Biotech exuberance spills over to big medtech

Analysis

While the medtech arena has not seen the same exuberance as biotech, the second half of 2013 has brought large cap device makers sizeable share price gains – and not a single one of them has suffered a fall. The top three risers can be loosely grouped as diagnostics specialists, so it is possible that they have benefited from the biotech boom as their fortunes are closely linked with those of drug makers.

The picture is more mixed for the mid-cap players, though many more companies have gained than lost, and by much wider margins (see tables). The winners here include broad-based companies Omron and Cardinal Health, perhaps pointing to the intentions of the more specialised companies that have moved towards diversification in the second half.

Stock Index % change in H2 2013
Thomson Reuters Europe Healthcare 15%
Dow Jones U.S. Medical Equipment Index 15%
S&P Composite 1500 HealthCare Equipment & Supplies (US) 12%

The share price indices covering medical technology companies have put in a similar performance, on average, in the second half of last year as in the first; that is steady, measured growth. The large cap medtech firms have outpaced them handily.

Large cap ($30bn+) medtech companies: top risers and worst performer in H2 2013
Share price (local currency) Market capitalisation ($bn)
Rank Top  risers H1 2013 YE 2013 Change H1 2013 YE 2013
1 Thermo Fisher Scientific $84.63 $111.35 32% 30.48 40.24
2 Danaher $63.30 $77.20 22% 43.85 53.82
3 General Electric $23.19 $28.03 21% 239.79 283.59
Rank Worst performer
1 Baxter International $69.27 $69.55 0% 37.64 37.74

Red-hot

Top of the list is Thermo Fisher Scientific, still enjoying the fruits of its takeover of Life Technologies, announced in April and due to close soon (Thermo Fisher spends $14bn to finally get a Life, April 15, 2013). Buying into the red-hot area of advanced genetic sequencing could hardly fail, and the company has gone from strength to strength since. As well as the high-end bioinformatics capabilities, the company manufactures simple hand-held devices designed for use by the layperson, such as tests for illegal drugs.

To facilitate the Life buy, Thermo Fisher last week sold its drug development operations to the third-highest riser, General Electric’s healthcare business. GE Healthcare has faced tricky headwinds this past year; imaging specialists have suffered particularly thanks to pricing pressure from hospitals and ongoing austerity measures that mean their equipment is simply not being replaced quickly enough (EP Vantage interview – GE Healthcare adapts to painful spending cuts, October 29, 2013). But the firm has a well-defined strategy to adapt to the tricky market conditions, and this appears to be meeting with some success.

The large-cap group was devoid of fallers in the second half of 2013. The worst performer in the $30bn+ group, Baxter International, posted a share price increase of 0.4%. Investors could be fearing the effects of the forthcoming clawback in US Medicare reimbursement of dialysis procedures (Event – US dialysis Medicare cut could be counterproductive, October 23, 2013). If the cut is not reduced, the company could be forced to close some of its clinics. Government cost-cutting is supposed to be easing, in the US if not Europe, but the polar vortex of austerity is still freezing.

Mid cap ($2.5-30bn) medtech companies: top risers and fallers in H2 2013
Share price (local currency) Market capitalisation ($bn)
Rank Top 5 risers H1 2013 YE 2013 Change H1 2013 YE 2013
1 Omron ¥2,979 ¥4,645 56% 6.9 10.8
2 Align Technology $37.04 $57.14 54% 3.0 4.6
3 Illumina $74.84 $110.59 48% 9.3 14.0
4 Hoya ¥2,049 ¥2,922 43% 9.1 13.0
5 Cardinal Health $47.20 $66.81 42% 16.1 22.8
Rank Top 5 fallers
1 Intuitive Surgical $506.13 $384.08 (24%) 20.3 14.6
2 Quest Diagnostics $60.63 $53.54 (12%) 9.6 7.8
3 Essilor International €81.74 €77.28 (5%) 22.9 22.6
4 Cochlear AUS$61.71 AUS$58.92 (5%) 3.7 3.2
5 Sysmex ¥6,490 ¥6,210 (4%) 6.9 6.6

Elective

The leader of the mid cap risers, Omron, jumped four places in the second half of 2013. Just like fifth-position Cardinal Health, it has a broad range of products; in Omron’s case these span blood pressure and weight monitors as well as respiratory devices and neurostimulation technology. Medtronic, Fresenius and Boston Scientific, inter alia, have all widened their focus in recent months; companies with a range of products and services seem likely to continue to do well, so this trend can be expected to persist into 2014 and beyond.

The other discernible pattern in the mid cap risers is growth in areas that are to a large degree elective. As the US job market as a whole picks up, albeit slowly, more people find themselves with health insurance – or simply with more cash in their pockets. Align Technology and Hoya, focused on ophthalmology and orthodontics respectively, are well placed to benefit from this. It is to be hoped that employment continues to grow, and an improvement in European economies, not least that of the UK, would also provide a welcome boost.

It is no surprise to see Intuitive Surgical leading the fallers. The robotic surgery company has lurched from disaster to disaster during 2013 and, while its shareholders held faith for a remarkably long time, a collapse was inevitable (Intuitive’s poor sales cast a pall over the robotic surgery sector, July 10, 2013).

There is some cause for hope that the moribund medtech sector could begin to improve in the coming year as companies continue to alter their strategies to adapt to harsh conditions of cost containment, itself unlikely to change in the near future. Many have wondered whether the astonishing growth of the biotech sector is setting it up for a devastating crash. With more modest growth, and tiny glimmers of improvement, medtech could be the tortoise to biotech’s hare.

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

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