Europe's recession. Tough competition. Recalls. What problem hasn't plagued the medical device industry recently? Med tech's top stocks have delighted investors this year, but that hasn't stopped even the strongest companies from struggling with a horde of issues.
But when it comes to sales troubles and disappointing bottom lines, one affliction might top all the rest in the device industry: plunging prices. According to a report released today by the Advanced Medical Technology Association, or AdvaMed, prices for some of the industry's top products have fallen drastically over the past few years. Just how bad has it been? It's enough to make an investor cringe.
More headaches for the cardiovascular kings
Virtually no major device group avoided falling prices over the past few years. Cardiac rhythm management devices, stents, orthopedic products, you name 'em -- all have sustained big hits, covering a who's who of top companies in the industry from Stryker (SYK +3.93%) to Boston Scientific (BSX +0.95%).
Unsurprisingly to investors who have kept a close eye on the industry lately, the cardiology department has taken a pounding. According to AdvaMed's data, average pacemaker prices crashed by 26% between 2007 and 2011 when adjusted for inflation, while prices for implantable cardioverter defibrillators, or ICDs, nosedived by 24% over that time.
Look no further than St. Jude Medical's (STJ +0.00%) sales over the first half of the year to see the ramifications of that plunge. St. Jude's ICD systems made up more than 32% of the company's total sales alone in 2013's first six months, but a revenue drop of more than 3% year over year took a bite out of the company's performance. Pacemakers haven't done well anywhere recently, but sales of the devices fell even more drastically at St. Jude, diving by 10% year over year in 2013's first half. Despite promising gains made in the growing field of atrial fibrillation, St. Jude's top line has taken a hammering from falling prices and other afflictions that have plagued its cardiovascular division.
The stalling of sales growth hasn't hurt St. Jude's stock much in the past two years, however.
STJ Revenue Quarterly YoY Growth data by YCharts.
It's a similar story at competitor Boston Scientific. Boston has been the toast of the industry among investors this year, as the company's shares have more than doubled since 2013 kicked off. Sales? They haven't done quite so well.
Like St. Jude, Boston's a big player in ICDs, pacemakers, and CRM products. Its interventional cardiology and CRM divisions are its two largest segments by sales, and each saw revenue fall year over year in the first half of 2013. It's become a major headache to the company, as full-year sales have dropped in each consecutive year since 2009, and Boston has only been able to post a full-year profit once since 2008. Even with this year's ridiculous stock run-up, only in the last two months were the company's shares able to return to their August 2009 position -- a point after the recession had already taken a withering toll on the stock.
Boston's making headways into higher-growth fields such as electrophysiology that should help the company's top line in the future. Still, it could really use a bounce back in prices for its top businesses in coming years to solidify its long-term future -- or even just a slowdown in their fall.
The stent industry's pricing collapse
It's hardly just ICDs and CRM products taking the brunt of falling prices. Everywhere an investor turns in the industry, plunging hospital budgets and ferocious competition have pared prices.
Abbott Laboratories (ABT +1.79%) might be much more than a medical device company, but its med tech division -- led by the top-of-its-class Xience drug-eluting stent -- is a big part of the company's post-pharmaceutical future. It's thus more than a little concerning for Abbott investors that average drug-eluting stent prices took the biggest hit of any of the products AdvaMed studied, with a 34% fall in prices between 2007 and 2011 when adjusted for inflation.
Ouch. The fall has already shown up in Abbott's performance, as the company's sales for drug-eluting stents and bioresorbable vascular scaffold products fell by 3% year over year in 2013's first half. Falling prices are another blow to the stent industry, especially as manufacturers already have to battle against reports such as American Medical Association's findings in August that stents were overused in elective procedures for stable coronary artery disease. Other studies have called out drug-eluting stents in the recent past, such as a study by St. Michael's Hospital in Canada published in The Lancet that found lower mortality rates in diabetic patients who had bypass surgery as opposed to stenting procedures.
Fortunately for Abbott investors, the company's Xience stent is at the top of the game in the industry -- even if stents are under fire from strained hospital budgets and journal publications. Abbott's innovative Absorb stent, which has already launched in a handful of international markets, looks like a long-term winner to succeed the Xience atop the industry. That innovation will be a key for Abbott and other device makers to battle against falling prices in the future as hospital budgets strain against the implementation of health care reform next year.
Orthopedics
We've seen stents and cardiovascular products take a tumble, but let's not leave out orthopedics.
Prices for total hip and knee replacements fell by 23% and 17% between 2007 and 2011, according to AdvaMed's data. That decline hasn't been enough to shake sales growth at orthopedics leader Stryker, but the company's reconstructive knee and hip segments, its two largest businesses by sales, have seen growth slow to a trickle recently.
Stryker's knee replacement business posted just 0.6% revenue growth over the year's first six months, with its hip business performing slightly better at 1.1% sales growth. It's an improvement, but a slowdown in falling prices would go a long way to help Stryker's top businesses bounce back to match the company's faster-growing segments, such as its neurotech business.
The importance for investors
Prices are plunging, but that doesn't mean med tech investors can't thrive. Like we see with Abbott's next-gen Absorb stent, innovation will be the key to beating out tough competition and falling prices in the future. Seeking high-growth fields such as atrial fibrillation, neuromodulation, and other small but growing industries will also go a long way to helping companies' top lines bounce back. Aging populations in top markets such as Japan and the U.S., as well as the increasing allure of emerging markets, will also help savvy companies and smart investors overcome the challenge of prices.
Stocks have surged across the device industry this year with the market's rise, and depressed prices won't end that run for the sector's best companies. The best takeaway you can glean from this trend is to invest in the med tech firms that have the best long-term plans -- those that can take falling prices head-on and overcome the challenge with products designed to sell for years to come. Top companies such as Stryker and Abbott have rewarded investors over the past few years, and their forward-thinking ways are set to keep up those gains for years to come.
