Bellevue : BB Medtech: Update JP Morgan Conference

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Medtech sector right out of the gate towards another great year

Stefan Blum Portfolio Manager

Marcel Fritsch Portfolio Manager

This year, like every year, all the top executives were on hand at the JP Morgan conference and available for meetings with investors. But this is only one aspect of the annual gathering: The big companies such as Medtronic dispatch teams of more

healthcare providers and medtech companies. Only large companies such as Medtronic have enough breadth and depth in their product range, can offer integrated services programs beyond the hospital setting and thus shoulder some of the attendant risks, and all the while maintain a competitive innovation incubator. Boston Scientific has recognized the same and its management is currently adjusting company strategy and will also offer more services solutions in the

than 30 employees to the conference, where they meet and mingle with their counterparts at other companies to sound out possible avenues of collaboration or potential alliances or acquisition oppor- tunities.

The healthcare industry's annual pilgrimage to San Francisco has be- come a tradition in itself and it's not surprising to see the industry who's who on the city streets and of course hotel rooms are almost impossible to find and will cost two or three times the normal rates.

China and the presidential elections in the US the key talking points

Thematically, the main points of interest at this year's event were macro issues. Two themes stood out: 1) The slower pace of growth in China and other newly industrialized countries and 2) the race for the White House and the potential risks that could emerge in the form of price controls.

While China's demand for industrial goods has definitely cooled off, no downturn has been observed in its healthcare sector. Delivering better healthcare services to the general population is a major stra- tegic and political priority for government officials in China and - just like in Western countries - healthcare demand is not subject to the vagaries of the economic cycle. Uniformly negative opinions were heard about Brazil and Venezuela, however, two countries plagued by both economic troubles and serious political uncertainty.

Modesty becomes a virtue (again)

Whereas the other healthcare sub-sectors have been shaken by in- vestor fears of government pricing regulations, the medtech sector was spared from a major sell-off and gained the status of a "safe ha- ven" in this regard. Mature medtech products have long been subject to pricing pressure, which means selling prices have usually been marked down by 1-2% a year. What would be completely normal in most any other sector had long been considered a sign of weakness in the healthcare sector, where it's not unusual for prices to be marked up by 5% every six months. Investors have become very wary ever since Hillary Clinton made healthcare pricing a plank of her elec- tion campaign in the summer of last year, and healthcare executives now realize that they are under a more watchful public eye.

Go big or go home! Consolidation in the medtech sector has just be- gun

Medtech's takeover bid for Covidien in 2014 was, at the time, viewed by many pundits as a defensive measure. Today, one and a half years later, it is commonly accepted that size and financial firepower are must-haves for a company to operate successfully in today's shifting business environment. The latest healthcare insurance models with fixed-fee, outcome-based reimbursements over a predefined treat- ment period are a strong incentive for greater partnership between

future.

Wave of consolidation should trigger strong price advances

We expect more large mergers and takeover deals to be announced in the current year. Stryker has a scalable platform with one leg in orthopedics and another in the operating room. Baxter, Abbott and Johnson & Johnson (J&J) will also be broadening their portfolios, and we don't rule out creative solutions or approaches in the case of Ab- bott and J&J. One company that must take strategic action is St. Jude. Its latest set of results indicate a lack of critical mass and that it doesn't have enough R&D resources to simultaneously move for- ward with all of its important development projects and clinical tri- als. The current stock market environment has put a slight damper on the expectations of potential takeover targets and brought them back down to more reasonable levels, which should make successful takeover transactions even more likely.

Positive outlook for the medtech market

Preliminary company results for the fourth quarter of 2015 traditionally published before the JP Morgan healthcare conference showed that the medtech market is in healthy shape. Many compa- nies presented excellent numbers. Those that did disappoint the in- vestment community were victims of company-specific, self-induced problems. The M&A carousel continues to turn too. NuVasive, for ex- ample, issued a takeover bid for Ellipse Technologies, a provider of innovative spine procedure solutions. Thanks to the suspension of the US medical device tax, medtech companies can step up their pro- duct development activities over the next two years and funnel more money into clinical trials. Some companies will be cautious about reinvesting the tax savings to make sure they can still meet investor expectations should their business unexpectedly hit a soft spot. Therefore, the risk of disappointment in the medtech sector should be much lower than usual in 2016.

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www.bellevue.ch

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