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Not All Of Healthcare Is Chemistry
When discussing healthcare and biotech, most discussions will go toward drugs or advanced therapies like gene editing, stem cells, etc. However, this ignores that a large part, if not most, of healthcare relies on medical devices – at least in a hospital setting. These can be as simple as a syringe, as life-saving as a pacemaker, or as complex as multi-million dollar MRI or surgical robots.
These products are often the results of years or decades of technical expertise and are covered by as many patents and trade secrets as the most advanced biological or pharmaceutical drugs.
An Attractive Market
This central part of healthcare is often ignored by investors, despite attractive characteristics creating a strong investing “moat” :
- Countless micro-niches with little competition.
- High cost of switching, as it would require retraining medical personnel, or at least a change of habit and risking worse results for the patients.
- Strong IP protection through patents and trademarks, despite a lighter regulatory constraint than for drugs.
Altogether, the market for medical devices was as much as $443B in 2022 and is expected to grow up to $584B in 2027, with an average yearly growth of 5-6%, depending on the category. Most of the market is represented by the USA and Europe, with Asia lagging behind but growing quickly.
Top 6 Medical Devices Companies
This list has been made to reflect a diversity of profiles and sectors in the medical device industry. So, it is a subjective list reflecting an assessment of the technology and characteristics of the companies.
Order is by market capitalization at the time of writing of this article.
Because this is a slightly different niche we already covered in a dedicated article, “Top 5 Robotic Surgery Stocks (May 2023)“, we excluded producers of surgical robots mentioned in this list, even if companies like Medtronic (MDT) or Stryker (SYK) are important medical devices manufacturers.
Boston Scientific is a very large medical device producer active in cardiology, endoscopy, urology, and neurological assistance.
This includes products like:
- Pacemakers & defibrillators.
- Spinal cord stimulators and stimulation electrodes.
- Laser surgery.
- Arteries stent.
The company uses a mix of self-developed products and acquisitions to grow in these markets. Since 2011, the company has spent $18B on acquisitions, with VC investments feeding the pipeline (35 VC investments currently).
Cardiovascular represents the largest segment by $5.8B of revenues for the 9 months ending in September 2022, on a total of $9.4B total revenues. $5.6B of sales were from the USA.
The company has grown revenue at 6-9% CAGR since 2011, with the sales delayed in 2020 caught up in 2021. It has also grown its earnings per share from $0.73/share in 2013 to $1.71/share in 2022.
In large part, the growth has been due to the overall growth of the markets where Boston Scientific is active, with 45% of its sales in moderate-growth segments (4-7% CAGR) and 35% in high-growth segments (>7% CAGR).
This is the electronic giant Siemens's medical imaging & data branch (SIE.DE). Its origins go way back to 1896, when Wilhelm Conrad Röntgen, a German scientist, discovered X-rays.
It sells products in:
- Imagery (MRI, X-ray, ultrasounds, mammography, etc…).
- Laboratory (blood tests, urine tests, etc…).
- Point-of-Care testing (diabetes, blood, etc…).
- Software and automation, including image database and connection to hospital patient files.
Siemens is leveraging the expertise of the Siemens group to enter the robotic market, with a strong focus going forward on endovascular robotics and other mechanical arms. This segment is currently “just” €1.9B in sales, compared to €10.9B in imaging and €6.1B in diagnostics.
Total revenues in 2022 were €21.7B.
Lastly, Siemens Healthineers has developed an offer on cancer treatment, Varian, which allows for synergies between multiple equipment, diagnostics, and software into a full-service offer for oncology departments. This sector is expected to grow 9-12% in 2023.
Revenues should be stable in 2023, as the growth in Varian (9-12%), imaging (7-9%), and advanced therapies (6-9%) will be compensated by a strong decrease in diagnostic (Covid-19 testing). While the company's net debt of -$12B is not neglectable, it is almost exclusively owned by the Siemens Group. So, it does not carry the same liquidity risk as more usual bonds or bank debt.
Siemens Healthineers is an investment option for investors looking for a very stable business with growing synergies between its activities. It is also a serious contender to challenge Intuitive Surgical, Stryker, and Medtronic in the medical robotic segment, considering the world-class quality of Siemens industrial robots.
Edward Lifesciences is a cardiovascular-focused company. This goes back to the origins of the company, in 1958, when Miles Lowell Edwards built the first artificial heart. To date, 800,000 patients have been treated with transcatheter therapies.
Today, the company produces aortic valve replacements, heart valves, valve repairs, and heart monitoring.
Edwards' sales have almost tripled since 2013. The sales growth in 2023 is expected to be 9-12%. The largest segment is Transcatheter Aortic Valve Replacement (TARV), representing 65% of sales.
Currently, Edwards controls around 50% of its market. The company expects the addressable market for its products to double by 2028, partly driven by the aging of the global population and economic development in previously under-treated markets, especially in Asia.
