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There may be opportunity in healthcare stocks if three tailwinds for the sector continue, according to David Toung, Senior Analyst with Argus Research. He joined MoneyTalk’s Greg Bonnell to discuss.
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Coming out of the pandemic, there was a boom in demand for healthcare services which had been postponed. But as that backlog works itself down, are there still opportunities in the space for investors? Joining us now to discuss is David Toung, Senior Analyst for Medical Devices and Healthcare Services with Argus Research. David, great to see you. Welcome back to the program.
Thank you very much for having me here.
All right. Looking forward to this--
Great to see you.
Yeah, good to see you, too. Looking forward to the discussion. I want to dig in on these healthcare stocks. As we said off the top, huge demand coming out of the pandemic for a lot of these services. What are you actually seeing now in terms of these procedures and the volumes?
The procedure growth continues to be strong. And you can see that in the volumes that they're reporting by the device companies. You also see that from the hospital statistics, the insurance company statistics. They're all reporting upside on procedure volume.
Another thing that's driving demand for devices is that you have some new technologies. You have things that are in cardiac care-- atrial fibrillation. You have robotics for soft-tissue surgeries and for orthopedics.
These procedures treat conditions for people who are aging but want an active lifestyle. And so there's definitely some tailwinds there.
I want to dig into that a bit, too, because you worked through the backlog of the pandemic. We know there was a huge backlog. You say it's still robust. It does seem, as you suggested there, to be a bit of a demographic play. Because even though the pandemic's well in the rearview mirror now, we're all roughly about three or four years older, and things start to need some work.
Sure. You look at the conditions of people-- you see that on the pharmaceutical side. What are the drugs that are the most popular drugs? And it's the same conditions. It's cardiovascular. It's oncology. So devices are another way of treating those conditions.
Now, when we think about the markets overall, we had a bout of volatility in August. And we had a sell-off where it's been a rough start to the month of September. When it comes to the healthcare stocks, how do they handle market volatility or even, I guess, the fears behind all of this, a slowing economy?
Well, in some cases, these stocks are seen as defensive plays. You saw last week, something like a J&J was up when the market was sliding. And J&J, half of the company is pharmaceutical, half of the company is medical devices.
And also, you look at a company like United Healthcare, it insures people for their health care, and part of the company provides a lot of services and technology to hospitals and practitioners. They even operate some hospitals and outpatient facilities. So they benefit from that, as we discussed earlier, about the increased utilization of health care.
And when I think about what you mentioned there, whether it's Johnson and Johnson or whether it's some of these service providers and the insurers, no matter if the economy is up or the economy is down, if you've got a health problem, you've got a health problem.
And we discussed also the orthopedics. People have osteoarthritis. Now, there are newer technologies that produce better outcomes-- less pain and quicker recoveries using robotic technology to assist the surgeries.
I think one name in the space that you wanted to highlight was Intuitive Surgical as well. What's going on with this name?
Well, Intuitive has come out with another iteration of its Da Vinci platform. The latest one is called Da Vinci 5. And it's got software. It's got a lot of technologies to have better outcomes.
I mentioned there's touch controls that reduce pressure on adjacent cells and tissues. And Intuitive's also having good placements overseas. So it's growth drivers are placement of new surgical robots, but also, they're adding indications, whether it's urology, whether it's other soft tissue.
You start with a menu of a few conditions, and you add more and more, and you get to like 10 and 20 conditions. So you see a multiplier effect there, the more procedures on a larger installed base.
All right. So we've got some interesting, as we said, tailwinds behind the healthcare space. An aging population, yes, but they don't want to be sedentary. They want to keep going. So you need those medical interventions. What are some of the risks, though, to the space?
Well, the risk is always there's competition. You have other companies that are developing robotic systems to compete against Intuitive. You have Medtronic is in that space, J&J is in the space, and other players are in that space.
And another risk was earlier in the pandemic, or at least coming out of the pandemic, companies had trouble with their supply chains. And when they could get the supplies, with components like electronics, they had to pay a premium for them. So that hurt their margins.
