- The medical technology sector has performed well during 2020, benefitting from broader healthcare tailwinds.
- The sector has many high-quality growth names that are well-placed to gain 2021 that Bank of America prefers over some of the big value names.
- Here are the 16 medtech stocks BofA thinks you should own going into 2021.
- Visit Business Insider's homepage for more stories.
Medical technology stocks performed strongly in 2020, benefitting from the wider healthcare tailwinds caused by the pandemic, and this is set to continue into 2021 for companies in the sector with strong fundamentals, according to Bank of America.
Healthcare companies have been at the top of the agenda throughout the pandemic, with the likes of drugmakers Pfizer, Moderna and AstraZeneca making the headlines with their COVID-19 vaccine candidates that have been at the fore of every investor's mind over the last month.
As many of these defensive sectors operate on historically expensive valuations, medtech offers a strong investment opportunity with good fundamentals and structural tailwinds at not "unreasonably expensive" prices, the BofA said in a note including analyst Patrick Wood.
The European medtech sector in particular boasts "higher quality growth names", which have become increasingly attractive, thanks to the massive shift out of growth stocks this year, the note said.
When news that an effective vaccine had emerged from clinical trials in November, many investors saw the possibility of a return to 'normal life' and therefore economic recovery, prompting them to move into value stocks which historically perform well when economies grow. But, BofA argue that particularly in the current environment of low to flat yield curves, high quality growth names are still preferable "over value", the note said.
In addition, payors look in "good shape," the note said, supported by federal programs. US demand across the Medicare and insurance markets are expected to remain steady, the note added, highlighting that there are "strong insurance reserves from low utilization over FY20E on lower elective procedure rates."
BofA believes strong recovery in China and continued low single-digit growth in the UK, France and Germany in particular, will put healthcare budgets "more in focus post pandemic."
However, not all names are winners, the note said. BofA also listed four names in the sector that are underperformers.
- Ambu, a Danish endoscopy solutions company. BofA are concerned of delays to the "Duodenoscope launch in H2 FY21" as well as increased competition from the US.
- Sonova, a Swiss hearing care company, is at risk from "new market entrants" as well as competition from GN & Demant, the note said, adding that the company has "little upside from here."
- Elekta, a Swedish company offering treatment for cancer and brain disorders, has seen its shares near "all-time highs" and BofA see a "more competitive radiotherapy environment going forward," the note said.
- BioMérieux, a French biotechnology company, is also close to all-time share price highs and may have tougher competition and longer term headwinds, meaning BofA see "a downgrade risk in FY21," the note said.
Here are the 16 medtech stocks that BofA think are well-place to gain post-pandemic. The following stocks also have "Buy" ratings from the firm's analysts.
Fresenius Medical Care
- Ticker: ETR: FME
- Market Cap: €19.65 bln
- Old PT/New PT: 69.4/86.0
- % Upside: 26.81%
"Our PO for FMC of €86/US$53.00 uses a P/E multiple of 18x 1-yr fwd earnings, in line with the historical multiple for FME but still maintaining FME's 15% discount relative to EU medtech peer group. Our EV/EBITDA multiple is 10x reflecting FME's relatively defensive business in comparison to peers more exposed to elective procedural delays," the note said.
"Downside risks to our PO are 1) Unexpected decreases in reimbursement across the world but especially in the US (70% of EBIT), 2) Consolidation of US private insurers, which could reduce FMC bargaining power," it added.
- Ticker: SWX: GALE
- Market Cap: €2.94 bln
- Old PT/New PT: 59.2/76.0
- % Upside: 29.14%
"We derive our CHF 76 PO based on the average of four methodologies EV/EBIT (CHF79 on a target multiple 24x), DCF (CHF 77, 2.5% terminal growth, WACC 5.1%), dividend yield (CHF 72 3% target yield), and P/E (CHF 73 on 26x PE)," the note said.
"Downside risk: 1) Inc. reimbursement cuts in the Swiss pharmacy market (greater than CHF 240mn from FY17-20) 2) Inc cost inflation impacting margins,
3) Inc online penetration in the health and beauty space causing increased competition, 4) Reduced tourism in Switzerland impacting sales," it added.
- Ticker: AMS: PHIA
- Market Cap: €38.87 bln
- Old PT/New PT/% change: 43.0/51.0
- % Upside: 16.66%
"We value PH using an SOTP model for its core businesses, using EV/EBITA as a core methodology to adjust for capital intensity relative to other EU MedTech peers," the note said.