The company has been growing earnings per share quickly and has also increased by 50% its R&D spending since 2018. The company is not distributing dividends but bought back shares for a total of $3.1B since 2019.
4. Alcon Inc.
Alcon is the world leader in eye care. It is the leader in all eye surgery segments: implantables, equipment, and consumables.
It is also the leader in eye treatment (like eye drops) and the second-largest company in contact lenses. The business activity is spread relatively equally between the surgical and vision care departments.
Alcon controls $5B of the $12B market of ophthalmic surgery (cataract, LASIK, etc…), making it by very far the largest actor in the segment, ahead of Johnson & Johnson, Zeiss and B+L (Bausch+Lomb).
Alcon controls $3.6B of the $20B market for contact lenses. For now, the focus of this segment is to increase margins by improving industrial efficiency. It also recently launched lenses that can be reused safely for a whole week.
In the segment of eye pharmaceuticals, Alcon plans to become a serial acquirer/aggregator as it leverages its network of clients for sales, and this is, for now, a very fragmented market, with most treatments below $1B. It is also running a clinical trial for a treatment for dry eyes, which are treated in less than 10% of the diagnosed patients, and expects to finish phase 3 in 2024.
The company's markets are supported by an aging population and the growing occurrence of diabetes and hypertension, both likely to cause retinal diseases. It is also estimated that 50% of the world will suffer from myopia by 2050.
The company is investing in maintaining its dominant position, with 7-9% of all sales re-invested in R&D. The sales from new products have grown by 13% CAGR since 2018, even when including the Covid-19 slump in sales. Total net sales have grown 7.7% since 2019 and are expected to reach $12B by 2027 (currently 8.7B).
Alcon is a very solid actor in its niche. Investors will be interested in this stock for its dominant position, with Alcon competing successfully with giants like Johnson & Johnson. At a P/E above 100, this safety and quality might nevertheless be somewhat priced in already.
A spin-off from the larger General Electric since early 2023, GE Healthcare is treating & scanning 2 billion patients annually, generating $18.3B in revenues in 2022. GE is a leader in:
- Imaging: MRI, X-ray, tomography, mammography, surgical imaging.
- Patient care: ECG (heart monitoring), anesthesia delivery system, infant care, patient monitors, ventilators.
- Pharmaceutical diagnostics: contrast media & molecular imaging, allowing better detection of health issues in the imaging technology.
The company is a serial acquirer, and just in 2022, acquired Caption Health in ultrasound and plans to acquire IMACTIS in tomography. It is growing at a rate of 4-6% CAGR.
GE as a group had become bloated, bureaucratic, and potentially endangered by its financial branch. It is now split between Healthcare, Aviation, and a combination of renewable energy + power + IT. This should make the Healthcare division free to pursue new opportunities while also still having the multiples tens of billions of dollar scale of a large corporation in capital and R&D intensive sector.
So, investors in GE Healthcare will be counting on this spin-off to be successful.
In a portfolio including Siemens Healthineers, GE Healthcare would give investors direct exposure to the medical imaging sector while not having to pick if or which of the 2 companies will emerge as the dominant supplier of this vital equipment.
Align is behind the Invisalign trademark, a revolutionary orthodontic solution for straightening teeth. Its unique offer is to make orthodontic treatment (re-aligning teeth) a less painful and almost invisible treatment. It has treated as many as 15 million patients, of which 4 million are teens.
The company's second product is iTero, an intra-oral scanner. This solution creates a full 3D digital model of the patient’s teeth in less than 60 seconds. It also integrates with other software like CAD/CAM systems, orthodontic labs, third-party scans, etc…
iTero comes on top of a completely digital platform, including dental practice software, remote dental medicine, online scheduling solution, doctor locator, patient financing, and marketing solutions.
The company is turning embarrassing and painful braces into a much more tolerable treatment, and continuous improvements have supported a 23% CAGR growth since 2001. The segment is under-treated, with plenty of patients reluctant to undergo the classic methods, as illustrated by the high number of adults among Invisalign clients.
Invisalign relies on dental practice to recommend, sell, and install its products. Especially multi-location Dental Service Organizations (DSO). One such key partner, Heartland Dental, which opened 188 new practices in the last 3 years, received a $75M investment from Invisalign.
Invisalign direct marketing relies heavily on social media, influencers, and the need to create a wider awareness that the product exists and delivers on its promises.
The company is working on expanding its offer, especially in IT. Notably, Exocad, for guiding facial surgery and a smartphone-based 3D face scan, allows the user to generate an “after” picture once the treatment is over through AI.
Align is a bet on the company successfully taking over the orthodontic market and being at the forefront of digitalizing dental practices. This could deliver explosive growth for years or even decades. Investors will need to be wary of new competitors to the market and not overpay for this growth potential.