Health is a topic that has dominated discussions, decision-making, headlines, and investment strategy for much of the COVID-19 pandemic. The fragile connection between the state of the world economy and public health has been front and center for what feels like way too long. Furthermore, the focus on health has been a strong reminder of the important role that the people and companies that work within the healthcare sector have in today's world.
Though much of the attention to the healthcare sector goes to the large-cap companies working on epidemic-level disease control, the sector is much more diverse and has plenty to offer all types of investors. One segment, which we've chosen to focus on in this article, is medium-sized U.S. healthcare companies that have arguably moved beyond the survival-type risks that they were exposed to when they were smaller but are not quite of scale to be considered large-cap. The group of mid-cap healthcare companies has significant upside potential within the public market while also having a risk profile that many investors find acceptable.
- Mid-cap healthcare companies tend to fly under the radar when it comes to those interested in investing in health-related companies.
- Top mid-cap healthcare stocks can be identified by analyzing the top holdings of popular ETFs and then filtering them by metrics such as portfolio weighting and the number of occurrences a holding has across the group of funds.
- Mid-cap healthcare companies typically have decades of experience, unique areas of specialization, and thousands of employees. This combination of factors helps give each mid-cap healthcare company its own type of competitive advantage.
How to Identify Top Mid-Cap Health Companies
The mid-cap healthcare sector comprises companies engaged in drug making, medical equipment manufacturing, healthcare infrastructure and facilities, diagnostics, research, and more. Mid-cap companies are often the targets of mergers and acquisitions (M&A) activity from larger companies within the healthcare sector, so it is common not to have as many candidates to choose from compared with other sectors.
For the purposes of this article, we gathered the top 50 holdings from five of the most popular mid-cap exchange-traded funds (ETFs) based on net assets. The list was filtered by sector and then sorted by the amount of capital invested in the various holdings. The top 10 holdings that resulted from the screen are presented in the list below.
· IQVIA Holdings Inc. (IQV)
· Welltower Inc. (WELL)
· Centene Corp. (CNC)
· Dexcom Inc. (DXCM)
· ResMed Inc. (RMD)
· Mettler-Toledo International Inc. (MTD)
· Veeva Systems Inc. (VEEV)
· Jazz Pharmaceuticals PLC (JAZZ)
· Repligen Corporation (RGEN)
· Neurocrine Biosciences Inc. (NBIX)
The market capitalization of some top holdings within popular mid-cap ETFs may have grown beyond the typical market cap associated with the mid-cap segment.
Repligen Corporation (RGEN)
Repligen Corporation (RGEN) is a mid-cap medical instruments and supplies company that has a market capitalization of $8.4 billion as of April 19, 2022. More specifically, since its founding in 1981, the company has been developing and commercializing key products and solutions that address critical steps in the production of biologic drugs.
Looking at the weekly chart below, you can see that Repligen stock has significantly outperformed the large-cap healthcare sector as represented by the Health Care Select Sector SPDR Fund (XLV). The XLV ETF is a popular fund used by investors for tracking the performance of the healthcare sector of the S&P 500 Index. As of April 19, 2022, XLV has $38.5 billion in assets under management (AUM) and comprises 65 holdings from across the sector. Bullish investors would likely use the convergence of the performance figures as a potential buy signal in hopes that the Repligen stock price finds a level of long-term support or buyer interest and starts to strengthen again.
Neurocrine Biosciences, Inc. (NBIX)
As the company name suggests, Neurocrine Biosciences, Inc. (NBIX) focuses its efforts and experience in the fields of neurological and endocrine disorders. In addition, as if advancing medicines in those two fields isn't ambitious enough, the company works to help people with various psychiatric disorders. As of April 19, 2022, the company had a market capitalization of $9.4 billion and had four Food and Drug Administration (FDA)-approved therapies under its belt.
Looking at the weekly chart below, you can see that the company's stock has most often outperformed the XLV ETF. In other periods, such as in recent months, Neurocrine stock has become more highly correlated with the broader sector. Given its strong performance and the vast level of unmet demand for products in the fields of its expertise, Neurocrine is one mid-cap healthcare stock that could make its way onto the radars of investors over the years ahead.
Jazz Pharmaceuticals PLC (JAZZ)
Another mid-cap healthcare stock that is working on bringing medicines to market for people who have limited options is Jazz Pharmaceuticals PLC (JAZZ). Like Neurocrine mentioned above, Jazz Pharmaceuticals is also focusing its efforts on the field of neuroscience by creating medicines for disorders such as epilepsy. In the case of Jazz, it also has strong expertise in oncology with a focus on medicines that target hard-to-treat tumors.
Looking at the chart below, you can see that Jazz Pharmaceuticals stock has oscillated between periods of outperforming and underperforming the XLV ETF since 2013. Investors who see potential in the company's pipeline could use the recent period of underperformance as a buying opportunity in hopes that future results will lead to the type of outperformance that the stock has experienced in the past.
The Bottom Line
People and companies within the healthcare sector either directly or indirectly improve the quality of life for millions of people within the United States and around the world each day. From an investment perspective, the large-cap drug makers get most of the attention when investors are thinking of the healthcare sector, but as we've discussed, the mid-cap segment offers an interesting investment case with a reasonable level of risk. In most cases, the companies within the mid-cap segment have grown over decades from small-cap firms with binary-like risk profiles into medium-sized businesses with thousands of employees and a diverse set of specializations, products, and services.
What Types of Industries Make up the Healthcare Sector?
The healthcare sector consists of all businesses involved in the provision, coordination, and delivery of medical care, as well as all related goods and services. Industries within the sector include pharmaceuticals, biotechnology, makers of generic drugs, medical equipment, and managed healthcare, as well as healthcare facilities and related infrastructure,
What Is a Competitive Advantage?
A competitive advantage is a combination of specific factors that gives a company or country an edge over a competitor. For example, within the healthcare sector, major barriers to entry exist in the form of professional licensure, regulation, intellectual property protections, specialized expertise, research and development costs, and natural economies of scale. Large- and mid-cap healthcare companies build up their competitive advantages by having decades of experience in a particular field of study, thousands of employees, and a scale that typically allows them to survive a binary-type risk event such as results from a recent study.