The list of top medical device manufacturers to watch in the coming year includes Johnson & Johnson (NYSE:JNJ), Medtronic (NYSE:MDT), and St. Jude Medical (NYSE:STJ). Each of these outfits had a good year and were able to overcome challenges posed by the 2.1% surtax on medical devices mandated by the Affordable Care Act.
Johnson & Johnson is a leader in the health care sector
The company consists of three primary units including consumer packaged goods, pharmaceuticals, and medical devices. In 2013, its medical device sector saw increased sales of 5.7% for the nine-month period ending on Sept. 30. The cost of the medical device tax (from $200 million to $250 million) did not appear to affect the company's broader value.
The consumer package unit performs steadily because products like oral care, skin care, and other consumer health goods are necessities regardless of the economy. The company's primary income driver is pharmaceuticals, though. In the third quarter, the pharmaceutical division continued to be the engine of growth, earning 11% over the same quarter in 2012.
The question remains, however, as to how this unit will perform going forward as more brand-name drugs' patents expire and become available as generics. The Affordable Care Act will play into that performance since the reform measure is designed to lower costs for medical services and prescription drugs.
However, because Johnson & Johnson is a large and multifaceted outfit, the company should continue to see long-term growth as the medical device sector evolves and new pharmaceuticals are brought to the market. Currently, the share price is expensive and could be trading at a premium. Investors should keep their eyes open when the company holds an analyst meeting on Jan. 21.
Medtronic offers an array of medical therapies
Medtronic is one of the largest medical technology companies with its array of therapies for treating cardiovascular diseases, diabetes, and neurological disorders.
The cardiovascular group is the company's largest unit. This group will continue to be a source of growth going forward as it creates new devices for patients with severe heart disease. In fact, Medtronic recently announced it implanted the world's smallest pacemaker in a clinical trial on a patient in Austria.
The device, called a Micra Transcatheter Pacing System, was attached to the heart by way of the femoral vein (the customary route for these procedures) and can be repositioned if need be. The pacemaker has yet to be approved by the FDA in the United States, but it will mark a new era in the treatment of heart disease here and abroad. In the most recent quarter, Medtronic reported its cardiovascular unit was the source of 52% of sales – an increase of 2.9% in 2013.
St. Jude Medical sees higher earnings
St. Jude Medical posted strong third-quarter numbers in October along with higher earnings guidance. Adjusted earnings per share in the quarter were $0.90, which was better than earnings for the same period in 2012 of $0.83 per share -- an improvement of about 8.4%.
Revenue was up a modest 1% year-over-year to $1,338 million in the third quarter. The company also upgraded its adjusted earnings expectations for 2013 to a range of $3.72–$3.74 from the earlier range of $3.70–$3.73.
St. Jude also continues to buy back shares as the board of directors authorized another round of about $700 million of its outstanding common stock. This buyback plan will have the effect of boosting its earnings numbers going forward. Like its rivals, St. Jude is developing new technologies to treat an array of cardiovascular conditions.
Final foolish thoughts
In the final analysis, the medical device excise tax looks like it was a speed bump for earnings growth across this sector. The total costs of the Affordable Care Act for the medical device sector remain to be seen, however.
That being said, Johnson & Johnson, Medtronic, and St. Jude Medical are well worth watching in 2014 and beyond. This is because treatments for heart disease and other vascular chronic conditions will evolve by way of new technologies. These technologies involve applying digitalization and miniaturization of heart valves, pacemakers, and other devices that can be implanted by catheters.
Applying these techniques mean fewer invasive surgeries, shorter hospital stays, and lower cost of patient care in the long run. This is good for medical device companies, patients, and investors as well.
Kyle Colona 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.