How to profit as medicine goes digital

Medical imaging has come a long way since the first X-rays 115 years ago. Today, the global market is expanding at 7% a year as it switches to digital technology. James McKeigue examines the sector and picks the best way to invest.

X-ray technology is now 115 years old. But medical imaging hasn't stood still. Indeed, the quest for new ways of looking into the body without cutting it open has turned imaging into the largest sub-segment of the global medical equipment market. And following the credit crunch some great long-term plays are cheap.

Big technological breakthroughs saw the market grow 10% per year between 2000 and 2007. The industry also consolidated through a series of mergers and acquisitions. But in 2008 the financial crisis caused a slump in medical imaging, with the costliest areas suffering the most. Magnetic resonance imaging (MRI) scans and computed topography (CT) suppliers had a grim two years as hospitals cancelled deals. "Expensive machines costing a million dollars or more [were] not in vogue," says Simone Carron of Frost and Sullivan consultants. However, now the global market is expected to grow by 7% per year to $24.6bn in 2015. Why?

One reason is that technological innovation keeps creating new uses for medical imaging. One example of this is ultrasound, says Stephen Holland, a research analyst at InMedica. Thanks to "advancements in technology and image quality", ultrasound can now pinpoint problems very accurately and is quickly becoming "an efficient, lower-cost alternative to more expensive options".The higher-end technologies are now being applied to illnesses where medical imaging has never been used before. For example, a recent study in America has shown that CT scans are effective in spotting early signs of lung cancer. New hybrid machines will also drive the market, says Carron. By combining MRI with positron emission tomography (PET), scientists have created "an ideal synthesis".

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The increased use of more complicated scans creates more data and needs more specialist computer programs and equipment. "Manufacturers of computers and companies engaged in developing software for image processing and picture archiving and communication systems (PACS) networks are expected to earn significant revenues in the diagnostic imaging market in the long run," says

Growth in computer imaging software is also being driven by the drive to digital. Digital systems allow medical tourist hotspots, such as Singapore or Colombia, to analyse patient results sent from all over the world. Developed countries facing spiralling health costs hope that digital networks, which, for example, allow patient self-registration, will reduce costs.

American think-tank the Rand Corporation calculates that digital systems could save $77bn a year. President Obama seems convinced his health reforms include a $19bn electronic patient record system. US health reform will also add 32 million people to the world's most valuable healthcare market. The new additions are expected to cost $938bn over the next decade.

But as Turner Investments noted recently: "in healthcare the future may belong to emerging nations". Analysts expect the medical imaging market in Brazil, Russia, India and China to grow by 6.4% per year to $4.28bn in 2015 from an estimated $3bn at present. That's in part demographic The Economist estimates that the ratio of elderly dependants to workers in China will quadruple over the next 40 years, from 10% now to 40% by 2040. We look at one firm that should benefit below.

The best bet in the sector

Agfa-Gevaert NV (BB: AGFB) is a Brussels-based conglomerate. It makes radiology scanners, PACS and health IT systems. It's also a leader in analog medical imaging. Analog might be in decline in countries that are members of the Organisation for Economic Co-operation and Development, but it is seeing strong demand from emerging markets. When those clients make the switch to digital, Agfa has an extensive range of 'digetisers' that can upgrade analog systems.


That all gives the firm a stronghold in Eastern Europe, Latin America and Asia. For example, it is halfway through a four-year, $500m deal to provide scanners to hospitals in China. Yet Agfa is far cheaper than most of its rivals. This is partly because only 42% of sales come from healthcare, with the rest coming from the printing industry and speciality products.

A recent rights issue designed primarily to help reduce debt also pushed down the price. But after a tough 2009 the firm has returned to profitability in 2010. So it looks cheap on a forward p/e of six. With a decent order book and growing emerging markets client base, this is a good bet for patient investors keen to play emerging-market growth. Bank DeGroof analyst Siddy Jobbe has a target of $5.50.

This article was originally published in MoneyWeek magazine issue number 513 on 19 November 2010, and was available exclusively to MoneyWeek subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.


After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the London bureau. 


James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. 


He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.