While biotech stock tends to dominate the healthcare headlines, another part of the healthcare sector quietly goes about its ways, and investors in this space have banked great returns during the years. What is this lesser known part of the healthcare industry? Medical devices.
Unlike pharmaceuticals, medical devices are not nearly as susceptible to generic competition, and their often high learning curves can help to create high switching costs among their users, which can lead to favorable economics. Better yet, the wind is at their backs as an industry; aging populations and the growth of emerging markets factor nicely into this industry's long-term playbook.
We asked our team of Motley Fool contributors to pitch a medical equipment or device stock that they believe could make a nice addition to your portfolio. Read below why we think that DexCom (NASDAQ:DXCM), Intuitive Surgical (NASDAQ:ISRG), and RTI Surgical (NASDAQ:RTIX) might be worth buying.
Todd Campbell: The convergence of technology and medicine is leading to a wave of innovation designed to improve health, including the use of data analytics to track and report real-time blood-sugar levels in diabetics. At the forefront of this emerging trend is DexCom (NASDAQ:DXCM), a maker of glucose monitoring sensors and devices.
DexCom's products are used by type 1 and type 2 diabetics to better control their diseases, and sales are soaring. In Q2, DexCom reports sales jumped 59%, to $93.2 million.
You're right to think that DexCom's growth is impressive, but even better days may lie ahead of it. According to the International Diabetes Federation, the number of diabetics globally is going to jump by 205 million people during the next 20 years. If they're right, there's going to be a massive need for medtech products like DexCom's that may slow the disease's progression.
To address that opportunity, DexCom announced last month that it's partnering with Google to develop inexpensive miniaturized electronics that can be used in small, bandage-sized, disposable sensors. If that effort pans out, then it will serve as yet another reason why DexCom is one medtech company worth owning.
Brian Feroldi: One of my favorite reasons that I like to invest in MedTech stocks is that they tend to offer high switching costs. After all, once a healthcare provider goes through the arduous process of learning how to use the device, they will likely be highly reluctant to switch to another device, even if there's a cost savings to doing so.
One of my favorite companies in the space that offers tremendous switching costs is Intuitive Surgical (NASDAQ:ISRG), the worldwide leader in robotic surgery. Once a hospital takes on the expense of installing a machine, and one of its doctors is trained for hours on how to operate it, you can bet that they would be extremely resistant to learning another system.
Intuitive Surgical produces the da Vinci surgical systems, which allow physicians to remotely control robotic arms that allow for minimally invasive surgical procedures. The system offers doctors greater access and visibility into a variety of surgical procedures, and it offers patients fewer scars, less blood loss, and a shorter stay at the hospital.
Intuitive offers investors a terrific razor/razor blade business model that creates revenue from both sales of the systems themselves, as well as from consumables used in every procedure performed. In addition, the company inks a high-margin service contract along with every system sold that helps to juice the bottom line, which creates a nice one, two, three punch that should keep the dough flowing into shareholders' pockets for years.
Shares in this best-of-breed medical-device maker rarely come cheap; even now, the shares are trading for a steep 38 times trailing earnings. However, Intuitive is a leader in the space, and is nicely positioned to continue to dominate the growing robotic surgery market. Investors who want in on this long-term trend might want to add some shares to their portfolios today, and add more on any weakness in the share price.
George Budwell: RTI Surgical (NASDAQ:RTIX) is an under-the-radar global surgical-implant company with high-growth potential, and a manageable risk profile that investors may want to check out. The company has three core business segments, namely biologic-based allograft and xenograft implants, hardware composed of metal and synthetic-based implants, and focused products such as nanOss advanced bone graft substitute, Fortiva porcine dermis, and map3 allograft.
The key reason to keep an eye on this small-cap medtech company is that management has outlined a bold plan to grow its revenue by 92%, and improve operating margins by more than 300% from 2014 levels. To achieve this goal, management believes that focused products will lead the way, along with an expanding international footprint, especially in Asia.
The good news is that RTI posted a 10% increase in total revenues, to $71.6 million in the second quarter compared to a year ago, on a constant-currency basis. And its gross profits edged higher by low single digits, as well, in the first half of 2015, relative to a year ago. Management therefore appears to be delivering -- at least so far -- on its stated goal of reaching $500 million in revenue, and improving profitability, making this an intriguing stock to watch in the crowded medtech space.
Brian Feroldi owns shares of Intuitive Surgical. George Budwell has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns and recommends Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.