Medtechnorist
#001
Hey friends, welcome to edition #1 of the Medtechnorist. The Medtechnorist is a newsletter for the loonies amongst us who are obsessed about innovation in healthcare, especially med devices, software, and digital health, but also innovative business models and especially patient-centric experience design.
Each week, I'll try to outline an idea in three different areas related to innovation in health: Innovation Thinking, Innovation Tools and Innovation Investing. Hopefully, you find it interesting, please get in touch if anything stands out.
INNOVATION THINKING
I thought this was a particularly interesting clinical paper published last week by Martijn Arns group around the impact of sleep problems on the efficacy of repetitive transcranial magnetic stimulation (rTMS) therapy in treatment-resistant OCD patients. What they discovered in an admittedly relatively small sample set (n=60), was that preexisting sleep disturbance at treatment outset negatively predicted treatment response. Sleep disturbance is so widely acknowledged as affecting outcomes in many areas of psychology and psychiatry, that an interesting future study suggested, would be examining if sleep disturbance correction by itself perhaps via light therapy or melatonin, etc, could see improvement even without rTMS & CBT.
https://www.sciencedirect.com/science/article/pii/S1697260022000618
INNOVATION TOOLS
Whilst this is not an on-market device yet, the University of Zurich group recently published a very interesting proof of concept type paper in May, on the use of their liver for life machine. This is used to restore kidney function prior to transplant, in organs previously beyond salvage. They have completed one case now utilising a liver rejected by all transplant centres in Switzerland at the time, ‘rehabilitated’ the liver for 3 days on their Liver4Life machine and then transplanted into a human patient. The first patient is one-year post transplant surgery and appears to be doing well at his one-year review.
This will be worth watching I think. Maybe it won’t translate, but if it does, it has significant potential for organ donors everywhere, because of the significant discrepancy between organs marked or harvested for donation, and those actually transplanted planted. Nowhere is this more so than in Australia, where we have a huge mismatch between those on waiting lists and the available donor organs due to very low donation rates.
INNOVATION INVESTING
BSX. Boston Scientific’s valuation.
BSX’s revenue for the last four years (FY18, FY19, FY20 & FY21) has been $9.8bn, $10.7b, $9.9b, $11.8bn, and ttm is $12.5b. So it’s growing topline, with some intermittent covid related shrinkage (as all the other medtech companies have experienced), but it’s not what I’d call a 'growth' stock or 'fast grower'.
Operating earnings, were $1.66bn, $1.74bn, $0.68bn, $1.82bn and ttm $1.98bn over the same period. So a modest return to growth is emerging in the last 12 months at an operating level. If we ignore the up and down of Covid impacts in the middle years of CY20 & CY21, the operating income growth from CY18-CY19 was 4.8%, and from CY21 to the current Trailing twelve months, was 8.8%. Encouraging but not exactly exploding.
Why then, would investors want to pay 107x trailing earnings per share? I don’t get it. Or a PEG of 2.35x on a stock that has an ROA of 4.25% and ROE of 3.8%? Most of the larger medtech stocks are in the 20-40x PE range, and maybe some of the smaller ones have great growth potential perhaps, but with BSX topline & operating earnings growing in the 5 to 10% range (if we ignore the tax refund driven anomaly of CY19 - Operating Income at $1.7bn, and Net Income of $4.7bn), I just don’t understand why you’d pay so much for the stock.
Maybe I’m missing something and someone can help me with some insight as to where this explosive earnings or cashflow growth is going to come from. BSX has always been pretty expensive on a PE basis, but now it seems downright crazy. A short is tempting but what if people keep paying crazy ratio’s? At the current pe multiple rate, it seems it would take a very long time just to make back your initial investment capital.