This year has turned out to be an odd one for the medical technology industry. Although the overall performance of the sector has basically matched the year-to-date performance of the S&P 500 (a low teens gain for the year), it has very much been a "stock picker's market" with individual company stories standing out against a backdrop of only modest volume growth and ongoing pricing pressure.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

Ortho Good, Cardio Bad?
It would seem that investors have regained a fair bit of confidence in the long-term health of the orthopedic device industry. Companies like Wright Medical (Nasdaq:WMGI), NuVasive (Nasdaq:NUVA) and Zimmer (NYSE:ZMH) have all logged solid market-beating returns for the year. It's worth noting, though, that none of these companies have seen dramatic end-market improvements yet - growth in hip and knee reconstruction is still in the very low single-digits, and likewise the spinal care market has yet to rebound strongly.

On the other side of the ledger, investors remain skeptical towards companies with a sizable exposure to the cardiology market. In particular, the three major players in cardiac rhythm management (CRM), Medtronic (NYSE:MDT), St. Jude (NYSE:STJ) and Boston Scientific (NYSE:BSX), have all lagged the med-tech sector and the S&P 500. Some of this can certainly be tied to the sluggish volume and pricing trends in CRM, but it's worth noting that these companies do have other challenges as well.

Medtronic has struggled with a weak spinal care market and problems tied to its InFuse bone graft product. Boston Scientific continues to struggle to turn around a business that has been hammered by share loss and an uncertain strategic direction. St. Jude has been heavily talking up its robust pipeline, but worries about the company's CRM lead business have intensified, with some analysts openly speculating on the need for product recalls.

SEE: 5 Most Costly Product Recalls

Individual Stories Still Stand out
As mentioned in the introduction, this has been a year where many strong individual stories have stood out from their broader industry groups. General surgery hasn't been all that strong, but companies like Covidien (NYSE:COV) and Bard (NYSE:BCR) have done quite well nonetheless. Likewise, Baxter (NYSE:BAX) has been an uncommonly strong story this year - more as a result of investors coming back to the story than any particularly strong financial performance (nine-month sales were up 4% through the end of September).

Ongoing optimism about transcatheter heart valves and double-digit revenue growth has continued to propel Edwards Lifesciences (NYSE:EW) higher (up about 26% year to date), while concerns about procedure volumes have weighed on Intuitive Surgical (Nasdaq:ISRG).

SEE: A Checklist For Successful Medical Technology Investment

The Bottom Line
Looking out into 2013, there are definitely some meaningful challenges for the sector. The gradual improvement of the United States job market is a positive, but the imposition of the medical device excise tax is going to pressure company margins, particularly so for the smaller companies. At the same time, there are significant pricing and reimbursement pressures in the U.S. and Europe that are limiting revenue growth opportunities.

On the positive side, it would seem that the industry is past the worst of the readjustments in orthopedics and CRM, and ongoing clinical progress in areas like transcatheter valves and renal denervation could provide a tailwind for companies like Medtronic, St. Jude, Boston Scientific and Covidien.

All in all, then, it looks as though 2013 will be a relatively typical year for the sector. While there will be some definite external challenges, companies with strong new products will likely rise above those challenges and deliver solid revenue and profit performance.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center