A Look at 2 Leading Medical Device Stocks
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Medical device companies face significant opportunities from targeting the retiring baby boomer generation. Device innovations in blood disorders and heart conditions have gotten a large focus, but the foray into drug development has caught many analysts by surprise. Will this pay dividends? And what other strategies are they taking to hedge against domestic headwinds? Below, I present my take on Baxter and Medtronic.
Baxter (NYSE: BAX)
Baxter is a leading company engaged in medical devices and pharmaceuticals. In late January, it decided to acquire OBI-1, a hemophilia compound that is still under investigation, as well as related assets. It is buying the compound from Inspiration Biopharmaceuticals. Ipsen Pharma S.A.S will provide the manufacturing operations. The compound is being investigated for the possible treatment of acquired hemophilia A, as well as congenital hemophilia A with inhibitors. Unlike other hemophilic disorders that mostly affect males, acquired hemophilia A affects both sexes.
Baxter has been on the frontline of researching and providing solutions for hemophilic conditions, so investing in OBI-1 is a good opportunity to open a new market. Baxter is expected to pay an upfront payment of $50 million for the asset and manufacturing operations. It will then be expected to pay around $20 million depending on regulatory approval in the U.S as well as for foreign approval. Additional payments may be made depending on their approval when sales amount to more than $100 million. The compound is in Phase III of clinical studies.
Baxter boasts a wide portfolio insofar as hemophilia is concerned. It has at least 60 years of experience in treating hemophilia, and it has developed various choices of therapy for both hemophilia A and B. The company, through its subsidiaries, has also invested in other products for life threatening illnesses and acute medical conditions. Apart from pharmaceuticals, the company also has invested in the manufacture of medical devices that continue to be used in hospitals globally.
Medtronic (NYSE: MDT)
This medical device giant has been able to register strong growth due to prudent investment in an aging population. The company manufactures medical devices that cater to heart diseases. But it has not been exactly smooth sailing for the market leader. There are challenges, like the excise tax that has been introduced on the sale of medical devices. But Medtronic is hedging by penetrating China, which is evident from last year’s acquisition of China Kanghui Holdings. Medtronic is also working hard to have an increased presence in the orthopedic implant market, thereby threatening other giants, such as Zimmer Holdings. Zimmer Holdings had made a similar Chinese strategic acquisition, which enabled it to ultimately generate more than 20% of its revenue from Asia.
Medtronic faces challenges from drugs that are able to achieve the same results as the devices it manufactures. There is a possible risk that the devices may be replaced by medical interventions in the future. For Medtronic to remain relevant, it will have to increase demand by keeping a keen eye on demographic trends. Due to its size, it is well positioned to have greater stability, but this does not necessarily mean upside will always be great.
Baxter and Medtronic have delivered terrific returns in recent months. The former is up 41.2% from its 52-week low, and the latter is up 35% from its 52-week low. Medtronic is slightly cheaper at 15.2x past earnings but has fewer growth catalysts. While there are costs and benefits to both, I lean towards buying Baxter. You should also consider hedging through investing in St. Jude Medical, which only trades at around 10.5x forward earnigns and is forecast a growth rate of approximately 9.5% over the next five years. The stock is 16% less volatile than the broader market and thus offers a degree of safety alongside an investment in Baxter.
TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic. 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. Is this post wrong? Click here. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.