Medtech Performance Outshines S&P

We’re kicking off July with a look back at the medical technology sector’s strong performance in the public markets over the past three months, particularly when compared to the S&P 500. We reviewed the performance of a representative sample of medtech leaders – Medtronic, Stryker, Boston Scientific et al – against the S&P 500 and noted a 9% gain in market cap from April through June compared to the S&P’s 3% increase. While the recent biotech rally has been driven in part by the news cycle, including some clarity into potential drug pricing policy decisions, we believe medtech’s recent performance is attributable to investors taking notice of the sector’s potential for steady, long-term growth and its favorable positioning in a value-oriented healthcare system. Several factors stand out:

  • Innovation: medical devices continue to evolve to treat patients less invasively and earlier in their disease states, as well as to enhance disease management (e.g., continuous blood glucose monitoring in diabetes). Medtech is also witnessing the emergence of entirely new classes of products, as with the development of robotic platforms. Robotic surgery has the potential to make surgery safer and less invasive, and despite the rapid growth of companies like Intuitive Surgical, which markets their robots for general surgery, gynecology and urology procedures and estimates 12-14% procedure growth in 2017, only about 4% of surgical procedures use a robot, leaving a lot of room for continued adoption. Orthopedics has been moving into this high-growth segment via M&A, with Stryker buying knee replacement robot manufacturer MAKO Surgical in 2013, Smith & Nephew acquiring Blue Belt Technologies’ handheld NAVIO system for knee replacements in 2015 and Zimmer acquiring the French spine robot company Medtech SA in 2016.
  • Demographics: the aging population is one of the key drivers of medical device utilization. In 2012, 43.1 million Americans were aged 65 or older; in 2050, that will nearly double to 83.7 million. Increased disease incidence associated with an aging population, particularly those associated with the obesity epidemic, such as osteoarthritis (already affecting 10-13% of people aged 60 or older) and diabetes (affecting 9% of the population), will further drive demand for medical devices. Emerging markets will also provide substantial growth opportunities (with some analysts predicting that emerging markets will outpace developed market growth by 2-3x).
  • Value: medical devices represent a small portion of healthcare spend, and they have not undergone increases in price (attracting both scrutiny and pricing pressures) the way drugs and biologics have. This contributes to a stable pricing environment for medical devices, even amid a shift toward value-based healthcare. As devices are generally a component of the cost of a surgical procedure, cost considerations are intrinsic to the development of new devices, and device manufacturers have institutionalized their methods for developing evidence to support the efficacy, quality and cost-effectiveness metrics that shore up a value-based heathcare system.

Medical technology’s recent performance against the S&P 500 reflects a heightened appreciation for this sector, which is positioned at a confluence of innovation, demographics and value – factors that help to insulate it from political and market pressures and ensure steady, reliable long-term growth. We will continue to track the unique attributes and performance of the medtech sector as it evolves, in the coming quarters, years and beyond.