Your Best Bet In The Medical Space

By Aaron Levitt | Updated July 24, 2014 AAA

Given America's graying population, healthcare remains a popular investment destination. Funds like the Health Care Select Sector SPDR ETF (XLV), which invests in pharmaceutical giants, have blossomed as rising medical costs and rising demand propel shares. Add in a dose of pro-healthcare legislation, such as the Patient Protection and Affordable Care Act (a.k.a Obamacare), and you have recipe for a rally.

And while our older population will undoubtedly need all sorts of drugs, facilities and healthcare products, a few sub-sectors of the market are bit more exciting than others. Take medical device companies for example. These high tech and much-needed appliances should continue to see robust growth. 

Riding The Gray Wave

Medtronic Inc.’s (MDT) recent decision to pay $40 billion for Covidien PLC (COV) highlights the growth and profit potential of the medical device industry. Such a dear price is a bet on a growing population of elderly Americans, a so-called “gray wave.” According to U.S. Census data, around 13% of the U.S. population is 65 or older. By 2030, that figure should be roughly 18% of the population. Factor in the aging populations of developed Europe or Japan, as well as longer life spans, and you have huge potential for demand.

Currently, more than 200,000 hip replacements and 600,000 knee replacements are performed every year in the U.S. And according to the American Academy of Orthopedic Surgeons, that number will rise to 572,000 annual hip replacements and 3.48 million knee replacements by 2030. And that’s just hips and knees in the United States; it doesn't include the various other heart valves, prosthetics, stents and other body parts that need repairing, not to mention catheters, artificial elbows and heart pumps.

Consultancy RnR Market Research’s latest report on the state of the medical device market predicts some pretty robust growth. Overall, RnR estimates that by 2017 the global market for medical devices will be worth $434.4 billion. China, with its growing middle class, will see its medical device market will grow to $53.5 billion in 2020 from just $20 billion in 2012. All in all, RnR’s projections shows the medical device market growing at compound annual growth rate (CAGR) of 7.2%.

The simple truth is the longer we live, the more we are going to need these things. The long term growth projections are quite rosy. (For related reading, see: Obamacare Winners In The Markets.)

How To Invest In Devices

While broad-based healthcare funds like the First Trust Health Care AlphaDEX ETF (FXH) do include several of the major device makers, the iShares US Medical Devices ETF (IHI) offers a pure play on the theme. The $707 million ETF tracks the Dow Jones U.S. Select Medical Equipment Index and currently holds 49 different medical device stocks. That includes Zimmer Holdings Inc. (ZMH) and drug-coated stent producer Boston Scientific Corp. (BSX). On the performance front, IHI has been pretty good. The ETF has managed to produce a 111% cumulative total return since its inception in 2006. Expenses for the fund run a relatively cheap 0.46%. Those costs might be a bargain; it’s really the only pure medical device play in town. (For more, see: Money To Be Made In Medical Devices.)

Eyeing Robot Surgery

While it recently ran into some issues with the FDA and patient lawsuits, Intuitive Surgical Inc. (ISRG) has bounced back. The remote surgery robot specialist was recently acquitted of any wrongdoing in the first major court battle it faced. At the same time adoption rates for its new Xi system have been swift. All in all, more than 367,000 procedures have been done by surgeons using robots since 2012. ISRG and Stryker Corp. (SYK), via its purchase of Mako Surgical, make ideal ways to play the trend. (For more, see: Medical Devices: Cure For Ailing Portfolios.)

Lower tech companies also offer opportunities. The vast majority of C. R. Bard, Inc. (BCR) in revenue’s comes from one-time use urology products, such as catheters, while Becton Dickinson & Co. (BDX) continues to sell disposable syringes by the truckload. These products are necessities and hospitals can't operate without them.

The Bottom Line

A rapidly aging population means opportunities in not only pharmaceuticals, but medical devices for the foreseeable future. For investors, the sector offers exciting high- and low-tech growth options to power your portfolio.

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