"Upside risks to PO are 1) faster than expected delivery on cost savings, 2) incremental share gains in the imaging market vs. peers," it added.
"Downside risks to PO are 1) higher price pressure in consumer health markets, 2) manufacturing regulatory issues in the imaging business," it concluded.
- Ticker: LON: UDG
- Market Cap: £38.87 bln
- Old PT/New PT: 786.00/854.00
- % Upside: 9.70%
"We value UDG on an average of three core metrics, including DCF (£11.17), P/E (£6.89), and EV/EBITDA (£7.57) resulting in a PO of £8.54," the note said.
"Upside Risks: Greater penetration of outsourcing to CSOs, biosimilars market growth faster than expected," it added.
"Downside Risks: Choppy order growth in Sharp causes market overreaction, Uncertainties with UK operations post Brexit," it concluded.
- Ticker: LON: CTEC
- Market Cap: £4.05 bln
- Old PT/New PT: 205.4/257.0
- % Upside: 26.35%
"We value CTEC across an average of three metrics to derive a PO of 257p: DCF (253p), P/E (259p), and EV / EBITDA (258p). Multiples apply to FY23E estimates, as this is the point the business will have reached a more consistent growth run rate (c. +5% organic) with OPEX having normalized out. We discount our estimates back to present at the cost of equity," the note said.
"Upside risks = better than expected ostomy growth in Europe, over delivery on cost savings, catheter share gains in EMEA. Downside risks = losing GPO contract in the US, low ROIC on incremental OPEX investments, price pressures from COLOB," it added.
Smith & Nephew
- Ticker: LON: SN
- Market Cap: £13.29 bln
- Old PT/New PT: 1500.0/1890.0
- % Commentary: 22.13%
"We obtain our PO of £18.90/US$50 using the average of three core metrics, including DCF (£18.46), P/E (£18.20), and EV/EBITDA (£20.04)," the note said.
"Downside risks to PO: (1) material deterioration of the economy in relevant geographies, (2) unexpected changes in reimbursement, (3) higher than expected product trading down, (4) adverse FX, (5) introduction of disruptive technology by competition which would lead to loss of market share," it added.
"Upside risks to PO: (1) Material acceleration of the economy in relevant geographies, (2) faster-than-expected turnaround in core execution & culture, (3) stronger-than-expected economy in any region that would accelerate demand for elective procedures, (4) more accretive acquisitions, (5) major product launches," it concluded.
- Ticker: SWX: STMN
- Market Cap: $18.00 bln
- Old PT/New PT: 1039.5/1262.0
- % Upside: 24.34%
"Our PO is CHF 1262. We value STMN on an average of three metrics: P/E, EV/EBITDA, and DCF:
P/E (CHF1,265, 50x) – we have used one-year forward earnings estimates, and applied a 50x earnings multiple (prev 44x), in line with current trading for STMN. Whilst the headline multiple is clearly eye-watering, our work suggests it is fair in the context of sustained double-digit organic sales growth," the note said.
"Downside risks: 1) Weaker macro in any of the regions where STMN is present given the cyclical nature of the dental market, 2) product delays or withdrawals,
"Upside risks: 1) Stronger macro in any of the regions where STMN is present given the cyclical nature of the dental market," it added.
- Ticker: ETR: SRT
- Market Cap: €26.02 bln
- Old PT/New PT: 365.8/422.0
- % Upside: 21.61%
"Our PO of €422 is based on our DCF analysis with the following assumptions: – we have a 4% terminal growth rate and a risk free rate of 2.0% in all our DCFs to account for a normalized yield curve over a long-term time horizon, while we have a 5% market risk premium based on internal estimates. We use a beta of 0.85 for SRT as per Bloomberg estimates, which seems fair though it could be argued the business is less cyclical than this input suggests," the note said.
"Upside risks: faster drug approvals, capacity shortages, faster capex normalisation.
"Downside risks: bioprocessing capacity glut on higher yields, venture capital funding slowdown," it added.
- Ticker: EPA: ERF
- Market Cap: €13.16 bln
- Old PT/New PT: 64.8/85.1
- % Upside: 22.43%
"Given restructuring costs and changing CAPEX dynamics at ERF, we think DCF is the best valuation tool. Our DCF assumes a beta of 0.70 for ERF (Bloomberg), with a 6.0% equity risk premium (in line with BofA internal estimates and a 1.5% risk free rate. Our model assumes cash restructuring costs out to terminal year (c. €146mn net in FY29E). Our €851 PO is based on our DCF using 5% WACC and 1.5% terminal growth," the note said.
