The global medical device market reached $331 billion in 2012, a growth rate of 3% from 2011. According to a report from EvaluatePharma, the medical device market growth rate is expected to accelerate to 4.4% annually and reach $440 billion by 2018. That is a growth rate almost 33% faster than the prescription drug market, which is expected to grow at a rate of 2.5% annually. The medical device market includes everything from large imaging systems to tongue depressors. While the pharmaceutical market represents a larger amount of dollars, the device market is responsible for more orders and transactions.
While the majority of medical device dollars will go to giant healthcare companies like Johnson & Johnson (NYSE:JNJ), GE Healthcare (NYSE:GE), Siemens (SI) or large medical device companies like Medtronics (NYSE:MDT) or Boston Scientific (NYSE:BSX), there are a number of smaller device makers that have been carving out a niche for themselves and could be good additions to one's portfolio. Below are three medical device companies whose stocks have the potential for significant gains in the coming year.
NuVasive: BUILDING A BILLION-DOLLAR SPINE DEVICE INDUSTRY
NuVasive, Inc. (NASDAQ:NUVA) has had an excellent run this year, and there are a number of factors in the company's favor that should allow the stock to continue to rise. NUVA carved out a growing business by developing minimally disruptive surgical devices and procedures for the spine. Back pain accounts for approximately 13.4 million trips to a doctor and 3.7 million emergency room visits annually in the U.S. And to achieve some relief, patients with acute, debilitating pain many times require spinal fusion. The spinal surgery device market is expected to grow at rate of 4% from $6.5 billion in 2011 to $8.7 billion in 2018.
The San Diego based company's lead platform is called Maximum Access Surgery [MAS]. MAS combines several categories of spine surgery to minimize soft tissue damage during surgery. The device includes a proprietary software-based nerve avoidance system, which enables safe navigation of the body's nerve anatomy. Additionally, it uses intraoperative neurophysiologic monitoring that provides information directly to the surgeon to help assess a patient's neurophysiologic status by electrically stimulating nerves via electrodes located on surgical accessories, along with electromyography monitoring. MAS is designed to eliminate the need to retract muscle laterally, therefore requiring a smaller incision than previously required. It also allows for maximum visualization for the surgeon while providing access to the spine via the side instead of the front or back, all which reduces surgery and recovery time.
Last month, NUVA reported strong third quarter results with sales rising to $169 million, a 14% increase over same quarter 2012, which came in at $148.4 million. Gross profit for the third quarter reached $125.9 million up from gross profit of $110.6 million in the same quarter 2012. However, total operating expense also climbed to $114.3 million in the third quarter compared to $98.1 million for the same quarter 2012. The company also raised its 2013 guidance to $670 million in sales up from $655 million, well above 2012 revenues of $620.3 million.
NUVA has a market capitalization of $1.47 billion; year-over-year its stock has risen 140%, closing on Friday, Nov. 22nd at $33.48 per share. The stock has moved past Barclay's analysts' prediction of $30.00 per share, and is honing in on Zacks price target of $33.80 per share. However on Nov. 15th RW Baird raised its price target from $33.00 to $37.00, citing improving spine fundamentals. Separately analysts at Needham & Company raised their price target from $35.00 to $40.00 per share.
And while the company has yet to turn a profit, its portfolio comprises over 80 products including: lumbar, thoracic, cervical applications, neuromonitoring services, and a biologics portfolio including a collagen bone graft matrix and a cellular bone graft matrix. Along with its continued R&D, these factors have helped grow the company to the fourth largest player in the spine device market. NUVA has built its business on focusing on developing less invasive devices for one area of the body: the spine. I like this company-- and if the company reaches or exceeds its yearly projections, I foresee this stock trending higher.
Arch Therapeutics: GIVING SURGEONS A CRYSTAL CLEAR VISION TO SLOW BLOOD LOSS
Blood loss has always been a concern in surgery. To address this, Arch Therapeutics, Inc. (OTCQB:ARTH) is testing liquid polymers designed to shorten the time it takes to stop bleeding (hemostasis), and to control fluid leakage during surgery and trauma care. The company s lead product, AC5, is a clear biocompatible synthetic peptide made up of naturally occurring amino acids. When applied to a wound, it gets between the connective tissue and self-assembles into a physical, mechanical structure that provides a barrier to quickly stop the bleeding. If AC5 proves successful in doing so, the product would stop excess bleeding, making surgeries not just faster, but safer.
AC5 is currently in tests to stopping bleeding in minimally invasive (laparoscopic) and open surgical procedures. According to CEO, Dr. Terrence Norchi, when AC5 was applied in preclinical tests, hemostasis occurred in less than 15 seconds, compared to 80 to 300 seconds when various control substances were applied. Other factors involved the nature of the control substance and the procedure performed.
With that said, investors should note that Arch is a nanocap stock, having a market cap of only $11 million, and also trades on the OTC exchange. The company does not have a great deal of cash and is just now set to begin human trials. Investors must acknowledge that risks are associated with the company, but should also realize that these risks are different from a typical biotechnology company because trials for AC5 are much cheaper. However, the risk or potential clinical failure exists the same way for all companies with clinical products.
