2 Medical Device Stocks to Consider Buying

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Medical device companies have been on a run over the last 12 months. While Medtronic underperformed the market during this period, Covidien and Baxter generated high double-digit returns of 28.8% and 36.6%, respectively. Could Medtronic see its multiples expand from this underperformance? What would justify it? And how likely are we to see Baxter continue its bull run? I review this and more below.

Is Biogen a Threat to Baxter (NYSE: BAX)?

Baxter recently showed strong data for its hemophilia B treatment BAX326. In the Phase I/III clinical trials, 43% of patients didn’t bleed. The medicine was also reported to improve physical health and quality of life. BAX326 was also given an orphan drug status due to the rarity of the condition it treats--only one in 25,000 males worldwide suffer from this disease. There is only one recombinant in the world that can treat the disease, and Baxter’s new treatment increases patient options.


Even though competitor Biogen’s (NASDAQ: BIIB) hemophilia treatment is showing good results, Baxter’s Advate is still likely to retain market leadership, since patients are not desirous to change medicines for such a disease. One area where Biogen’s product is in most use is when spontaneous bleeding starts; it helps stop and treat the bleeding. This only meets one-fourth of domestic sales for Advate.

The company is also not resting on its laurels; operational momentum is often a good indication of future gains for shareholders. Baxter approved a $50 million upfront to Onconova Theraputics, which will provide commercialization rights to Rigosertib, a new medicine for blood malignancies and pancreatic cancer, in the European market. Baxter was also interested in strengthening their dialysis products when it bought out Gambro for $4 billion. It is estimated that the cost of production will be decreased by $300 million each year for Baxter and that it will become profitable in 2014. They also improved their dividend and share repurchase program. Lastly, the company is slashing prices to draw in customers.

Medtronic (NYSE: MDT): Strong Data + Momentum

Medtronic, the world’s largest medical technology company, recently announced a 1-year report for Symplicity, a renal denervation product. The product gave an enormous blood pressure drop for patients (-28/-10 mm Hg [p<0.001]) after 12 month use without any serious side effects. The product had a 100% cure rate in all nine tested patients, which reduces hypertension through radiofrequency pulses that stimulate sympathetic responses. More than 42 million people are affected by this worldwide. It is usually done by inserting the catheter into a renal artery.

The company also turned to emerging markets by buying out China’s Kanghui Holdings, a company for orthopedic implants, for $816 million. And like Baxter, it has shown momentum in its own right. Medtronic reported that its CoreValve heart implant increased survival rates and quality of life for patients in a groundbreaking 1-year study. If the company can carry this momentum through strong pipeline developments, investors will be glued to the upside.

At a respective 13.9x and 11.2x past and forward earnings, Medtronic is also fairly cheap. Analysts forecast 6.6% annual EPS growth over the next five years on top of a 2.4% dividend yield. While I do not believe this growth rate and dividend yield alone will cause the stock to outperform the broader market, when combined with multiples expansion the returns will be fairly close. Over the past five years, Medtronic has had an average PE multiple of 16.4x, which represents 18% upside to the current price.


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