The movement of small and mid-cap medtech companies’ shares last year clearly illustrates the gains that can be made simply be being active in the right sector. Companies in extremely competitive, genericised and mature markets have had a tough time, while those with newer, more innovative technologies in the ever-popular cancer and cardiovascular sectors have benefited from huge investor enthusiasm.
But this can be a trap. A technology or company that has been talked up and seen its shares go through the roof will crash horribly if its products disappoint. The disappointing performance of some smaller companies in 2015 shows the paramount importance of justifying the hype.
Abiomed (NASDAQ:ABMD) has had a storming 2015, with a 25% share price fall in October barely making a dent in an otherwise stellar performance. Thanks to a wave of FDA approvals and high demand for the approved technologies its stock more than doubled across the year.
Expanded US approval for its temporary heart pump Impella 2.5 in March enabled its use during elective and urgent high-risk coronary interventions, by August the company said this had boosted patient usage 62% year on year, and pushed it into a first-quarter net profit, versus a net loss a year earlier. Shares hit a high of $106.45 on August 17.
In October the group exceeded its sales and earnings forecasts, and raised its full-year revenue guidance, but stock fell to around $70 as investors sold on the news. Closing the year with a market cap of nearly $4bn, Abiomed is looking less like a takeover target than it has in the past- the larger cardiovascular groups might even be lamenting a missed chance.
Hologic, like many imaging and surgical equipment suppliers, employs a razor-razorblade pricing model. It has a decent-sized installed base and therefore many customers to whom it can sell high-margin disposables, and as a result its fiscal third-quarter profits climbed nearly 10%. And, while Hologic’s shares have risen, it could still be a tempting purchase for a conglomerate wishing to grow its own mammography division.
The molecular diagnostics group Cepheid trundled along quite nicely during the first half of 2015, but unravelled badly in the second half, with the lowered revenue guidance it released along with its second-quarter results prompting a 12% share price fall. Cutting guidance further at its third-quarter results triggered a 16% fall.
There is perhaps a general malaise in the genetic diagnostics sector. GenMark Diagnostics, a similar though much smaller company, also saw a steady stock decline. This once-hot area is now part of a highly competitive and rather undifferentiated market, thanks to the availability of sequencing technology and the vastly lower cost of computing power.
The Swedish radiotherapy specialist Elekta also felt the pressures of a maturing market, issuing a profit warning in May due to a weak US performance; it said large orders did not close as expected and there were delays in deliveries from order backlog. Its shares fell 22%.
The company lost orders valued at approximately SKr700m ($82m) related to projects in North America, where hospital consolidation led to order cancellations.
Don’t believe the hype
If traditional cancer radiotherapy is stagnating, a new spin on it seems to be doing very nicely. IBA Group specialises in proton beam therapy, a precisely targeted form of radiation that is intended to destroy tumours while minimising harm to surrounding tissue. The technology required is hugely expensive- the systems are so large new facilities must be built to house them- but this has not put hospitals off acquiring the machines.
In March the Belgian company’s shares spiked when it signed an $80m contract to install a proton therapy system at the Miami Cancer Institute. Deals with Philips and Toshiba were also brokered last year, helping to push the company’s value skywards, and the disposal of its radioactive isotope unit IBA molecular was also welcomed by shareholders.
Innovative technology is often wonderful – but too much buzz can be a danger if the results do not live up to the promise. OvaScience’s (NASDAQ:OVAS) share price nearly quintupled in 2014 as expectations built for its IVF-boosting technology Augment (Mid-cap medtech shares rise in 2014 on deals and the possibility of more, January 15, 2015).
But the stock stumbled badly last April when, in presenting long-awaited clinical data on Augment, the group conceded that no babies had yet been born to Augment-treated patients. At least one birth has occurred since, but the company’s value has never recovered. It closed 2015 less than 7% higher than it had been two years earlier.
The patterns in share movements in 2015 have, to a surprising extent, been determined by trends within sectors. It is salutary to realise how easily a technology can switch from being highly innovative to old news, as has happened to genomic sequencing or radiotherapy companies with undifferentiated technology.
It is not impossible that this might happen to heart failure devices or proton beam therapy in the coming years. Abiomed and IBA can congratulate themselves on an excellent year, but they might not be at the top for long.
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