Besides being well known, actor Michael Douglas, rock star Eddie Van Halen, tennis icon Billie Jean King and Duke basketball coach Mike Krzyzewski all have one thing in common: Each has been able to resume an active career thanks to joint replacement surgery.
A growing legion of Americans has had an orthopedic implant. In fact, one in 30 people today has undergone joint replacement surgery. That’s double the percentage of just a decade earlier. And whether it’s knee and hip replacements, spinal implants, orthobiologics or trauma implants, the demand for orthopedic implants is accelerating rapidly.
Poised to capitalize on this opportunity are industry leaders Zimmer Holdings (NYSE:ZMH), Stryker (NYSE:SYK), the DePuy Orthopaedics unit of Johnson & Johnson (NYSE:JNJ), Smith & Nephew (NYSE:SNN) and privately held Biomet.
Driving demand for orthopedic implants are the aging populations in developed countries, the desire of baby boomers desire to maintain physically active lifestyles and better technology.
The fact is, Americans’ penchant for fast food is dramatically increasing obesity, especially among children, where it has tripled in the past 30 years. With increased weight comes greater risk for joint disorders. According to research conducted by International Orthopedics, patients undergoing joint replacement are significantly more likely to be obese.
Thus, it’s no surprise that the orthopedic industry is set to boom in the coming years. One global group says it is forecast to grow to $41.8 billion by 2016 at an annual rate of 7.8%. Joint reconstruction will remain the largest orthopedic implants category, reaching $22.9 billion by 2016.
Another reason for investor enthusiasm is that the companies that make orthopedic implants are highly profitable. In fact, one study shows that they rank just behind Big Pharma and Big Biotech with an extremely sweet 35% margin.
Zimmer is the top maker of knee and hip replacements. Trading in the $60 range, the company’s share price in the past year has been outpaced by both Stryker and Smith & Nephew. Extending the view to five years shows Stryker and Smith & Nephew shares are up about 40% and 20%, respectively, while Zimmer has dipped about 5%.
Zimmer has suffered relative to its competitors by failing to execute on its promises, costing the company valuable market share, according to one analyst. Additionally, Zimmer is also the only company among the industry leaders not to pay a dividend.
Stryker, on the other hand, recently boosted its payout to 18 cents from 15 cents a share, giving it an annual yield of 1.1%. Stryker further rewarded shareholders by boosting its stock buyback program by $500 million this past December.
Investors who like the prospects for the industry but want to spread their risk might want to consider iShares Dow Jones US Medical Devices (NYSE:IHI) exchange-traded fund. Stryker and Zimmer are among its top 10 holdings.