Investor's Business Daily, February 1st, 2008
An aging baby boom population is living large and fueling a push for more advanced medical systems and equipment.
Not only are baby boomers living longer than previous generations, they have higher expectations about their quality of life and activity level.
According to the latest U.S. Census Bureau data, there are about 35 million Americans over the age of 65, or 12% of total population. That will grow to 21%, or 86 million people, by 2050.
These trends have influenced the direction and opportunity for medical systems and equipment companies.
The kinds of health care products provided by these companies are vast and varied. It includes blood analysis, minimally invasive surgical systems, tissue repair equipment, molecular diagnostic, medical robotics, heart instruments, radiation therapy and much more.
Some of the giants in the space include Varian Medical Systems VAR, Beckman Coulter BEC, Kinetic Concepts KCI, Hologic HOLX and Hillenbrand Industries HB.
The advancements in medical systems and equipment are complemented by companies that make medical devices, such as pacemakers, orthopedic implants and other medical tools. Together, these industries accounted for about $82 billion in industry sales last year. Average annual revenue growth is about 6%.
The U.S. holds a competitive advantage in these fields, thanks in part to strength in biotechnology, software development, microelectronics and instrumentation.
The end result is clear. According to a recent study published in medical journal The Lancet Oncology, survival rates for cancer patients are higher in the U.S. than in Europe. Men had a 66% survival rate vs. 47% in Europe. For women, it was 63% U.S. vs. 56% for European woman.
Researchers say reasons for the sharp difference in survival rates between the two countries included access to new treatment and screen options, quality treatment facilities and early diagnosis.
1. Business
Investors generally are most attracted to companies developing new technologies, which drives the medical systems and equipment companies to continually innovate or seek new opportunities through acquisitions.
So research and development spending is an indicator of a company's commitment to long-term success. The competitive nature of the industry requires a solid commitment to R&D. These firms also rely on strong intellectual property rights to protect their investments in this research.
The business is highly regulated, causing firms to spend considerable resources on the product approval process. If they win approval by the FDA and state and local regulatory agencies, companies typically then seek to have their products covered by insurers. The big prizes are the government's Medicare and Medicaid programs, which along with the State Children's Health Insurance Program, account for about a third of health care spending.
The market also is characterized by rapid technology development, intense competition and pricing pressures.
Because many of the health systems being made are costly, some in the range of a half million dollars or more, customers carefully make purchase decisions.
"The bad news is that more and more health care is purely a business, and it's getting more difficult to justify the purchase of new equipment without solid evidence that this is needed," said Perry DeFazio, research analyst at Nerac. "Whatever you're selling has to be markedly better than what is currently on the market.
"But the good news is that with technology being what it is, there's so much more that can be done with it."
Name Of The Game: Intense innovation, a highly talented sales staff and a strong, dedicated commitment to research and development are critical to success.
2. Market
Spending on health care reached $2.1 trillion in 2006, or $7,206 per person. That's up 6.5% from $1.97trillion in 2005, according to Centers for Medicare & Medicaid Spending. The health spending share remained stable in 2006 at 16% of the nation's gross domestic product.
Hospital spending -- which at 31% of total heath care spending is a core revenue source for medical systems and equipment makers -- grew 7% in 2006.
Spending by physicians and clinical service providers, another key revenue source, rose 6% in 2006.
The money is out there, but making the sale to a hospital or physician requires hard work and patience.
Case in point: Varian Medical Systems, a maker of cancer therapy systems, received regulatory clearance to market its $400,000 Rapid-Arc radiation therapy system in December.
On a Jan. 23 conference call after Varian posted fiscal first quarter results, analysts peppered CEO Timothy Guertin about how the sales process was going and whether it was facing any resistance.
"You know, we have people here who have strong degrees in physics background," he said. "And so our physicists can sit with the physics people from our customers and they can go through the technology."
When people first hear about the technology advancements and features in RapidArc, he said, "it is a little shocking that this could be done."
In addition to producing documents and white papers supporting how RapidArc performs, another step is to get the medical community to write about it. Once enough experts endorse a product, it's full steam ahead. Analysts expressed optimism that RapidArc likely will drive Varian's growth for the year.
Citi analyst Amit Bhalla, in a note to investors said: "We expect U.S. and worldwide cancer incidence to continue to rise, thereby driving continued demand for sophisticated cancer therapies."
About 50% of cancer patients receive some form of radiation therapy, "and we expect demand to persist going forward," Bhalla said.
3. Climate
Revenue flow of medical equipment and systems companies are affected by the budgeting cycles of hospitals and clinics, as well as fluctuations in government spending. Economic trends factor into that. The U.S. and many other countries around the world also are facing skyrocketing health care costs and have been trying to trim costs by cutting back on reimbursement rates and establishing price caps on services.
Nevertheless, as global population grows, as more hospitals are built and as governments establish public health insurance plans, the demand for new equipment remains. To stay in the game, companies must continue to improve existing products and develop new products that bring value well beyond what currently is on the market.
4. Technology
Among areas seeing rapid innovation are drug delivery services and the integration of radiology with information systems. Other hot fields include systems that conduct minimally invasive surgery, 3-D imaging and scanning and medical robotics.
To remain competitive, small steps forward are not good enough. Companies need to stay well ahead of competitors if they hope to persuade a buyer to step up.
"You have to demonstrate clear clinical benefits, being able to detect things or treat things that weren't possible before," DeFazio said.
A lot of the innovation in medical systems and equipment comes from startup companies.
"The smaller companies are a lot more agile and focused with a greater ability to react to changes," DeFazio said.
5. Outlook
Confidence in the sector is evident by the rising level of venture capital money flowing into the life sciences sector, which combines biotechnology, medical systems and devices. The life sciences sector set an all-time record for venture capital investing in 2007, with $9.1 billion in 862 deals, accounting for 31% of the total invested. Medical systems and device companies alone saw a 40% jump from 2006, to $3.9 billion. That is up 78% from 2005 (see related story this page).
Upside: U.S. companies are expected to remain globally competitive due to their lead in innovative technology and increased experience in exporting.
Risks: The industry has become increasingly competitive as multinational firms, especially those based in Europe, focus more attention on this market. Moreover, some regulatory barriers in foreign markets have proved difficult to surmount.