One of the reasons that medical device companies are attractive is because they improve conventional methods of treatment and because studies are often speedier. Arch is trying to replace bandages in many industries, a practice that has been in place for 100s of years. Also, with biotechnology companies of this size, cash position is always a major concern. And while Arch investors must be wary of the company's financial position, the trials are much less expensive and quicker through the FDA process. For example, Arch has a net loss of just $500,000 in its last quarter, and its clinical process consists of AC5 being used in surgery then monitoring patients to determine if the sealant holds and if it leaks. Neither of which are expensive to monitor, and is far less than an oncology company manufacturing a complex product from human cells.
AC5 is not a headline-grabbing product, thus like many medical device companies, it does not receive a lot of attention. This fact does carry some weight on its market capitalization, as a reason for it being a Nano stock. However, if more successful and effective than bandages or other sealants, AC5 is well positioned to enter a large market, and its nanocap status won't matter.
While ARTH's product is still in the development stage (and therefore the company is not generating any revenue), AC5 has enormous potential, as the growth rate for sealants is expected to rise in the coming years. Annually there are roughly 114 million surgical and procedure-based wounds worldwide: 36 million in the U.S. with 20-25% of these procedures performed laparoscopically. In 2012, global sales of hemostatic agents were over $2.8 billion, and an additional $1.3 billion were for fibrin and other sealants. Combined totals are expected to reach over $7 billion in 2017. The company touts its technology as an innovative platform with far reaching potential for products in the field of stasis and barrier applications. Furthermore, ARTH strives to develop sealant products based on its self-assembling peptide technology platform.
As it gets closer to begin human trials, ARTH is preparing for initial clinical trials and has been seeking out a large manufacturing partner to produce AC5 while engaging with both U.S. and EU regulators. If the company is successful moving forward in its tests, I can see the stock rise considerably from where it is today. This may just potentially be the sleeper stock of the medical device sector.
LDR Holding: SMALL MEDICAL DEVICE COMPANY WITH LESS INVASIVE PLATFORMS
Like NUVA, LDR Holding Corporation (NASDAQ:LDRH) focuses on designing and commercializing novel and surgical technologies for the treatment of spine disorders. With headquarter locations in Troyes, France and Austin, Texas; the company went public on Oct. 9th, offering 5,000,000 shares of common stock at $15.00 per share. The stock has since risen over 10%. LDRH's primary products are based on its VerteBRIDGE fusion and Mobi non-fusion platforms, both of which are designed for applications in the cervical and lumbar spine areas. According to the company, both platforms enable its products to be less invasive, provide greater intra-operative flexibility, while offering simplified surgical techniques. This has promoted improved clinical outcomes for patients compared to existing alternatives.
Industry sources expect that the cervical disc replacement market will be one of the fastest growing segments of the U.S. spine implant market. In August, the company's Mobi-C cervical disc replacement device became the first device to receive approval from the FDA to treat both one-level and two-level cervical disc disease. Dr. Gregory A. Hoffman, orthopedic surgeon and member of the SpineONE Medical Team at Ortho North East in Fort Wayne, Indiana commented:
Mobi-C is unique in that it is now the only cervical disc replacement FDA approved for both one and two-level clinical use. The population of patients suffering from one or two-level cervical disc disease is large, and Mobi-C has the potential to make a significant and positive impact to the treatment of those patients.
LDRH's other platform, VerteBRIDGE fusion, targets the cervical and lumbar spine fusion markets. The platform has been put to use in over 30,000 device implantations over the last five years. On Nov. 7th LDRH released its third quarter earnings, and revenues increased to $27.20 million, up 30.01% compared to $20.9 million in the same quarter 2012. This figure beat consensus estimates of $24.53 million. Revenue from exclusive technology products grew 36.7% to $22.9 million. Gross profit for the nine months ended Sept. 30, 2013 came in at $67.1 million compared to a gross profit of $55.2 million for the same period in 2012. Net loss for the third quarter of 2013 totaled $8.0 million, or $1.68 per share. This included $4.7 million in noncash expenses associated with the revaluation of warrants leading up to the IPO-- compared to a net loss of $3.1 million, or $0.66 per share, for the same quarter 2012. As of Sept. 30, 2013, LDR had $11.6 million in cash and cash equivalents, $10.3 million in working capital.
LDRH is a $498 million market cap company. Its stock closed on Nov. 22nd at $21.98 per share. Earlier this month, analysts at Piper Jaffray initiated coverage, giving a LDRH a $26.00 price target. The stock has a consensus "Buy" rating and an average price target of $25.67. LDRH is a small company, with basically two product platforms; it is competing against some of the largest device manufacturers that have worldwide sales, marketing, and distribution channels. The company is also competing against NUVA, as both focus on developing medical devices for the spine. That being said, the company's products are innovative and address a specific segment of the overall spine implant market; but that market still represents $3.9 billion in sales in 2012. LDRH needs to develop a strong sales and marketing force, both in house and via distribution channels. And if it does, LDRH stock may well be a bargain today.
Medical device companies in the development stage do not generate the attention that developing drug companies receive; but a device company producing a novel product can be just as lucrative. The three device companies profiled today all have great potential to carve out a niche for themselves. While each carries its own level of risk/reward, I think all three could see their stocks rise significantly over the next year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.