Like most everything else these days, medical technology stocks have reached their highest valuations in decades. But unlike some sectors—say, cannabis, that other kind of medical technology—med tech’s shares might stay aloft.
Analysts in many corners of the market are nervously assessing the heights their stocks have scaled. The software issues in the iShares North American Tech-Software exchange-traded fund (ticker: IGV) are up 29% this year, compared with 9% for the S&P 500.
The med-tech sector is the year’s next strongest gainer. It’s advanced 26%, as measured by the iShares U.S. Medical Devices ETF (IHI). In a recent meditation on med-tech valuations, the analysts at Canaccord Genuity Group attribute med tech’s outperformance to revenue growth, merger activity, and the defensive character of health-care stocks when economic expansions slow.
Hot performers among medical-device stocks this year include cardio device maker Boston Scientific( BSX) and robot surgery leader Intuitive Surgical (ISRG), each up 50%. Canaccord’s Jason Mills and Kyle Rose note that such large-cap med-tech stocks now trade at an average of 5.5 times 2019 sales, compared with a range of two-to-3.5-times over the past decade.
One reason med tech trades at a premium, they say, is its double-digit sales growth. Another reason is scarcity. Over the past 10 years, mergers have reduced the number of publicly traded med-tech outfits from more than 110 to 77. Canaccord thinks the group will maintain its premium.
Mergers among device makers will also probably continue. Wells Fargo analyst Larry Biegelsen speculates that Boston Scientific or its heart-valve rival, Edwards Lifesciences (EW), would make sense as an acquisition for Johnson & Johnson (JNJ). In a Sept. 16 note, the analyst observed that devices accounted for 41% of J&J’s total sales in 2012 but are expected to generate only 32% in 2019. Lately, he writes, J&J Chief Executive Alex Gorsky has called out the increasing innovation and friendlier regulation of devices, compared with some other products.
By Bill Alpert | Barron’s
Image Credit: Ron Antonelli/Bloomberg