Does Growing Use of 3D Printing in Healthcare Make This Stock a Buy?

3D printers are crafting increasingly precise medical instruments and appliances for hip surgery, knee surgery, and dentistry, while 3D simulators and anatomical models are increasingly being used to prepare the next generation of surgeons. Does healthcare's growing use of 3D solutions make 3D Systems' (DDD) stock worth buying?

In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Todd Campbell to explain how 3D printing is revolutionizing healthcare, and why the industry is so important to 3D Systems' future.

A full transcript follows the video.

This video was recorded on Aug. 29, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is August 29th, and we'll be talking Healthcare. I'm your host, Kristine Harjes, and I'm joined by fool.com contributor Todd Campbell via Skype. Todd, welcome back from vacation! How was it? 

Todd Campbell: It was great! I went to Seattle, took the family to Seattle. My son is living out there right now, until early next year. I figured this was a great opportunity to go to the West Coast, enjoy some fantastic coffee, and visit some of their breweries. 

Harjes: That sounds wonderful!

Campbell: Quick shout out to anyone living in the Seattle area -- Fremont Brewery was just phenomenal!

Harjes: Awesome. That's one of my favorite things to do when I travel, go to different breweries. It's always a good local crowd. You can talk to the people that actually made the beer. It's just one of my favorite things to do on vacation. 

Campbell: Yeah, me too. Me too. It was a great time. A little hazy, though. The wildfires in California, the cascades were trapping on a lot of the smoke. That was a little bit of a bummer. We weren't able to get a really good view of Rainier or from the Space Needle or anything, it was too overcast.

Harjes: That's too bad. It sounds like you had some good indoor fun.

Campbell: Yeah. Next time! I'll do those things next time!

Harjes: You'll be back. Anywho, today's episode is going to be all about 3D printing and, of course, because this is the Healthcare show, its application to the medical industry. Let's start with a quick primer about the technology.

Campbell: It's kind of cool to be talking about this again. It's been a few years.

Harjes: Yeah, this probably sounds like a blast from the past, and, potentially, for some investors, it probably is a painful memory. I personally got a little bit burned on 3D printing stocks. This is a technology that had the cart in front of the horse a few years back, especially with a lot of these stocks with crazy valuations. That bubble more or less burst. But it's still a technology that is being developed. It's pretty cool. It's starting to have some really legitimate applications. And, of course, it has some stuff that it's working on in the healthcare industry. 

Campbell: A little 3D printing history. The first 3D printers were launched back in the 1980s. One of the first patents ever recorded for this technology was actually done by one of the companies we're going to talk about later in the show. The technology has been around a while. But the early generation, even up through 2010, there were drawbacks to them. It was hard to construct really complex, durable products using these things. 

Just to give people a little primer, what exactly is 3D printing, in case you're not familiar with the story. I think it's probably helpful to understand how we make things today. That can be a good starting point. When we make things today, currently, in a manufacturing setting, we're using a subtractive process. Picture this big block of material, and we're carving that block down into an item. As you can imagine, in doing that, you generate a lot of waste. You're not using everything in that block, you're only using whatever is going to be remaining for that product. 3D printing turns that concept upside down. Rather than subtracting from a big block, they're adding, in successive layers, material, one on top of the other, to create some sort of an item. You can see, by flipping that upside down and using a 3D printing model, why it might be attractive to some manufacturers. They're able to look at it and say, "Wow, if I can reduce all of this waste from my current manufacturing process by using 3D printing, this layer upon layer process, only using what I need in materials, that could save me a lot of money over time."

There are multiple ways that 3D printers work. You can have the material in a liquid resin. You can have the material that's added layer by layer in powder form. The way that each layer is connected to each successive layer may include the use of binders. It could use lasers that fuse together to make a durable layer, each successive layer. Or, it can use light and heat to cure the resin or whatever the material is, to develop the item that way. There's a few different approaches to 3D printing. 

I think what's really important for people to understand is that this is an additive manufacturing process. And, the materials that you can use, traditionally, typically, are going to be things like plastics, waxes, and maybe metal powders like aluminum or stainless steel.

Harjes: If it sounds like a very wide-ranging technology, that's because it is. There are super high-end 3D printers. There are also pretty cheap home printers that folks like you and I could use almost like a toy, if we wanted to. Really, everything ranging from frivolous usage of 3D printers all the way to really important and meaningful use of very complex and advanced high-end 3D printers. When we're talking about the application to healthcare, that's really what we're looking at. We're looking at things from bio-printing and potentially making human organs to making personalized prosthetics. There are so many different ways that the medical field is using 3D printing. 

