk of exposure to the virus.

Zacks’ industry rankings point to boring prospects

The Zacks Industry Ranking of the Zacks Medical Instruments industry, which is essentially the average of the Zacks Ranking of all member stocks, indicates a bleak near-term outlook. The industry, housed within the broader Zacks Medical sector, currently carries a Zacks industry ranking of #154, which places it in the bottom 39% of over 250 Zacks industries. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

We’ll highlight a few stocks that have the potential to outperform the market based on strong earnings prospects. But it’s worth taking a look at industry shareholder returns and current valuation first.

Industry underperforms S&P 500, sector

The industry has underperformed the Zacks S&P 500 composite and its sector over the past year.

The industry lost 31.7% compared to the S&P 500’s 12.3% drop in one year. The broader sector shrank by 26.2% during the said period.

Year-over-year price performance

Current industry assessment

Based on the 12-month forward price-to-earnings (P/E) ratio, which is commonly used to value medical stocks, the industry is currently trading at 31.45X compared to 20.60X for the whole of industry and 17.39X for the S&P 500. .

Over the past five years, the industry has traded as low as 44.67X, as low as 26.82X and at the median of 32.63X, as seen in the charts below.

Year-over-year price/earnings forecast (F12M)

Year-over-year price/earnings forecast (F12M)

3 stocks to buy now

Medical ShockWave: This manufacturer of medical devices for the cardiovascular treatment market is enjoying continued clinical acceptance and penetration of its IVL technology. Increased adoption of coronary VILI in the United States, continued expansion of the sales force, increasing international expansion and increased adoption of Shockwave products are contributing to the company’s performance. The company’s strong global growth highlights the significant clinical need for better calcium therapy and how the team at ShockWave Medical is addressing the same with IVL.

Zacks’ consensus estimate for ShockWave Medical sales in 2022 is pegged at $479.8 million, indicating a 102.3% year-over-year increase. The same is true for ShockWave Medical adjusted earnings pegged at $2.57 per share versus a loss of 26 cents reported a year ago. ShockWave Medical carries a Zacks Rank #1 (Strong Buy).

You can see the full list of today’s Zacks #1 Rank stocks here.

Price and Consensus: SWAV

Scientist Semler: Semler Scientific provides technology solutions to improve the clinical effectiveness and efficiency of healthcare providers. QuantaFlo, patented by Semler Scientific and cleared by the U.S. Food and Drug Administration, is a rapid point-of-care test that measures arterial blood flow in the extremities to aid in the diagnosis of cardiovascular diseases, such as arterial disease peripheral. Semler Scientific is introducing QuantaFlo’s product extension to its existing customer base using its current sales force for use as an aid in the diagnosis of another cardiovascular disease.

The consensus sales estimate for this Zacks Rank #2 (Buy) company in 2022 is set at $58.96 million, indicating an 11.2% year-over-year increase. The consensus score for Semler Scientific’s 2023 revenue is set at $78.58, indicating a 33.3% increase over the prior year period.

Pricing and Consensus: SMLR

Asensus surgery: Asensus Surgical digitizes the interface between surgeon and patient to usher in a new era of performance-driven surgery by unleashing clinical intelligence for surgeons to achieve consistently superior results and a new standard of surgery. This builds on the foundation of digital laparoscopy with the Senhance Surgical System powered by the Intelligent Surgical Unit to increase surgeon control and reduce surgical variability.

The consensus estimate for this Zacks Rank No. 2 company’s sales in 2022 is pegged at $10 million, indicating a 21.5% year-over-year increase. The same for Asensus Surgical’s 2023 revenue is pegged at $21.26 million, indicating a 19.4% improvement over the prior year period.

Pricing and Consensus: ASXC

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