It has been more than a month since we rounded up 10 companies that we believed could have a tough year ahead of them, as indicated by their recent stock price and movement. Below we give an updated report on how they are performing, as of early March.
As we did in a similar analysis in December, we will look behind the numbers and attempt to discern the headwinds that are acting to depress these shares. All market data are as of the closing bell on Wednesday, March 5.
- ResMed Inc. is a developer and manufacturer of medical equipment for treating, diagnosing, and managing sleep apnea, sleep-disordered breathing and other respiratory disorders. From their high last fall ResMed common shares have lost nearly a quarter of their value as earnings have continued to disappoint. A recent attempt at a rebound fizzled with the release of the company's fourth quarter and full year data. Share prices are down about 6% year to date. CEO Mick Farrell commented, "'While we are disappointed with the U.S. numbers, the two key issues, as we have previously noted, are market restructuring due to competitive bidding and increased competitor activity... It's important to note that we have a rich pipeline of products scheduled for introduction, and we remain optimistic about future growth in the U.S. market.”
- Edwards Lifesciences, a global leader in heart valves and hemodynamic monitoring, is up more than 10% year to date, but that is from a
low bottom. The company, which was trading at over $100 in late 2012, hit a three-year low in December when shares dipped below $61. This was after a late-October nosedive of nearly 20% on disappointing results. Zacks stated on January 27 that it "fail[s] to see any significant catalysts that could drive Edwards' shares in the near term. Subsequently, we downgrade the stock to Underperform." According to a report by Kevin Cook on Forbes.com, analysts at William Blair believe the worst has passed and confirm their 12-month outperform rating. These analysts believe “value investors should be starting positions in Edwards at current levels” while growth investors, they say, may want to wait until after Medtronic releases its competing transcatheter aortic valve replacement. (Edwards has had some legal success of late against Medtronic with a federal jury in Delaware finding that Medtronic willfully infringed on an Edwards patent related to the CoreValve, owes Edwards nearly $394 million in damages and patent royalties. Medtronic is seeking to have the verdict overturned.) Edwards on Feb. 3 reported that fourth quarter profits were slightly down year-over-year. But for all of 2013, Edwards earned $391.7 million off $2.05 billion in sales, up from $293.2 million in profits and $1.90 billion in sales in 2012.
Edwards Lifescience's Sapien 3 could be used in a broader range of patients than earlier TAVR products introduced internationally.
- Orthofix International N.V. shares surged past $45 in early October 2012 amid positive earnings reports. The following year was not as kind, as several class-action lawsuits were filed against the company, deadlines for SEC and Nasdaq filings were missed, and an investigation into possible breaches of fiduciary duty by corporate officers was launched. It would seem that most, if not all, of this turmoil was due to an audit that caused the company to restate its financial results for 2011, 2012, and Q1 2013. The company's stock, which had peaked in December 2007 at over $61, opened 2014 at $22.69 per share and then dropped a few bucks in late January before recovering to around $23 in early March.
- Baxter International may be a case in point to the way numbers sometimes do lie. Baxter is primarily focused on products to treat hemophilia, kidney disease, and immune disorders. The company's share price is down about 2% since the beginning of the year. As of March 5, the company was trading around $68 per share, significantly below its 52-week high of $74.60. This is despite a fourth quarter that was pretty much in line with expectations. Yes, profits took a big dip due to the acquisition of Gambro AB, and competition from a new hemophilia product from Biogen looms on the horizon. But in December, the company won FDA approval of its FEIBA anti-inhibitor coagulant complex and also received CE Mark approval of its Vivia hemodialysis system. As Stephen D. Simpson, writing for the Motley Fool, says, “Baxter basically just needs to do what good companies are supposed to do—execute on the opportunities in front of them.”
- Hill-Rom Inc. makes hospital beds, furniture, other health care equipment, and medical technology systems. In the opening weeks of the new year, a burst of investor optimism drove share prices up to their 52-week high of $44.64 per share. Then came the quarterly report and the axe fell. In two days of trading, Hill-Rom lost 16% of its value. It was trading around $38 in early March. The company's own words tell the story: “First quarter revenue declined 8% versus prior year. Adjusted diluted earnings per share for the first quarter decreased 33% to $0.36 compared to $0.54 in the prior year. Reported diluted earnings per share for the first quarter decreased 44% to $0.22 compared to $0.39 in the prior year. Operating cash flow for the quarter of $42 million compares to $65 million in the prior year.” The company has also announced a restructuring program it says will eliminate approximately 350 net positions and save $30 million. “We are clearly disappointed by our weaker than expected results," said John Greisch, Hill-Rom president and CEO.
