By Stephen D. Simpson
There is no question that investors can find a lot of exciting growth stories in the medical technology space. From surgical robotics to gene sequencing to radiation therapy, a winning idea can produce not only eye-popping revenue growth, but very solid margins and returns on capital. Better still, customers have yet to show much price sensitivity and the FDA approval process means that competitors cannot exactly sneak up on a company overnight.
And yet, a lot of would-be world-beating ideas never quite work out as expected. Companies have tried drilling holes in the heart with lasers to improve angina, using pacemakers to treat depression and obesity, and developing entirely new sequencing technologies only to meet with failure.
The good news for investors though, is that there are a lot of "boring" medical technology companies out there that avail themselves of most of those positives – decent (if not great) growth, solid margins, and good returns on capital, and protected market share – without the risks of trying to push risky moon-shots into the market. With these names, investors can often look to remarkable consistency over time, with the shot at occasional break-out winners. All in all, then, investors should give a serious look at some of the less-exciting ideas in medical technologies.
One of the first names to look at in any discussion of "boring but good" medical technology is Covidien – a name that has long been boring, but only really became good when it was spun out on its own and able to make its own decisions about reinvesting capital into R&D and business development. Covidien is in the top four of the large majority of its businesses, and in the top two of many of them – including promising markets like bariatric surgery tools, soft tissue repair, and vascular intervention.
CR Bard (BCR)
Bard is not as undervalued as Covidien, but the company has a stellar long-term record of financial performance. With leading positions in vascular intervention, urology, and oncology, Bard has built a great business despite competing with heavyweights like Boston Scientific (BSX), Covidien, and Johnson & Johnson (JNJ). Bard benefits from a heavy weighting towards consumables/disposables, earns an excellent return on its cost of capital, and has a real growth opportunity in the emerging vascular intervention market.
Becton Dickinson (BDX)
Known best for its long history in needle safety systems, prefilled syringes, surgical scalpels, and the like, this is still a lucrative low-growth business for the company. BDX has paired stable cash-cow with higher-growth opportunities like diagnostics (including STD and hospital-acquired infection tests) and biosciences. BDX has a solid dividend history, good capital appreciation potential from here, and a very appealing mix of legacy businesses and growth opportunities.
ICU Medical (ICUI)
Though having not yet stood the tests of time that would put it in the same group as Covidien, CR Bard, and Becton Dickinson, ICU Medical is a candidate to join this list. The company's core businesses, needle-free connectors, custom tubing sets, and critical care devices, are not exciting at first blush, but the company has garnered significant growth from delivering superior mouse-traps to the market. With growth opportunities in fields like cancer drug delivery, ICUI could be a name for more risk-tolerant investors to consider.
Techne is a fantastic business that is perfectly happy flying completely below the radar. Though not well-known, Techne is a leader in the development of cytokines, enzymes, and antibodies for biological research and clinical diagnostics. The company maintains an exceptionally active and broad R&D program (many products do not reach their full sales potential for seven or eight years after launch), and is actively positioning itself for growth in Asia. While the markets wiggle and waggle, the persistence and consistency of growth at Techne has been something of a marvel for many years.
Life Technologies (LIFE)
Life Technologies may not really belong on a list of high-quality boring medical technology names. After all, Life Technologies is a serious competitor in sequencing with the likes of Illumina (ILMN) and that is hardly a boring business. That said, a lot of Life Technologies' business is more mundane – the company offers tens of thousands of products, and much of the sales base is made up off regularly-used lower-ASP consumables. Still, this is a good mix of stable slower-growth legacy business with several higher-potential shots on goal and if the company can start delivering better margins and asset utilization, the stock could work well for the long term.
Bio-Rad has a very appealing mix of clinical diagnostics and life sciences research operations. Bio-Rad has not always been the most liquid or well-covered stock, though, and significant family ownership and control is a problem for some investors. Like Life Technologies, Bio-Rad could do better on margins and returns on capital, but the company is not all that deficient at present. Moreover, the company has solid future growth prospects with new high-throughput systems for the diagnostics and immunohematology markets.
Baxter is a bit of a quirky company to categorize. The company has a large business in device categories like medication delivery and dialysis equipment and supplies, but also a high-margin growth kicker in injectible drugs, biologicals, and blood collection equipment. Demand for plasma products and antibody therapies weakened in the recession, but look like solid long-term businesses. What's more, while the company's growth history may not be quite as dependable as other names on this list, it still scores well overall and is definitely worth a look from long-term investors.
The Bottom Line
Although this latest recession likely put to bed the myth that healthcare is a safe hiding place during recessions, the fact remains that healthcare is a market with attractive long-term prospects. Though there will undoubtedly be more pressure on pricing and margins going forward, solid companies with innovative and life-improving technologies will get their money and continue to enjoy strong margins.
Investors looking to play healthcare and medical technology should give serious thought to the advantages of companies that look boring on the surface. It is not easy to get venture capital financing for a new catheter to compete with an entrenched player like Bard and it takes an incredible amount of time and capital to replicate Techne's product array and reputation with customers. What's more, as valve company Edwards Lifesciences (EW) has so ably demonstrated, a boring company can quickly became quite exciting and post strong growth on the back of an innovative product launch.
All told, there's nothing boring about making money and beating the markets, and these companies look to give investors an above-average shot at that very worthy goal. Be prudent and resist the temptation to chase these names, but when the markets get bored with their consistent growth and mark down the valuations (and this happens in a regular, if not predictable, cycle), be ready to move.