Medtech stocks look set to bounce back
Medical technology companies have been the stars of the health care sector for the past decade, but they met their match in 2020 when the COVID-19 pandemic arrived in full force.
Lockdowns during the past spring led to cancelled elective surgeries and slowed the pace of necessary surgeries. Patients were afraid to visit hospitals for check-ups and less urgent needs. And while many of the companies in this space are global, that didn’t help as the pandemic affected all of their markets.
That meant slim returns for investors. But with hopes that vaccinations will normalize conditions this year, is 2021 the year medtech bounces back?
The consensus seems to be yes, but exactly where the opportunities lie is a matter of opinion. The sector includes multi-million-dollar surgical robots, simple blood tests, and everything in between. For Canadian investors, domestic choices are limited, so the U.S. is often where they turn.
“I see it as the year of low-hanging fruit,” says Hans Albrecht, vice-president, portfolio manager and options strategist at Horizons ETF Management (Canada) Inc. in Toronto, who thinks that managing costs will be an utmost priority for health care systems this year.
“That means growth in efficiencies,” he says, pointing to areas such as virtual health care and behind the scenes improvements to health care records, booking and billing.
“These are plug-and-play solutions with an easy training and learning curve. That’s very different from robotic surgical solutions, which are fantastic, but not cheap,” Mr. Albrecht says.
Peter Choi, a senior research analyst with Vontobel Asset Management Inc. in New York, says he believes that once surgical backlogs are cleared, hospitals will resume their normal purchase patterns. That includes higher-end products that cost more but offer features that are improving constantly.
In many cases, that means less invasive and less painful surgeries, resulting in shorter hospital stays with fewer post-surgical complications. Hospitals can therefore do more surgeries that increase revenue and patients who are happier with the outcomes.
“It’s a win-win on both ends. Less traumatic surgery and fewer complications,” he says.
Mr. Choi says pre-pandemic, global medtech players such as Boston Scientific Corp. BSX-N and Medtronic Inc. MDT-N were attractive. They remain so, enjoying high barriers to entry in many product lines and strong relationships with customers. Vontobel, an asset management firm based in Zurich with a multi-boutique approach and a global business, holds both stocks in one of its equity funds.
Boston Scientific, with annual revenue of US$10.1-billion is a leader in heart-related implants and products. Medtronic is the world’s largest medical device company with annual revenue of about US$27.8-billion. Both companies experienced share price declines in 2020, with Boston Scientific off by about 20 per cent and Medtronic down by about 1 per cent.
Mr. Choi says incremental product improvements create a flow of new business, citing pacemakers as an example. While it’s a relatively old technology, it has evolved continuously. Medtronic introduced the world’s smallest pacemaker in 2016, that’s the size of a large pill. It’s inserted under the skin and monitored through a wireless connection. It eliminates the need for invasive surgery and complications caused by electrodes found in older models.
The virtual health care opportunities Mr. Albrecht sees are areas of growth for behemoths such as Telus Corp. T-T and Loblaw Cos. Ltd. L-T. Telus has used its telecom expertise to generate $800-million annually from patient management software and a patient app linking medical staff with patients. Loblaw is using its Shoppers Drug Mart subsidiary to connect customers with doctors and pharmacists.
“I think you’re going to see growth in the efficiencies of these systems,” Mr. Albrecht says. “Health care records are very old school. It’s a world that hasn’t really caught up in many ways.”
He agrees that improvements of higher-end systems mean more features and lower costs. That attracts more business in a virtuous circle in much the same way that “the cost of your TV and computer has come way down in price from 20 years ago and [the technology] is thousands of times better.”
So, what are the areas to watch? Mr. Albrecht sees advances in early cancer detection using genomics, a process that uses DNA to treat disease.
Simple robots are another area. China is a leader here, he says. The machines clean hospital rooms with ultraviolet light, deliver supplies and take temperatures as children go to a school. Their advantage is performing repetitive tasks, which free staff for more important things, at a more modest price point.
Both Mr. Albrecht and Mr. Choi sees opportunity in surgical video imaging systems which are improving rapidly. They allow surgeons to watch their operations and make adjustments as they go.
“Imaging is getting to the point at which you’re actually getting suggestions from the robots,” Mr. Choi says.
He agrees that early cancer detection is one area to watch. New products from Intuitive Surgical Inc. ISRG-Q, the leader in surgical robots, and Johnson & Johnson JNJ-N are enabling non-invasive lung biopsies for earlier cancer detection, he says.
“[Medtech companies] are attractive businesses with the steady growth, incremental innovation and the ability to open new markets,” Mr. Choi says. “COVID-19 hit them square on, but as things normalize they will benefit.”
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
Published at Mon, 08 Feb 2021 09:45:00 +0000