Mergers fuel big-cap medtech stocks in 2014

2014 was a tumultuous year in medtech but, for the biggest companies at least, a pretty good one. For the third consecutive half-year period, no large-cap company has seen a decrease in its share price. This is boom time for medtech, with a spate of megamergers helping to drive the shares of both acquirer and target upwards.

Speculation that the other big-cap companies will strike takeovers of their own has done much of the rest of the work. Taken as a whole, the large-cap cohort has added a total of $75bn to their combined market caps – and even the worst performer outdid the average growth of the sector as a whole.

Amid all this sunniness a look at the share indices might provide a hint of cloud. The US seems to be where the action is, with the medical and health device markets growing nicely. In Europe it is another story, with the Thompson Reuters Europe Healthcare index expanding just 3% across last year.

Stock Index  % change in 2014
Thomson Reuters Europe Healthcare (EU) 3%
Dow Jones U.S. Medical Equipment Index 22%
S&P Composite 1500 HealthCare Equipment & Supplies (US) 23%

It is true that these indices do not tell the full story, but this gap is unusually wide. As with the IPO market, Europe seems to be lagging badly (Tripling of medtech IPO yield points to changing industry, January 12, 2014).

Fewer companies, faster growth

While the share prices of the large-cap companies have been growing, the cohort itself has shrunk – and will get smaller still in the coming months. This is a result of last year’s mergers and demergers. Johnson & Johnson is now excluded from this analysis because, owing to the divestment of its diagnostics business, its medtech operations are now so small that they are unlikely to account for any movement in its share price.

The leader in terms of share price growth, Covidien, up 53% over the year, is soon to disappear. Its purchase by Medtronic, up 26% year-on-year and fifth greatest riser, is set to close in the first half of 2015.

Because the purchase is to be funded with a mixture of cash and shares the value of the deal will in fact increase from the $43m figure mentioned when the merger was announced in the summer (Medtronic keeps up the heat in medtech with $43bn bid for Covidien, June 16, 2014). Covidien’s investors will get $35.19 in cash and 0.956 Medtronic shares for each Covidien share they hold. Using December 31 prices this works out at $104.21 each. Whatever happens to the wider market in the next few weeks, Medtronic and Covidien shares will be in lockstep.

Another of the risers also makes the grade based on a purchase. Becton Dickinson’s shares were almost flat for the first three quarters of 2014, but jumped in October after it announced it was buying drug delivery company CareFusion for $12.2bn (BD to buy CareFusion in third biggest deal this year, October 6, 2014). BD’s shares have increased 11% in the three months since then.

Large cap ($15bn+) medtech companies: top risers and worst performer in 2014
Share price (local currency) Market capitalisation ($bn)
Top five risers YE 2013 YE 2014 Change YE 2014 12M change
Covidien $66.08 $100.99 53% 45.6 15.7
Coloplast DKr329.50 DKr465.90 41% 17.0 2.7
Intuitive Surgical $384.08 $528.94 38% 19.2 4.6
Becton Dickinson $107.01 $141.26 32% 27.1 6.3
Medtronic $57.39 $72.20 26% 71.1 13.8
Worst performer
St. Jude Medical $61.95 $65.03 5% 18.6 0.5

The 41% increase in Coloplast’s shares has been more gradual, with the stock rising steadily over the course of the year; a share repurchase programme has played its part here. The company makes devices for, as its website puts it, “people with very personal and private medical conditions” – principally devices for urinary and faecal incontinence and colostomy bags.

As so often, the ageing population is a boon for the company, which has seen enviable sales growth over 2014: 12% in its urology and continence division and 10% overall. There is a large element of patient choice in this market, and the company’s emphasis on the ease of use but also aesthetically pleasing design of its products have helped it achieve this.

The hospital sector, into which Coloplast also sells its devices, is more cutthroat. According to UBS analysts Coloplast’s private competitor Convatec is competing on price, which could see it take share from the Danish group. EvaluateMedTech consensus forecasts have Coloplast expanding more slowly out to 2020, with an annual growth rate of 7%.

Bumpy

By contrast, the 38% increase in surgical robot maker Intuitive Surgical’s stock was a pretty bumpy ride. The shares spiked in April as the company gained FDA approval for an upgraded version of its flagship Da Vinci system (Intuitive hopes Xi approval will put sales as well as shares back on track, April 2, 2014).

This good work was more than undone, however, when the company released first-quarter results that were weak across the board and issued a massive guidance cut, saying that procedure growth in 2014 would be around 2%-8% rather than its previously stated 9%-13%. A recovery of sorts came with second-quarter results; Intuitive announced that its profit had shrunk by 35% thanks to falling sales – but this still topped Wall Street expectations, sending shares up again.

With a company like Intuitive seeing its shares rise even as its profits fall it seems somewhat unfair to single St. Jude Medical out for the booby prize: the company’s shares grew throughout 2014 at a rate of 5%, outpacing the wider medtech market which grew at just 3.2%. But such was the extraordinary growth among the large-cap cohort that this represents sluggishness. St. Jude bought two companies in 2014, but neither deal topped $400m; if it wants its stock to hurtle skywards it might be well-advised to consider a purchase in the billions.

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

This article has been corrected to rectify an error in calculation that had led to the percentage share price rises being misstated.

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