Campbell: I think one of the things that's most intriguing to me in the application of 3D printing in healthcare is the ability to generate customized products for each specific patient. What I'm thinking about there, let's use prosthetics as a starting point for that discussion. Each individual person is going to have slightly different bone structure, joint structure, whatever. It's going to make their gait slightly different, the way they stand slightly different, the way they carry their weight, everything. Currently, the way that we produce prosthetics ... we can be pretty good, but we can't be precise. What 3D printing allows people to do is take precise measurements and analyze, in a 3D simulation, how a person's structure is, and then be able to design a prosthetic that is very similar to what they had previously. That's a huge advance for patients. Again, you reduce your pain and you reduce fatigue, you improve quality of life. That's one example. `

You can also then extrapolate that further out and say, well, how would it be used more commonly in medical? I think that now, you're looking at things like hip replacement, knee replacement, joint replacement type surgeries, which are incredibly common and getting more and more common as baby boomers stay active and live longer, and there are more of them. 

Harjes: What's really cool about that is, a lot of times, when you get an advancement in quality of care, it's more expensive. We talk a lot about these very expensive cancer treatments on the show all the time. But in the case of 3D printing, it's actually bringing costs down because you're able to do the 3D building of the actual device not using this subtractive manufacturing style that is incredibly wasteful of material.

Campbell: Yeah, and you can take it one step further, too. You're talking about improving the entire surgical process. By mapping out each individual patient, you're then able to create models that you can use and do simulated surgeries beforehand, you can create surgical guides that are specific to each patient, which can speed the surgery and reduce recovery time. I mean, theoretically, people are developing systems now for knee replacement where you could go in in the morning and come out in the afternoon in just an outpatient setting because of the ability to have these advances in the way you do surgery. 

You're also seeing 3D application, because of this integration of both the software, by doing the modeling, with 3D modeling, you're then able to produce the 3D product. The 3D modeling produces software, the software is put into the printer, the printer prints out the device. Well, at each step there, you're able to create advances in the procedure that can improve patient outcomes. Just to go back quickly to the use of, say, 3D printing for hip cups and hip surgery, or surgical guides and knee replacement surgery -- that's a major, major market. We're doing over 300,000 hip replacements in the U.S. per year right now, and we're doing over 700,000 knee replacements per year as well.

Harjes: This can also be used to train surgeons, not even specifically for, you know, Todd Campbell's hip replacement, practicing on an actual model of his body; but, if you're in school. Just being able to work with really, really good replicas of the human anatomy is very cool for ramping up surgeons even faster and with even better experience as they train.

Campbell: Absolutely, creating those models, say, of your heart, if you've got a complex surgery, a complex case. Especially for these dangerous surgeries, having that model ahead of time and being able to experiment in your surgical process beforehand, that's pretty transformative.

Harjes: There are also devices being made as well, particularly in dentistry. You see dentists being able to make retainers and dentures and crowns, all to spec for that specific patient, and being able to do it faster and cheaper and with more precision. Hearing aids is another big one. You can make better hearing aids that are really custom-suited for the patient themselves. That is a huge market, as well. 

Campbell: The dentistry, I'd say that's where 3D printing has become most penetrated. They've made huge advances in that. As an aside, you can use 3D printing to create the molds and stuff to help with clear aligners for orthodontia work. You can use it to help create dentures, to help create crowns. If you look at just the dentures market, there's 37 million people that are expected to be wearing full dentures by the year 2020. Again, an aging population playing into the greater demand for dental products.

 Harjes: Yep. One more that I want to mention is bio-printing, which is recreating human body parts like blood vessels and organs. While the technology is not quite there yet, that could one day replace something like an organ transplant.

Campbell: That's a fascinating concept. We could be decades away from that. But the concept is fantastic! Think about that for a second. You're talking about eliminating the waitlist for transplants.

Harjes: Yeah, that is absolutely incredible. There are applications of 3D printing in healthcare that are currently out there and being used a lot. And then, there are ones that are a dream, they're a little bit farther away. Bio-printing is definitely in that latter category. 

But, as an investor, there are ways that you can already get into this space. One stock that we wanted to highlight is 3D Systems, ticker DDD.

Campbell: DDD is the company that I alluded to earlier on. It was founded back in the early 90s. The founder of the company actually was one of the first filers of patents for 3D technology. They offer printers that span the entire range, either working with powders or working with liquids, using light, using lasers. They're taking it from an industrial perspective -- for example, creating these huge 3D printers that can be used in manufacturing, anything from aircraft parts to whatever. They also have make personal at-home printers, as well, with the goal of one day being able to allow everybody to have one of these printers in the house. If you break a glass, you can just create your own glass by pressing a button. 

One of the reasons that we're talking about 3D Systems today is because, over the course of the last eight years, they've been spending a lot of money on doing acquisitions to turn themselves into a big player in 3D printing for healthcare. As we stand today, healthcare represents or accounts for about 35% of their revenue. 