Find out more about the medical device industry—including its technology, supplier networks, and much more—at BIOMEDevice, March 26-27, 2014 in Boston.
- ArthroCare Corp. could be an example of a company that one might think ought to be shunned by investors, but is in fact embraced. ArthroCare—which makes surgical devices that use coblation, a non-heat driven process, to remove tissue in the joints, spine and other areas—recently agreed to pay a $30 million fine and cooperate with the Justice Department's ongoing investigation into alleged wrong-doing by ArthroCare executives between 2005 and 2008. Federal prosecutors say shareholders lost more than $400 million in mid-2008 from the alleged scheme, which involved the company "parking" medical device products at its distributors near the end of each quarter so that it could falsely pump up its sales numbers. ArthroCare's stock price fell from $40.03 to $23.21 per share on July 21, 2008, when the company announced it would be restating financial results going back to the third quarter of 2006. John Raffle and David Applegate, both former senior vice presidents of ArthroCare, have both pleaded guilty to conspiracy to commit securities and wire fraud. The company's former CEO Michael Baker and former chief financial officer Michael Gluk are scheduled to stand trial this May. In spite of all this, the company's stock is up abotu 20% year to date as of the March 5 market close. Considering the damage to the company's reputation and the possibility of further legal action, this may just be what is referred to in trading circles as a dead-cat bounce.
- Derma Sciences Inc. has now managed to recover from a rocky 2013. As of March 5, its stock was trading at nearly $15 per share, up about a third since the start of the year.The company bills itself as a medical technology firm targeting three segments of the wound care marketplace: “pharmaceutical wound care products; advanced wound care dressings to address chronic wounds including diabetic ulcers; and traditional dressings.” On January 24 the company announced a public offering of more than 6.5 million shares of common stock at $11.50 per share. At the closing bell the stock was at $11.87. The company intends to use the proceeds of the sale for the continued development of its DSC127 patented analog of the naturally occurring peptide Angiotensin. DSC127 is said to accelerate dermal tissue repair and is currently entering Phase III trials as a diabetic foot ulcer treatment.
- EnteroMedics Inc. was trading at over $3 a share about a year ago. It opened 2014 just a little over $2 and closed at nearly $2.50 on March 5. The company is showing improvement, but it still has a way to go to return to year-ago levels. EnteroMedics specializes in weight loss treatment for obesity and the recent rise appears due to the issuance of a patent for a new method of obesity treatment that down-regulates nutrient absorption in the small intestine of a patient. The company's VBLOC therapy, delivered by a pacemaker-like device called the Maestro Rechargeable System, is designed to control both hunger and fullness by blocking the vagus nerve, the primary nerve which regulates the digestive system. The system is currently an FDA investigational device, but recent rumors reported by iStreetWire.com but as yet unsubstantiated by EnteroMedics would have the company soon to meet with an FDA advisory panel, which could lead to approval of VBLOC therapy.
- HeartWare Inc. appears to be trying to weather disappointed investors, who endured a roller-coaster ride in 2013. The firm makes a ventricular assist device called the HVAD Pump which is designed to be implanted next to the heart in the pericardial space. The device obtained FDA approval in 2012 as a bridge-to-transplant therapy for patients with advanced stage heart failure. HeartWare's stock, which briefly flirted with $100 per share in May 2013, dipped below $70 in October. Then it rallied, finally crossing the $100 mark on January 7. But the release of disappointing Q4 results on Jan 14 caused an after-hours slump of more than 9%. Share prices rallied for a time, reaching a mid-day high of over $105 on January 22, but the rollercoaster then resumed. Shares were trading around $96 on March 5. Though the company makes hearts, some may not have a strong enough stomach to hold this volatile issue.
- Volcano Corp.—a developer and manufacturer of precision guided therapy tools designed to enhance the diagnosis and treatment of coronary and peripheral vascular disease—hit its all-time high of $33.22 a share in July 2011. On March 5, it was trading around $22, about where it was at the start of the year. Analysts have downgraded their recommendations. In a January 8 report, Zacks.com reported unusual short interest in the stock. Though the firm reported its fourth quarter 2013 performance as “solid,” it has revised its 2014 forecast significantly downward.
While doubtless some of these companies will shake off a bad year (or two) and rebound, others won't be able to overcome the headwinds.
We aren't analysts or stock pickers and can't say who will rise again and who will sink. Still, the 10 medtech companies above appear to have a rougher road ahead in 2014 than many others.
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