"Upside risks: 1] Stronger than expected COVID-19 testing rates. 2] Faster growth in biopharma testing due to increased trial complexity. 3] Sustained higher environmental and food testing on tougher infection control protocols.
"Downside risks: 1] Failure to ramp COVID-19 testing capacity or earlier vaccine solution than expected. 2] Failure to see cash conversion increase post lower M&A spend. 3] Longer than expected demand delays in environmental and food testing," it added.
- Ticker: STO: GETI-B
- Market Cap: $5.72 bln
- Old PT/New PT: 181.4/245.00
- % Upside: 30.88%
"Downside risks: 1) GETIB takes longer than expected to execute on footprint rationalisation and restructuring, 2) a sharp slowdown in developed market hospital capital equipment spending, and 3) cancellation of ventilator orders.
"Upside risks: 1) significant improvement in developed market capital equipment demand, 2) faster-than-expected delivery on margin expansion," the note said.
- Ticker: ETR: SHL
- Market Cap: €44.23 bln
- Old PT/New PT: 38.4/47.0
- % Upside: 13.93%
"Upside risks to our price objective are better than expected placements and bring live rates on Atellica, higher emerging market growth, and less reimbursement pressure in mature markets.
"Downside risks to our price objective are worse than expected feedback on Atellica Solution or any quality issue, higher reimbursement pressure in mature markets, and emerging market healthcare spending slowdown," the note said.
GN Store Nord
- Ticker: CPH: GN
- Market Cap: $11.37 bln
- Old PT/New PT/% change: 488.0/552.0
- % Upside: 14.10%
"Downside risks 1) Incr ASP pressure due to competitor launches at similar time 2) Further retail consolidation," the note said.
- Ticker: JSE: APN
- Market Cap: $3.89 bln
- Old PT/New PT: 123.9/151.0
- % Upside: 21.97%
"Our PO of ZAR151.0 is based on the average of 3 key metrics (DCF = ZAR155, P/E = ZAR161 and EV/EBITDA = ZAR138)," the note said.
"Downside risks to our price objective for Aspen: 1) Regulatory changes in various markets that could disrupt pricing or supply, 2) Supply issues in anesthetics and thrombosis production, 3) FX risk, 4) Rising cost of debt," the note added.
- Ticker: LON: HIK
- Market Cap: £5.85 bln
- Old PT/New PT: 2532.0/2678.0
- % Upside: 5.23%
"Risks to our price objective: 1) pricing pressure in all markets, 2) an inability to get pipeline products to market, 3) an inability to find new acquisition or licensing targets, 4) dilutive acquisitions, 5) political disruption in MENA, 6) further negative currency movements," the note said.
- Ticker: JSE: LHC
- Market Cap: $1.56 bln
- Old PT/New PT: 16.3/20.2
- % Upside: 30.74%
"Our PO of ZAR20.20 is derived using a valuation methodology based on the average of 3 key metrics (DCF = ZAR21.5, P/E = ZAR16.9 and EV/EBITDA = ZAR21.5)," the note said.
"Downside risks to our price objective are negative regulatory changes in any of its markets, mostly related to NHI implementation, higher cost inflation than can be compensated for by price increases, significant depreciation of the ZAR making procurement more expensive, failure to execute on the roll-out required to fulfil the PET-CT contract in the AMG acquisition and failure to capture the SA radiology market," the note added.
- Ticker: FRA: RIG2
- Market Cap: $4.61 bln
- Old PT/New PT: 7245.0/8550.0
- % Upside: 17.67%
"Our PO of HUF 8,550 is based on the average of 3 key metrics (DCF = HUF 8,666, P/E = HUF 8,539, and EV/EBITDA = HUF8447)," the note said.
"Upside risks: accretive in-licensing or acquisitions, HUF weakening relative to EUR, USD and RUB, successful commercialization of biosimilars in Europe, further Vraylar label expansion," it added.
"Downside risks: HUF strengthening relative to EUR, USD and RUB, failure of commercialisation of biosimilars in Europe, generic price / mix pressure on reimbursement reform," it concluded.
(All share prices and graphs are accurate to Dec 22)
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