But now, the margins have improved because the supply chains have improved. And we should see some better margins towards the back half of the year-- growth and profit margins. [AUDIO LOGO]
[MUSIC PLAYING]
Coming out of the pandemic, there was a boom in demand for healthcare services which had been postponed. But as that backlog works itself down, are there still opportunities in the space for investors? Joining us now to discuss is David Toung, Senior Analyst for Medical Devices and Healthcare Services with Argus Research. David, great to see you. Welcome back to the program.
Thank you very much for having me here.
All right. Looking forward to this--
Great to see you.
Yeah, good to see you, too. Looking forward to the discussion. I want to dig in on these healthcare stocks. As we said off the top, huge demand coming out of the pandemic for a lot of these services. What are you actually seeing now in terms of these procedures and the volumes?
The procedure growth continues to be strong. And you can see that in the volumes that they're reporting by the device companies. You also see that from the hospital statistics, the insurance company statistics. They're all reporting upside on procedure volume.
Another thing that's driving demand for devices is that you have some new technologies. You have things that are in cardiac care-- atrial fibrillation. You have robotics for soft-tissue surgeries and for orthopedics.
These procedures treat conditions for people who are aging but want an active lifestyle. And so there's definitely some tailwinds there.
I want to dig into that a bit, too, because you worked through the backlog of the pandemic. We know there was a huge backlog. You say it's still robust. It does seem, as you suggested there, to be a bit of a demographic play. Because even though the pandemic's well in the rearview mirror now, we're all roughly about three or four years older, and things start to need some work.
Sure. You look at the conditions of people-- you see that on the pharmaceutical side. What are the drugs that are the most popular drugs? And it's the same conditions. It's cardiovascular. It's oncology. So devices are another way of treating those conditions.
Now, when we think about the markets overall, we had a bout of volatility in August. And we had a sell-off where it's been a rough start to the month of September. When it comes to the healthcare stocks, how do they handle market volatility or even, I guess, the fears behind all of this, a slowing economy?
Well, in some cases, these stocks are seen as defensive plays. You saw last week, something like a J&J was up when the market was sliding. And J&J, half of the company is pharmaceutical, half of the company is medical devices.
And also, you look at a company like United Healthcare, it insures people for their health care, and part of the company provides a lot of services and technology to hospitals and practitioners. They even operate some hospitals and outpatient facilities. So they benefit from that, as we discussed earlier, about the increased utilization of health care.
And when I think about what you mentioned there, whether it's Johnson and Johnson or whether it's some of these service providers and the insurers, no matter if the economy is up or the economy is down, if you've got a health problem, you've got a health problem.
And we discussed also the orthopedics. People have osteoarthritis. Now, there are newer technologies that produce better outcomes-- less pain and quicker recoveries using robotic technology to assist the surgeries.
I think one name in the space that you wanted to highlight was Intuitive Surgical as well. What's going on with this name?
Well, Intuitive has come out with another iteration of its Da Vinci platform. The latest one is called Da Vinci 5. And it's got software. It's got a lot of technologies to have better outcomes.
I mentioned there's touch controls that reduce pressure on adjacent cells and tissues. And Intuitive's also having good placements overseas. So it's growth drivers are placement of new surgical robots, but also, they're adding indications, whether it's urology, whether it's other soft tissue.
You start with a menu of a few conditions, and you add more and more, and you get to like 10 and 20 conditions. So you see a multiplier effect there, the more procedures on a larger installed base.
All right. So we've got some interesting, as we said, tailwinds behind the healthcare space. An aging population, yes, but they don't want to be sedentary. They want to keep going. So you need those medical interventions. What are some of the risks, though, to the space?
Well, the risk is always there's competition. You have other companies that are developing robotic systems to compete against Intuitive. You have Medtronic is in that space, J&J is in the space, and other players are in that space.
And another risk was earlier in the pandemic, or at least coming out of the pandemic, companies had trouble with their supply chains. And when they could get the supplies, with components like electronics, they had to pay a premium for them. So that hurt their margins.
But now, the margins have improved because the supply chains have improved. And we should see some better margins towards the back half of the year-- growth and profit margins. [AUDIO LOGO]
[MUSIC PLAYING]
