Another Trio of Stock Prospects in Medical Devices

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Following my last article on medical devices stocks, I have discovered three other companies that are worth analyzing.

These companies develop products focused on the new global trend toward less invasive interventional procedures, which help save hospitalization costs and reduce the patient's recovery time.

Accuray: Back on track
The first company is Accuray , which provides radiosurgery and radiation treatment options for patients diagnosed with cancer. Its key product, the CyberKnife, is a non-invasive alternative for the treatment of tumors.

The company posted a good first quarter 2014. Its products are experiencing continued strong order momentum, with gross orders of $63.4 million, up 17% compared to prior-year quarter. The previous third and fourth quarter were characterized by internal manufacturing and supply related issues that delayed the launch of new products and widened the losses. Now things are improving, and Accuray looks like it's getting back on track. 

The reason behind the turnaround is that the company implemented several actions to improve its commercial focus and business processes. This major restructuring plan, which was announced in January and included a 13% workforce cut, set a new structure to enhance marketing capabilities to boost sales. These initiatives are taking effect, pushing sales and reducing operating expenses, which dropped 13% year-over-year.

Market conditions remain on Accuray's side. According to GlobalData, the $1.9 billion global radiation therapy systems market is expected to reach $3.6 billion by 2018, so there is substantial space for growth!

Cepheid: Impressive net loss reduction
Second, we have Cepheid , which is well-positioned in the molecular diagnostics space. Its two principal systems, GeneXpert and SmartCycler, test for organisms and genetic-based diseases by automating complex manual laboratory procedures.

After a disappointing second quarter, the company reported a strong third quarter, with revenue surging 24% year over year to $100.1 million. Cepheid made a huge improvement by greatly reducing its net loss, which went from $21.3 million in the prior-year quarter to $1.4 million.

Continuous growth in emerging markets, particularly BRICs, is encouraging for Cepheid as well. Sales abroad grew 57% in one year, and there are still many untapped markets. Regarding the U.S., the health care reform is expected to extend coverage to over 30 million additional patients, resulting in higher demand for diagnostic tests. While growth in the overall in-vitro diagnostic products and services market is modest, the molecular diagnostic market is growing at a compound annual growth rate of 42% through 2017.

However, margin pressure on its high burden developing countries business, or HBDC, is dragging overall gross margins down, which went from 51% to 48%. This business in particular depends on agreements with foundations and/or health organizations to increase volume and help margins recover.

Cyberonics: Record quarter
, which specializes on neuromodulation and provides vagus nerve stimulation, or VNS, therapy to treat refractory epilepsy.

Cyberonics announced a record second quarter for sales, operating income, and income per diluted share. Net product sales of $70.1 million increased 12% year over year, and sales in the U.S., which account for of 82.6% of total sales, grew 12.4%. Definitely positive figures for the company.

What is encouraging for Cyberonics is that the epilepsy market is big and remains fairly underpenetrated. Being the second most prevalent neurological disorder in the world, nearly 2.7 million people suffer from epilepsy only in the U.S., so there is quite a market out there. In fact, the company's newest AspireHC VNS therapy generator is enjoying a positive momentum, and is sold at a premium to other company products.

Nonetheless, the rest of the company's product line is facing gross margin pressure. According to Cyberonics expectations, gross margin will hover around 89.5% for fiscal 2014 as the medical device tax, and higher costs associated with its Costa Rica facility push it down.

Bottom line
Accuray's recent strong commercial and operational execution is a positive sign to consider. If the company continues on this track, profits will only go up.

Cepheid's net loss reduction is impressive, and considering the international expansion and market prospects, the company should be able to revert its situation and provide profits. However, good margins and sales growth are indispensable. Hence, new contracts will be key.

Record sales pushed by Cyberonics' solid foothold in the epilepsy market and strong overseas prospects should continue to drive growth for the company. However, decreasing margins could put a cap on profits. Keep an eye on this variable.

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The article Another Trio of Stock Prospects in Medical Devices originally appeared on

Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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