Want to tap into a mar­ket worth $340bn a year?

We re­veal the big­gest names in the health­care equip­ment and ser­vices sec­tor and ex­plore their mixed for­tunes

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Med­i­cal de­vices and health­care equip­ment are vi­tal to help­ing peo­ple live longer and health­ier lives, and glob­ally this mar­ket is worth an es­ti­mated $340bn ev­ery year ac­cord­ing to lead­ing op­er­a­tor Smith & Nephew (SN.).

As well as de­vel­op­ing and man­u­fac­tur­ing life-chang­ing and en­hanc­ing prod­ucts, there is also a sig­nif­i­cant mar­ket for help­ing meet de­mand for qual­ity care and treat­ment.

Among the big­gest Lon­don­listed health­care equip­ment and ser­vices spe­cial­ists are Con­va­Tec (CTEC), Spire Health­care (SPI), UDG Health­care (UDG), NMC Health (NMC), Medi­clinic (MDC) and Smith & Nephew.

In this ar­ti­cle, we will ex­plore why the per­for­mance among this group­ing of stocks has been mixed de­spite the strong de­mo­graphic driv­ers un­der­pin­ning the space.

HEALTH­CARE SPEND­ING TO SOAR

One of the big­gest driv­ers for the sec­tor is growth in health­care spend­ing, which is nec­es­sary to tackle an age­ing pop­u­la­tion and more life­style-re­lated ill­nesses such as obe­sity.

Global health­care spend­ing is ex­pected to rise from $9tn in 2014 to $16tn in 2030 and $24tn in 2040 ac­cord­ing to a study com­mis­sioned by the Bill and Melinda Gates Foun­da­tion.

TAKEOVER TAR­GETS

Two busi­nesses in the sec­tor have been reg­u­larly con­sid­ered to be takeover tar­gets, namely Smith & Nephew and Spire.

Smith & Nephew man­u­fac­tures ad­vanced wound care prod­ucts, knee and hip im­plants, as well as prod­ucts and tech­nolo­gies that aim to help heal se­vere frac­tures.

Pre­vi­ous spec­u­la­tion in­cludes in­ter­est from US ri­val Stryker, Medtronic and John­son & John­son.

In May 2018, Smith & Nephew warned an­nual sales growth would slow from 3% to 2%, which was blamed on softer mar­ket con­di­tions and a weak per­for­mance from Ad­vanced Wound Bioac­tives.

While trad­ing has im­proved since then, the per­for­mance has been at best solid rather than spec­tac­u­lar with Beren­berg an­a­lyst Tom Jones claim­ing ‘not bad is good’.

Jones ar­gues main­tain­ing guid­ance of 2% to 3% sales growth and mar­gins at 2017 lev­els will re­as­sure in­vestors as there were con­cerns new chief ex­ec­u­tive Na­mal Nawanda might look to re­set ex­pec­ta­tions.

WHY SPIRE AND MEDI­CLINIC HAVE NOSE­DIVED

It is fair to say that 2018 has been a dif­fi­cult year for pri­vate hos­pi­tal provider Spire Health­care as NHS-re­lated trou­bles have dragged on trad­ing.

Spire re­cently warned of ‘sig­nif­i­cantly de­clin­ing’ NHS ad­mis­sions, lower than an­tic­i­pated growth in pri­vate ad­mis­sions and in­vest­ment in the busi­ness, push­ing the share price to an all-time low of 138p.

In 2017, the pri­vate hos­pi­tal group re­jected a takeover ap­proach from 29.9% share­holder Medi­clinic on grounds that it sig­nif­i­cantly

un­der­val­ued the busi­ness.

Liberum’s Gra­ham Doyle is scep­ti­cal that Spire’s shares can re­cover, flag­ging guid­ance for an­nual earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion was 9% worse than ex­pected at £120m to £125m.

He ar­gues if the com­pany was to miss the bot­tom of its earn­ings range by 5%, it could breach its debt covenants.