Harjes: And importantly, it is driving their revenue growth. It's about one-third of their business, but the healthcare solutions segment itself grew revenue 26% in the last quarter, up to $61.4 million. That was really what was behind their overall revenue growth of 11% when you look at the prior quarter.

Campbell: Right. We talk about razors and blades on the show a lot, the concept of being able to sell some item that produces something that uses a consumable that will drive revenue in the future. 3D Systems has a razor and blade model, when you think about it. You're saying, "OK, I'm going to sell this 3D printer. Then, I'm also going to sell you the 'ink,'" kind of like HP printers that you use in your home. OK, great, I bought the printer, but now I have to buy the ink cartridges over and over again. Those can be very profitable. 

This is still a very young thing. I don't think I know anyone who has a 3D printer in their home. Nobody jumps out at me, yet. They're still very nascent in the at-home use. But we are seeing the use, again, pick up in industries like dentistry, and in hospitals for surgery and simulation. That's really where 3D Systems is making a lot of its money, in that healthcare segment. If you look at the 26% growth that you highlighted, that helped increase the percentage of revenue that they get from healthcare from 30% to 35%. You can see it's becoming a bigger and bigger proportion of the company's revenue. With the business growing 26%, and this being a global business -- you can sell in Asia, you can sell in Europe, you can sell here in the U.S. It's not just limited here to the U.S.

I think this is a really intriguing stock if you're interested in 3D printing and you're interested in the applications in healthcare This is a good way to play it, because they have a pretty good presence in dentistry and also in surgical simulation and in models. 

Harjes: Yeah, and they're announcing new capabilities, it seems like, every single day. One that stood out to me was, in June, they announced the availability of an on-demand anatomical modeling service for people in the medical profession. Basically, how this works is, you upload a 3D model file to this on-demand service, and you get to pick what material you want to actually use. You can receive an instant quote, and within five business days, have that model in your hands. It's pretty sweet. 

Campbell: Yeah, the on-demand stuff that they're doing is almost like an introduction, to get people introduced and addicted [laughs] to the concept of using 3D printing in their process. I think that's pretty exciting. 

The other thing that's really interesting, and investors want to keep eyes on over the course of the next year, is whether or not they sell a lot of their latest dental printer, which is the NextDent 5100. The NextDent 5100 is being marketed as a much faster solution that also can use a lot more different materials. That would be important, too, as far as making durable dentures, durable teeth, durable temporary crowns, that thing. 

Harjes: And it's worth noting, too, with 3D Systems, that they're not just doing stuff in healthcare. As we mentioned, that's only one-third of their business. If you're interested in the stock, definitely check out some of the stuff that they're doing in aerospace and in automotive. They definitely have a pretty wide reach with the application of this technology.

Campbell: Yeah, and with the Simbionix brand that they have, that's a healthcare simulation, surgical simulation. They actually are helping train doctors on robotic surgery using that platform, which is cool, too. We've talked about robotic surgery and how that's gaining a lot of momentum and winning a lot of use. You don't want to tie up the OR in these expensive machines. Being able to have simulated robotic surgery systems in place that you can train new doctors on without tying up that OR for that training, that's pretty cool, too.

Harjes: Yeah, that's awesome. I was previously a shareholder of 3D Systems. I sold it after my investing thesis seemed to have collapsed. I don't know. I am wary to buy shares again because I got so burned. What do you think, Todd? Is this an interesting stock to you?

Campbell: I've owned it a long time. It's part of a core long-term growth portfolio for me. I intend to hold it for decades. I have no idea if I'll end up making money on it or not. I think that the potential to reshape how we manufacture and distribute goods using 3D printing is massive. In my brain, I'm always thinking of the Star Trek replicators. If the future is on-demand items or on-demand products, 3D printing could help get us there. Granted, we're a long way from that kind of penetration. But I think that it's compelling enough to make it warrant a small slice of my long-term growth portfolio.

As far as the company in particular, their profit has been inconsistent, but they don't lose a ton of money. They don't have a lot of debt. I look at this stock and I say, I think we've rallied from its low to about $20, something like that. Yeah, it's expensive, I suppose, if you're looking at traditional metrics like the P/E ratio. But, I don't know, 3.5X sales, that's not horrible for a company that theoretically could revolutionize industries.

Harjes: I think the lesson that I will draw out of my failure of an investment in them is, just be a little bit more patient. This is a technology that seems very promising. Who knows if 3D Systems will be the stock to play the space? But they're doing a lot of really interesting stuff. I know I'm definitely going to take a look at what they're doing in sectors outside of healthcare, as well, to consider reinvesting in them.

Campbell: Sounds good!

Harjes: As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!