The medical devices industry has been growing steadily over the past few years, gaining about 16.7% over the past five years. And there’s still impressive growth potential for the industry over the next several years.
A new study found that spending on medical devices only accounted for 6% of the overall national health spending. If that number grows — and it should — makers of medical devices should skyrocket.
The study also found that, while spending on medical devices has risen consistently with the overall health expenditure since 1992 (6% annually), the cost of medical devices since 1989 has risen by less than 1% on the average. By comparison, the medical consumer price index and the entire consumer price index have risen 4.5% and 2.7% respectively, during the same period.
With less than a one percent average increase in the price of medical devices since 1989, there is a significant growth potential ahead for the medical devices industry.
The medical devices industry group — Advanced Medical Technology Association (AdvaMed) — now has a good case to tender to the Fed in its fight to have the 2.3% tax on medical device sales removed. If AvaMed succeeds, medical devices companies’ bottom lines would benefit.
Long story short, the growth opportunity in the medical devices space is impressive, and it’s a good time to consider adding well-positioned companies within the industry to your healthcare portfolio. Here are three companies that are well-positioned to benefit from the trend.
Medical Devices: Stryker Corporation (SYK)
Stryker (SYK) is competitive in a number of big medical markets. Think surgical equipment, neurovascular and the orthopedics. One reason to like SYK stock is that it is well diversified, especially when compared to a close medical devices competitor like Zimmer (ZBH).
SYK stock classifies its operations into three segments: Orthopedics, Spine and MedSurg and Neurotechnology. Remarkably, SYK stock doesn’t rely excessively on any of its segments for its revenue. Its biggest segment by revenue, Orthopedics, contributed 43% of its total revenue in 2014.
By comparison, ZBH stock relies on its corresponding orthopedics segment, which it calls Reconstructive, for about 75% of its revenue.
The diversification of SYK stock’s revenues means that, the company is well positioned to benefit immensely from an increase in spending on medical devices.
While orthopedics is very attractive, it is susceptible to economic downturns as it can be likened to the ‘consumer discretionary’ segment of the medical devices industry. The reason is that, like in the last recession, poor economic situation can cause already affected patients to postpone non-compulsory procedures.
Because of its broader portfolio, SYK stock has better odds of surviving an economic downturn than ZBH stock.
Medical Devices: Medtronic (MDT)
Medtronic (MDT) is another well-positioned company in the medical devices space. For the most part, MDT stock is involved in making devices for spinal, neurological and heart conditions. In fact, MDT stock owns about 50% of the Implantable Cardiac Rhythm Devices (ICD) market.
In addition, MDT stock has been expanding its reach through M&A. MDT stock completed the acquisition of Covidien in January. This acquisition gives MDT stock stronger foothold in the hospital devices market, putting it in prime position for hospital partnerships.
MDT’s 50% position in the ICD market would make it benefit directly from any growth in medical devices spending, and its leading position in the ICD market also makes it quite a stock that should weather a recession.
Heart conditions can’t be taken lightly. And so even though the economy is down, patients with heart condition won’t be able to put off treatment for very long. This is a big part of why MDT was able to grow its revenue during the last recession.
Between its position in the ICD market and its solid M&A strategies, there’s a lot to like about MDT stock.
Medical Devices: St. Jude Medical (STJ)
St. Jude Medical (STJ) stock has been diversifying its business through M&A over the past 10 years. In the process, it has closed gap on main competitors.
For instance, STJ has grown to own the second-largest portion of the ICD market — behind only MDT stock. This means that STJ stock will also benefit from the opportunity the ICD market presents just as described with MDT stock above.
In addition, STJ stock is building a strong competitive advantage for itself through its growing patent list. STK stock is also a strong player in the atrial fibrillation and aortic stenoisis markets, which both have an impressive growth potential. These two markets speak to a large underserved population, which is also well-positioned to benefit from a surge in medical devices spending.
As the market develops, watch for STJ stock to jump.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.