Five Medtech Ideas to Leverage
Streetwise is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By George S. Mack, The Life Sciences Report
Before spending the last decade as a sellside analyst, James Terwilliger now with The Benchmark Company worked at Johnson & Johnson and other medtech companies where he learned quickly that the way to a surgeon's heart is to bring shiny new technology into the office. Physicians who spend their working lives in interventional cath labs or hospital operating suites have a natural inclination to listen and learn about new ideas and see how the latest toys work. But medtech companies want to sell their mature product lines as well. "Face time with the physician is hugely important because that new product doesn't just drive the new business," says Terwillger. "It also puts the medical device sales force in the position to do a pull-through with other products." He learned all the tricks first-hand.
In this exclusive interview with The Life Sciences Report, Terwilliger, has five interesting ideas that he believes small- and mid-cap investors need to know. Given that there are a lot of headwinds facing the medical device industry, I asked him what his bullish-case theory was for his picks. Could these weak conditions today make for strong comparisons a year or two years from now? "Absolutely," he says. "That's the reason to stay invested and to be looking at these stocks. You are 100% correct that when you take into account these easy comps, and then you factor in the biggest driver for the investment thesis in this space, which is an aging population, it's going to be very, very significant when we get to the other side of this downturn."
In addition to medtech, he also follows companies that serve the needs of institutions. Terwilliger makes a strong case for Healthcare Services Group Inc. (NASDAQ: HCSG) which is an outsourcing group that does things like laundry and food service. His investment theory here is about one of those aforementioned headwinds that seem to worry analysts at night. "These [service] providers are looking at Obamacare and asking if it might cut reimbursement rates," he says. "How do we tighten our belt and improve our cost structure today? So what we think is going to happen is that a lot of these different providers are going to be looking to outsource certain nonessential, nonclinical services. In that case, Healthcare Services Group has been a great stock for us," and he expects that to continue.
As for medical device companies, his current favorite is catheter-based Cardiovascular Systems Inc. (NASDAQ: CSII). Although it is currently a single-product business with technology designed to clean out vasculature in the legs of patients who are at risk for amputation, the company is currently doing a clinical study to migrate that same technology to blockages in coronary arteries. Even though peripheral artery disease (PAD) is a growing market, Terwilliger loves the coronary opportunity that makes this name a legitimate growth story. "Before it's over," he says, "We think it is going to have the PAD market in Europe and in the U.S., as well as cardiology market in the U.S. and in Europe. So, this is a small company, and it's a very, very nice new-product visibility story."
Another of Terwilliger's picks is ICU Medical Inc. (NASDAQ: ICUI). "People think it's pretty boring," he says, "But this is a very interesting story, and the stock has been a great performer." No joke. It's up 53% over the past 12 months, and we're not talking about a high tech juggernaut, but rather a commodity-style business that manufactures intravenous (IV) connection systems. However, "It's a closed system," he says. "And it was one of the first companies to come out with a needle-free system." He can't say enough about this company. He loves the cash flow and especially the balance sheet which he describes as "absolutely pristine." However, I do want to know about ICU's dependence on Hospira Inc, which is a major conduit of recurring business. Isn't that a lot of eggs in one basket? "Absolutely," he says. "Its relationship to Hospira is the risk to the story because it's a huge customer." Terwilliger says the company is going into the oncology IV infusion business, "And that's going to lower its reliance on Hospira."
He also likes Vascular Solutions Inc. (NASDAQ: VASC), another catheter company. Its lifeblood is the 2,000 "big-time cath labs" that happen to be customers all over the U.S. To emphasize the capacity for big returns Terwilliger stresses, "This is a very, very small company," he says. "It's also another good balance-sheet story, and it has a net-loss carry forward which means it's not paying taxes currently. "So it has more cash coming onto the balance sheet, and it is buying back its own stock," he says.
Terwilliger's last big idea is another small-cap idea with extraordinary potential. Exactech Inc. (NASDAQ: EXAC) is moving against the slow growth trend in orthopedics with "One of the fastest growth profiles that we've seen in the entire orthopedic industry," he says. Terwilliger likes the fact that Exactech is focused on extremities, not the declining spine segment of the market. Even though it's a small-cap company, it's diversified," he says. "I would say it's firing on three of its four cylinders right now."
To read the entire interview with James Terwilliger, visit www.thelifesciencesreport.com.
StreetWiseReport has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports does not accept stock in exchange for services or render general or specific investment advice and do not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.