Medical Devices Stock Outlook

The host of macro headwinds (including price and procedure volume pressure) that hit the MedTech industry last year continued to haunt the sector during the March quarter and encumber growth. Although a number of these issues are expected to linger through the remainder of 2011, the industry is expected to fare relatively better this year thanks to several tailwinds and growth opportunities.Industry Dynamics

The global medical devices industry is fairly large, intensely competitive and highly innovative, with estimated worldwide sales of more than $300 billion in 2011. The U.S. is the largest market, with estimated sales of roughly $95 billion in 2010.

The medical devices industry is divided into different segments including Cardiology, Oncology, Neurology, Orthopedic and Aesthetic Devices. The U.S. medical devices industry continues to grow at a brisk pace, backed by an aging Baby Boomer population, high unmet medical needs and increased incidence of lifestyle diseases (including cardiovascular diseases, diabetes, hypertension and obesity). Neurology, orthopedic and aesthetic represent the fastest growing categories.

Last year was challenging for medical device companies given the exigent economic conditions and a precarious health care environment. The MedTech industry faced several issues in 2010, including pricing concerns, hospital admission and procedural volume pressures, health care reform, reimbursement pressures and increasing regulatory involvements, which put investors in a dilemma about these stocks.

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While several catalysts for growth in 2011 exist such as new product cycles, an aging population, geographic expansion, ongoing transition towards minimally-invasive techniques and emerging markets lingering issues from last year are expected to remain an overhang.

The aging population represents a major catalyst for demand of medical devices. The elderly population (persons 65 years and above) base in the U.S. was roughly 40 million in 2010, representing around 13% of the nation’s population and accounting for a third of health care consumption. Federal government estimates indicate that the elderly population will catapult to 72 million by 2030, ensuing a major boost for medical devices utilization.

Given the maturing legacy markets, medical device companies are looking to expand into lucrative incipient markets. Expansion in the emerging markets, especially those with double-digit annual growth rates, represents one of the best potential avenues for growth in 2011 and beyond.OPPORTUNITIES

In our universe, we see growth potential in companies dealing with cardiovascular devices, neuro, radiation oncology and blood-related products. Names include Medtronic Inc. (MDT - Analyst Report), Boston Scientific Corporation (BSX - Analyst Report), St. Jude Medical (STJ - Analyst Report), Edwards Lifesciences (EW - Analyst Report), ZOLL Medical (ZOLL - Analyst Report), Abiomed Inc. (ABMD - Analyst Report), Varian Medical (VAR - Analyst Report) and Haemonetics Corporation (HAE - Analyst Report).

The above-listed companies produce life-sustaining products and are less affected by economic turbulence. Some of these companies have been successful in weathering the storm (pricing, currency and volume headwinds) in the cardiovascular space in the wake of recovery.

In addition, low global penetration and robust demand provides a positive long-term thesis for investing in the blood processing industry. Also, the radiation oncology market is benefiting from improving trends and technology advancements, providing a compelling growth opportunity. These companies are all leading players in their respective fields and are potential winners in the long run.

Read more about Zack’s medical device forecast here.