Medi­clinic it­self has strug­gled of late with in­vestors con­cerned about prob­lems in its Swiss hos­pi­tal busi­ness where it has taken sig­nif­i­cant im­pair­ments.

A SEC­TOR CONSOLIDATOR

Rather than a bid tar­get, NMC Health is a consolidator in this space as it con­tin­u­ally looks for in­ter­est­ing busi­nesses to take over in a bid to sup­ple­ment its of­fer­ing.

Re­cent ac­qui­si­tions in­clude cos­met­ics busi­ness Cos­meSurge and the largest pri­vate gen­eral hos­pi­tal in the United Arab Emi­rates, Al Zahra Hos­pi­tal.

NMC Health is the largest pri­vate health­care com­pany in the United Arab Emi­rates. In 2017, 70.5% of over­all sales were gen­er­ated through med­i­cal ser­vices at its net­work of clin­ics and hos­pi­tals.

The com­pany also has a dis­tri­bu­tion busi­ness, rep­re­sent­ing the re­main­ing 29.5% of sales last year. Through this di­vi­sion, NMC of­fers over 108,000 prod­ucts across phar­ma­ceu­ti­cals, med­i­cal equip­ment and con­sum­ables, con­sumer, ed­u­ca­tion and vet­eri­nary.

In June, NMC an­nounced plans to cre­ate a new na­tional health­care com­pany in Saudi Ara­bia via a joint ven­ture with Has­sana In­vest­ment, po­ten­tially cre­at­ing one of the largest pri­vate op­er­a­tors in the coun­try.

Beren­berg an­a­lyst Charles We­ston reck­ons NMC can more than dou­ble sales by 2023 – even with­out fur­ther M&A.

RESHUFFLE AND RE­VIEW AT UDG

UDG Health­care has an un­typ­i­cal busi­ness model com­pared to the rest of the sec­tor. The Ash­field di­vi­sion fo­cuses on com­mu­ni­ca­tions, com­mer­cial and clin­i­cal ser­vices, in­clud­ing sci­en­tific com­mu­ni­ca­tion con­tent. It is the big­gest con­trib­u­tor of group prof­itabil­ity at 63.1%.

UDG also pro­vides con­tract pack­ag­ing ser­vices such as pack­ag­ing de­sign and la­belling through the Sharp di­vi­sion, gen­er­at­ing 31.9% of group profit.

Its small­est busi­ness, phar­ma­ceu­ti­cal prod­ucts dis­trib­u­tor Aquilant is be­ing sold to H2 Eq­uity Part­ners for up to €23m.

In Au­gust, the com­pany said it would re­view Ash­field and reshuffle its man­age­ment team fol­low­ing an un­der­whelm­ing per­for­mance due to the phas­ing of con­tracts and a lack of busi­ness de­vel­op­ment op­por­tu­ni­ties.

ROCKY RIDE FOR CON­VA­TEC

Since its stock mar­ket de­but in 2016, Con­va­Tec has ex­pe­ri­enced a se­ries of highs and lows as it en­tered the FTSE 100 only seven weeks af­ter its IPO and beat profit ex­pec­ta­tions in March 2017.

Con­va­Tec de­vel­ops med­i­cal prod­ucts, in­clud­ing wound care dress­ings, colostomy bags and catheters.

Its strong per­for­mance helped the stock hit an all-time high of 344p, but fall­ing profit, the de­par­ture of chief fi­nan­cial of­fi­cer Nigel Clerkin and slashed an­nual sales growth guid­ance in Oc­to­ber 2017 amid sup­ply is­sues, hurt the share price and con­trib­uted to the com­pany’s ejec­tion from the FTSE 100.

Nu­mis an­a­lyst Paul Cud­don says new hires Stephen Bon­nely­cke and Sten Scheibye should help to re­vive growth in the os­tomy busi­ness and 2018 per­for­mance has been more en­cour­ag­ing so far. (LMJ)

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