The robots will finally take over in 2019, one industry expert says.
XBut it won't be the murderous Skynet at the helm. Rather, artificial intelligence and robotics are transforming the medical equipment landscape, says Jeremie Capron, director of research and managing partner for Robo Global. Robo Global is an index and advisory firm specializing in robotic and artificial intelligence investments.
"Health care is undergoing a dramatic transformation and it's technology driven," he said in an interview with Investor's Business Daily. "These trends are not sensitive to the business cycle or health of the economy. So I think it's right to be bullish in medtech."
In 2018, medical equipment stocks outperformed other health care industries like biotech and pharmaceutical stocks. Capron, and others, call for continued innovation in 2019. Bright spots will include robotic surgery, DNA sequencing and medical devices in treating diabetes.
Medical Technology Stocks Outperform
Medical technology, or medtech, is split into three broad segments. Over the first 11 months of 2018, medical products stocks climbed nearly 26%. Medical research stocks popped north of 28%. Shares of medical systems companies jumped 23%.
Those groups also are well represented on the IBD 50. Thermo Fisher Scientific (TMO), Edwards Lifesciences (EW) and Illumina (ILMN) are among the elite list of growth stocks.
To compare, pharmaceutical stocks climbed a less bullish 15%. Meanwhile, biotech stocks lost 1.7% and generic pharma stocks plunged 29% over those same 11 months. Industry experts say that's because medical equipment tends to be a less volatile area of health care.
Biotech tends to be an "all or nothing" proposition, Robo Global's Capron said. That makes it hard to pick stock winners in biotech. But medical technology has become a mainstream area for savvy investors, says Edward Jones analyst John Boylan.
"A lot of these companies are very large and have pretty well known names," he told IBD.
Device Innovations In Treating Diabetes
Investors know medtech for incremental innovation. This allows for a quicker turnaround between products, Boylan said. He likens the cycle to Apple's (APPL) iPhone franchise — new products, features and communications tend to improve with each iteration.
"All of those incremental improvements push innovation and keep pricing at bay," he told IBD.
The bellwether example for this is medical devices in treating diabetes, says Scott Whitaker, chief executive of the Advanced Medical Technology Association, or AdvaMed, a trade group. Diabetic patients now benefit from continuous glucose monitoring devices and new insulin pumps.
Some innovations allow these devices to "talk" to one another, Whitaker said. That frees diabetic patients from having to constantly engage with their medical devices, he said. From a patient care standpoint, the innovation "has been amazing," he said in an interview with IBD.
"Traditional IT (information technology) is merging to some degree with medical devices," he said. "It is creating opportunities that I think are going to be fascinating to watch."
Medical Devices: Implantable And Wearable
In 2019, Whitaker expects to see more "wearables" among medical equipment offerings. CFRA analyst Kevin Huang echoed that sentiment in a Dec. 11 report to clients. Huang credited the newest iteration of the Apple Watch for spurring renewed interest in medical devices.
Huang notes several medtech companies are working on adding a continuous glucose monitor for diabetic patients to their wearable medical devices. This could help shift the health care paradigm "from treatment and cure to prevention," he said.
Implantable medical devices are also getting attention. New technology called neuromodulation uses electrical signals to mask pain. AdvaMed estimates as many as 50,000 patients receive spinal cord stimulators, like neuromodulators, each year.
Further, it's becoming less common to know someone who doesn't have an implantable hip or knee. In 2017, there were more than 1.4 million hip and knee replacements performed in the U.S. Today, AdvaMed estimates there are nearly 10 million people in the U.S. living with these.
"Millions and millions" of people are touched by the medtech industry, Whitaker said. "Every time someone enters a health clinic or a hospital, they are impacted by medtech in some way."
Robotic Surgery Floating On Tailwinds
Intuitive Surgical (ISRG) will continue to be the biggest name in robotic surgery in 2019, Robo Global's Capron said. But others like Medtronic (MDT), Johnson & Johnson (JNJ) with partner Alphabet (GOOGL), and NuVasive (NUVA) are looking to deepen their efforts in robotic surgery.
"We're seeing acceleration in revenue growth in surgical robotics," Capron said. "It looks like greater adoption and good reception by the surgeon community. We're also seeing good traction in the spine market right now."
Medtronic made waves in September with its plan to buy Mazor Robotics (MZOR). Mazor makes robotic surgery systems for spine procedures. Medtronic will pay $1.34 billion upfront to acquire Mazor, on top of the stake it already owns.
Further, Capron notes NuVasive recently tapped former Medtronic executive J. Christopher Barry to take its chief executive spot. NuVasive also makes products for spinal surgery. Capron expects NuVasive to "aggressively" battle for share in this area.
"All of this is positive for the industry of surgical robotics," he said. "More players are coming, which means this is an attractive market."
Labs Benefit From Increased DNA Sequencing
Other medtech companies are building on the result of the Human Genome Project. The project aimed to map the DNA in a human. Today, the cost to do so has dropped precipitously.
Researchers say understanding a patient's DNA can unlock the reasons behind their disease. It could also help physicians identify treatments that might be better suited for that patient.
Illumina may be at the top of the DNA sequencing pyramid, but others are building on as well, including Myriad Genetics (MYGN) and Thermo Fisher. A number of governments, including the U.S., are pushing for more people to be sequenced in an effort to lower unnecessary health care costs.
"There's the DNA sequencing area, which will grow in terms of revenue from suppliers with solutions for DNA sequencing," Capron said. "The outlook for any automation solutions provider is quite exciting next year as well."
Medtech Policies Look Beneficial In 2019
Representatives of the U.S. and China are negotiating tariffs. But few experts see that as a problem for medical technology in 2019.
CFRA's Huang says most makers of medical devices are well insulated from tariffs. Edward Jones analyst Boylan says tariffs are likely to only have a small impact as many of these medical equipment products are "lifesaving and life enhancing."
"Every country wants to have a healthy and happy population," he said. "That's why we think the impact of anything in China could be muted or offset elsewhere."
In the U.S., AdvaMed is working with the Centers for Medicare and Medicaid Services to make coverage decisions for medical equipment products more transparent. Sometimes, the Food and Drug Administration will clear a product, but it doesn't get CMS coverage.
So, "there's this gap," Whitaker said. AdvaMed is working to make sure CMS and private insurers understand the long-term benefits of medical technology products, like hip or knee replacements.
"The challenge is oftentimes, they only look at a one-year window," he said. "But we're starting to see them change and think about it differently on value-based models. But you have to do it product by product or category by category."
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The post Robots, DNA And Implantable Devices — Why 2019 Isn't Your Dad's Medtech appeared first on Investor's Business Daily.
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