In this piece, I evaluated two medical device companies, T2 Biosystems, Inc. (TTOO) and Merit Medical Systems, Inc. (MMSI), to determine the better growth stock. Based on the fundamental comparison of these stocks, I believe MMSI is the better buy for the reasons explained throughout this article.
The COVID-19 pandemic has put the medical device industry in the spotlight, with unparalleled demand for products, including personal protective equipment (PPE), ventilators, diagnostic tests, and other general hospital supplies. Furthermore, the industry is well-poised for continued growth this year and beyond, driven by the growing prevalence of chronic diseases and a rapidly aging population.
The geriatric population is more likely to acquire age-related diseases that are less prevalent among younger individuals. Common health conditions associated with aging include cataracts and refractive errors, chronic obstructive pulmonary disease, hearing loss, diabetes, osteoarthritis, and heart disease.
The growing incidence of age-related diseases leads to an increasing number of patients undergoing diagnostic and surgical procedures, boosting the demand for medical devices and equipment. According to a report by Mordor Intelligence, the global medical devices market size is expected to reach $834.72 billion by 2028, growing at a 7% CAGR.
Additionally, the rising focus on developing technologically advanced medical devices and growing product launches contribute to the medical device industry’s expansion. In recent years, the digital transformation of the healthcare sector has been accelerated to meet demands for smart devices and robotics, AI-based data analysis, wearable technology, and enhanced platforms, among others.
As technology continues to advance every aspect of healthcare, there is an increased interest in incorporating artificial intelligence (AI) and machine learnings (ML) technologies into medical devices and equipment.
Over the past decade, the U.S. Food and Drug Administration (FDA) has reviewed and authorized a rising number of medical devices legally marketed (through 510(k) clearance, granted De Novo request, or approved PMA) with AI/ML functionality across various categories of medicine and this trend is expected to continue.
As per a report by Market Data Forecast, the global medical device technologies market is projected to grow from $601.43 million in 2023 to $769.78 million by 2028, registering a 5.6% CAGR during the forecast period. Increasing research & development (R&D) investments amid the growing focus of companies to develop technologically advanced equipment is mainly fueling the market’s growth.
MMSI is a clear winner in the price performance, with 7.8% returns over the past three months compared to TTOO’s 63.4% decline. MMSI has gained 44.4% over the past nine months, while TTOO plunged 96.5%. Also, MMSI’s 51.2% gains over the past year are higher than TTOO’s decline of 97.9%.
Here are the reasons why we think MMSI could perform better in the near term:
Latest Developments
On May 30, TTOO announced the second-largest sale of sepsis-driven T2Dx® instruments in the company’s history. The initial order includes seven T2Dx instruments, valued at more than $450,000, with the potential for nine additional instruments to be sold and deployed in selected hospitals across Poland during the second half of 2023.
“Our sepsis test revenue increased by 67% in Central Europe during the first quarter of 2023, compared to the prior year period, and we believe there is enormous potential to further expand the adoption of our sepsis products in Poland and throughout Europe,” said John Sperzel, TTOO’s Chairman and CEO.
On June 9, MMSI completed the acquisition of a portfolio of dialysis catheter products and the BioSentry® Biopsy Tract Sealant System from AngioDynamics, Inc. for a total cash consideration of $100 million. Also, the company announced the recent acquisition of the Surfacer® Inside-Out® Access Catheter System from Bluegrass Vascular Technologies, Inc. for a total cash consideration of $32.5 million.
These acquisitions are expected to strengthen MMSI’s position in the dialysis and biopsy markets and expand the foundation of the company’s growing specialty dialysis device offering, which includes WRAPSODY™ Cell-Impermeable Endoprosthesis, HeRO® Graft, and the Surfacer System devices.
Recent Financial Results
For the first quarter that ended March 31, 2023, TTOO’s total revenue was $2.08 million, a decline of 71.3% from the prior year’s period. The company reported a loss from operations of $13.69 million during the quarter. In addition, TTOO’s net loss and comprehensive loss widened 8.9% from the year-ago value to $17.97 million, while its net loss per share was $1.32.
