So far so adequate for big-cap medtech

Big cap medtech disappoints – but still beats pharma.

It is not that investors are not positive about the largest medical technology companies – it is just that they are not as positive as they were. Amid macroeconomic uncertainty prompted by talk of trade barriers in the US and Brexit in the EU, the performance of big-cap medtechs across the first six months of 2018 has disappointed compared with their performance throughout 2017.

Still, with the lead riser, Abiomed, more than doubling its value medtechs vastly outpaced big pharma and biotech companies, none of which could muster an increase of more than 16% during the first half. For many years medtech has been regarded as biotech’s safer, duller cousin; perhaps now that opinion ought to be reversed.

A good idea of the pullback from the admittedly stratospheric highs of 2017 can be gained from a look at the stock market benchmarks of the medtech industry. US-listed stocks are still doing fairly well, though the growth here is nothing like as impressive as the 30% seen across last year (2017 saw the stars Align for big-cap medtech, January 9, 2018). European stocks, never quite as frothy as those across the Atlantic, have slipped into a loss.

Stock index  6mth change
Thomson Reuters Europe Healthcare (EU) (3%)
Dow Jones U.S. Medical Equipment Index 13%
S&P Composite 1500 HealthCare Equipment & Supplies 14%

Overall retrenchment does not, of course, preclude some eye-catching leaps in value. The 118% rise in the heart pump maker Abiomed’s stock does not equal last year’s winner, the record-breaking 131% jump in Align Technology’s shares, but in dollar terms the value increases were almost equal, at about $10bn.

Abiomed sells the Impella range of temporary heart pumps, used to treat heart attack or cardiomyopathy patients in cardiogenic shock. And it sells them well: the franchise, which encompasses four different devices, is forecast to grow 20% per year out to 2024, hitting the $1bn mark in 2020. Abiomed has little real competition, with the large cardio device makers focused on permanent implants, and shareholders are rewarding its successful execution.

Large cap ($10bn+) medtech companies: top risers and fallers in H1 2018
  Share price (local currency) Market capitalisation ($bn)
  6mth chg H1'18 6mth chg
Top 5 risers
Abiomed 118% 18.3 10.0
Align Technology 54% 27.4 9.6
Lepu Medical Technology 52% 10.4 3.9
William Demant 48% 10.7 3.58
Boston Scientific 32% 45.1 11.1
Fallers
Zimmer Biomet (7.6%) 22.7 (1.8)
Hologic (4.7%) 10.9 (0.6)
Olympus (3.9%) 13.2 0.1*
*Market cap fell 4% on constant currency basis. Source: EvaluateMedtech.

Execution, or rather the lack of it, is also behind the largest big-cap fall. Zimmer Biomet has had problems meeting demand for its orthopaedic devices for years now, and its attempts to clear the backlog have been hampered by a former Biomet plant in Warsaw, Indiana failing an FDA inspection in late 2016. A re-inspection this spring failed to clear the plant for use, and Zimmer has a hard slog ahead to rectify its supply problems.

New blood

Only three of the big-cap medtechs have endured a fall in their share price so far this year. In the coming years, though, the big-cap cohort will expand.

The analysis includes companies that obtain at least 40% of their revenue from medical devices, since then it will be their medtech businesses that move the shares. Two large mixed businesses are to spin out their medtech operations in the coming years, and the new groups will qualify for inclusion: GE Healthcare will emerge from General Electric and Novartis will set its Alcon unit free.

Another big-cap spin out has already occurred. The newly independent Siemens Healthineers listed on March 16 and while it cannot be included in a six-month analysis it is interesting to note its stock is up a respectable 27% from its float price of €28.

So far 2018 has been largely devoid of the large eye-catching moves that have shaken up the medtech space in recent years. This relatively quiet period seems to have allowed shareholders to judge companies on how well they can deliver on their promises. This might well be something for the sector’s debutantes to bear in mind.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizVantage on Twitter

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