It’s that time of year again – the time when sell-side junior analysts say goodbye to primetime television and social lives, the time when buy-side analysts hope that they’ll pass through with no smoking craters in their portfolios, and the time when painfully repetitious hold music starts carving away at the sanity of investors and analysts alike. In short, it’s time for earnings from the med-tech sector.
Kicking off with some of the largest names
Johnson & Johnson (NYSE:JNJ) will be getting the ball rolling Tuesday morning, when analysts expect this healthcare giant to report more than 7% year-on-year revenue growth and similar growth in EPS. Key details to watch for will be the ongoing sales ramp of Zytiga, the organic revenue performance of the company’s large orthopedics business, and the underlying growth in segments like surgery and diabetes.
Following JNJ on Tuesday morning will be reports from St. Jude Medical (NYSE:STJ), Abbott (NYSE:ABT), Stryker (NYSE:SYK), Danaher (NYSE:DHR), Intuitive Surgical (NSDQ:ISRG), and GE (NYSE:GE). With these, we’ll get at least a reasonable sense of where major med-tech market segments are trending, including cardiac rhythm management, coronary stents, orthopedics, diagnostics, surgery, and hospital capital equipment.
Has capital equipment turned to "watchful waiting"?
When Intuitive Surgical warned the Street a little while ago that second quarter earnings would miss expectations, it definitely sent ripples through the med-tech space. While the procedure volumes implied by the guidance were a little lower than some expectations, that wasn’t the real source of the miss – the miss was fueled by a significant and surprising slowdown in U.S. robot sales.
On some level this isn’t completely surprising. Some analysts have posited that hospitals would get more cautious ahead of Obamacare, as administrators aren’t quite sure what it will mean for procedure volumes, reimbursement, and so on. At the same time, there has been a greater push for non-surgical interventions in the core prostatectomy and hysterectomy markets for Intuitive Surgical, and there are the much-publicized worries about procedure safety, marketing, training, and cost/benefit.
The trouble is, Intuitive has successfully navigated past downturns in industry-wide cap-ex virtually unscathed. Couple that with uninspiring comments from companies like General Electric, Philips (NYSE:PHG), and Varian Medical (NYSE:VAR) in the recent past and it may be that we’re looking at another industry-wide slowdown in capex demand. Stryker, GE, and to a lesser extent Danaher will be the names to watch in this regard.
Is ortho back? Can volumes improve in CRM?
Privately-held Biomet reported encouraging overall growth from its orthopedics business, but the details were interesting. Reported growth of nearly 8% (constant currency) was nice, but that was significantly enhanced by an acquisition; like-for-like sales were up just 1%. Large joint recon still looks pretty soft (up less than 1%), while extremities continues to be a robust growth market. That should quite encouraging for Tornier (NSDQ:TRNX) and Wright Medical (NSDQ:WMGI).
On the CRM side, analysts are still wondering if St. Jude is going to pay a significant market share price for its lead issues, with Medtronic (NYSE:MDT) most likely reaping most of the benefits. St. Jude has stubbornly hung on to share so far, though, and the bigger question may well whether management ups its targets U.S. and European pricing and volume for the remainder of 2013.
Look for momentum, but watch the valuations
With the performance of the space being what it has, investors need to be a little more selective with their picks in the med-tech space. There certainly are still some apparent bargains out there, but the multiples have moved up across the board and instead of beating and raising relative to earnings estimates, more and more companies are just getting by with in-line results.
It looks as though reality has caught up with both Intuitive Surgical and Edwards Lifesciences (NYSE:EW) for the time being, and companies like Stryker, Covidien (NYSE:COV), and Boston Scientific (NYSE:BSX) could start seeing the market get less forgiving with respect to their reported and forecasted growth. Of course, a strong earnings report patches over a lot of concerns with institutional investors, so I wouldn’t be in a rush to sell ahead of those reports.
Disclosure – As of this writing, the author owns shares of Wright Medical Group.
Stephen Simpson CFA is a former sell-side and buy-side analyst who focuses most of his professional attention on financial and investment writing. In addition to a decade of work as an analyst, Mr. Simpson has worked as a wet-bench biomedical researcher and a consultant in the med-tech industry, as well as writing on a freelance basis for over 10 years. He can be reached via email at firstname.lastname@example.org.