MMSI’s net sales increased 8% year-over-year to $297.57 million in the first quarter that ended March 31, 2023. Its gross profit was $138.36 million, up 14.4% year-over-year. Its non-GAAP operating income grew 19.3% from the prior-year period to $47.97 million. The company’s non-GAAP net income was $37.50 million or $0.64 per share, compared to $30.40 million or $0.53 per share a year earlier.
Past And Expected Financial Performance
TTOO’s revenue has grown at a 23.5% CAGR over the past three years. However, the company’s total assets have increased at a 13.9% CAGR over the same period.
For the fiscal year ending December 2023, TTOO’s revenue is expected to decrease 42.3% year-over-year to $12.87 million. In addition, analysts expect the company’s EPS to remain negative for at least two fiscal years. However, the company’s revenue for the fiscal year 2024 is estimated to grow 87.1% year-over-year to $24.08 million.
Over the past three years, MMSI’s revenue and EBIT have grown at 5.5% and 26.4% CAGRs, respectively. The company’s normalized net income has increased at a 37.4% CAGR over the same time frame, while its levered cash flow has grown at a 29.8% CAGR.
Analysts expect MMSI’s revenue and EPS for the fiscal year (ending December 2023) to increase 7.5% and 7.3% year-over-year to $1.24 billion and $2.90, respectively. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 6.2% and 10.9% from the previous year to $1.31 billion and $3.21, respectively.
Profitability
MMSI’s trailing-12-month revenue is 68.2 times what TTOO generates. Moreover, MMSI is more profitable, with a trailing-12-month gross profit margin of 45.74% compared to TTOO’s negative 146.84%. Also, MMSI’s trailing-12-month levered FCF margin of 4.89% is higher than TTOO’s negative 110.11%.
Furthermore, RM’s trailing-12-month Return on Assets (ROA) and Return on Total Capital (ROTC) of 7.87% and 4.86% compared with TTOO’s negative 143.48% and negative 159.09%, respectively.
Valuation
In terms of trailing-12-month Price/Sales, TTOO is currently trading at 0.05x, 98.7% lower than MMSI, which is trading at 3.87x. TTOO’s trailing-12-month EV/Sales multiple of 3.04 is lower than MMSI’s 4.08.
However, TTOO’s forward EV/Sales of 4.05x is higher than MMSI’s 3.87x.
POWR Ratings
TTOO has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system. Conversely, MMSI has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TTOO has a grade of F for Stability. The Stability grade is justified by its 24-month beta of 1.15. On the other hand, MMSI has a B grade for Stability, consistent with its 24-month beta of 0.86.
In addition, TTOO has a grade of C for Sentiment, in sync with its poor financials and mixed analyst estimates. MMSI, in contrast, has a B grade for Sentiment, consistent with its solid financial performance in the previously reported quarter and optimistic analyst expectations.
Of the 140 stocks in the Medical - Devices & Equipment industry, TTOO is ranked #108, while MMSI is ranked #9.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Quality, and Growth. Click here to view TTOO Ratings. Get all MMSI ratings here.
The Winner
Despite an uncertain macroeconomic environment, the medical device industry is well-placed to witness significant growth and expansion in the long term. The growing prevalence of chronic diseases, a rapidly growing aging population, and the increasing emphasis of healthcare agencies on early diagnosis and treatment should fuel the demand for medical devices.
Furthermore, favorable support from the regulatory bodies in approving medical devices and the rapid adoption of digital technology are primary attributes driving the industry’s growth. Therefore, leading medical device companies TTOO and MMSI are expected to benefit from the industry tailwinds.
However, TTOO’s relatively weak financials, low profitability, high volatility, and bleak growth prospects make its competitor MMSI a better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Medical - Devices & Equipment industry here.
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MMSI shares were unchanged in premarket trading Tuesday. Year-to-date, MMSI has gained 15.39%, versus a 15.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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