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3 Key Points of Investment Advice for the Medical Device Industry

By Dan Carroll – Apr 19, 2013 at 1:50PM

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Investors in this industry can't afford to ignore these three important trends.

The medical device industry can be a tricky field for those looking for investment advice. Between companies selling products in every category from drug-eluting stents to neuromodulation, where in the wide field of health care do you start? Fortunately, the ongoing earnings season has told us a few key trends every medical device investor can take advantage of. Here are three need-to-know points from the industry's earnings season that your portfolio can't afford to ignore.

This isn't a biotech-style growth industry
First off, the medical device industry as a whole is facing some tough times. Pricing pressures, maturing markets, and a tough European business climate have all contributed to slowing or declining sales among the top names in the industry.

Take a look around the top device companies reporting this week, and you'll see a picture of lackluster growth. Johnson & Johnson (JNJ -0.64%), one of the biggest names in health care, saw double-digit growth from its medical device department, but only because of its $12 billion acquisition of orthopedics powerhouse Synthes last year. Fellow diversified medical firm Abbott Labs' (ABT -0.62%) medical device sales fell more than 4% despite its dominant position in the stent industry. St. Jude Medical (STJ) also saw sales decline 3% at a constant currency, even as the company managed to grow earnings by more than 5% by cutting costs.

What advice should you take away? Don't expect the kind of high growth from medical device companies that other firms in the health care sphere -- particularly fast-growing biotech companies or big pharma giants propped up by billion-dollar drugs -- can deliver. Medical device investors especially need to focus on long-term performance and growth in this industry.

Cardiovascular sales on the decline
If any market has slowed down the medical device industry's growth, it's been the cardiovascular market. Sales of heart products -- particularly cardiac rhythm management, or CRM, devices such as pacemakers and implanted defibrillators -- have been pounded by a mature market that's left little room for growth.

St. Jude's sales slipped again in this area in its most recent quarterly report, falling 8% -- a bad sign for the company considering that CRM revenue makes up the foundation of its sales. Pacemaker sales in particular nosedived, dropping 12%. It isn't any easier across the industry: Boston Scientific (BSX -1.55%), which made the majority of its revenue from cardiac products last year, saw sales in its interventional cardiology and CRM businesses fall 11% and 7%, respectively, at a constant currency in 2012. Rival Medtronic (MDT -1.61%), the largest purely medical device maker on the market, managed to eke out gains in its cardiac and vascular group over the last nine months but still lost 6% in cardiac rhythm disease management sales.

What should you take away? While the cardiac and CRM markets aren't necessarily a killer for companies in the business, watch out for firms that are overly focused on this industry. Firms such as Abbott, which produces vascular products including its leading drug-eluting stents, are safeguarded against this industry's slump by virtue of their diverse sales portfolio. St. Jude and Boston Scientific, however, have suffered from the CRM market's fall, and sales have yet to recover.

Keep an eye on what's growing
With sales in major markets such as CRM slowing, it's pivotal that investors look to see what trends are growing -- and what the future of the market will look like.

Niche fields have grown substantially lately, with companies pouring resources into fields such as atrial fibrillation, or AF, and renal denervation. The former has been a bright spot for St. Jude, with sales in its AF business growing 7% on a constant currency this quarter even as every other division's revenue fell. Neuromodulation products dealing with the spine and brain have also provided a spark .While the segment fell for St. Jude this quarter, neuromodulation sales have been on the rise at both Medtronic and Boston Scientific lately. Stryker's (SYK -1.71%) neurotechnology business alone posted double-digit growth in 2012.

Aging and obesity will dominate the future of advanced economies' health care systems, however, and it's here that real money will be made. Companies dominating the orthopedics sphere such as Johnson & Johnson's DePuy Synthes unit and Stryker are in great position to capitalize on repairing creaky hips and joints of elderly or overweight patients. Orthopedics sales have managed to rise recently despite the industry' slow progress, and that trend should only grow stronger in coming years.

Investing for the long term
Long-term investors can do well in the medical device industry by keeping an eye on the future. While companies here won't experience the drastic up-and-down cycles of regulatory approvals and patent expirations that beset pharmaceutical and biotech firms, they can form a solid part of any health care portfolio's foundation.

Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$165.66 (-0.64%) $-1.06
Abbott Laboratories Stock Quote
Abbott Laboratories
$100.06 (-0.62%) $0.62
Stryker Corporation Stock Quote
Stryker Corporation
$203.40 (-1.71%) $-3.53
Boston Scientific Corporation Stock Quote
Boston Scientific Corporation
$38.30 (-1.55%) $0.60
St. Jude Medical, Inc. Stock Quote
St. Jude Medical, Inc.
Medtronic plc Stock Quote
Medtronic plc
$81.33 (-1.61%) $-1.33

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