Are you an investor looking for stocks that beat the S&P 500 index? Think big. And think medical devices.
That's a strategy that has worked over the last five years. Since 2014, 8 of the 10 biggest medical devices have outperformed the S&P 500. Five of these large medical device stocks more than doubled the return of the popular index. Here's what you need to know about the 10 biggest medical device stocks on the market right now.
Image source: Getty Images.
A quick overview of the medical device industry
There are three primary things you need to know about the medical device industry:
- It's really diverse.
- It has a lot more small players than big ones.
- It's highly regulated.
The medical device industry ranges from very low-tech products like surgical gloves to very high-tech products, including artificial heart valves. This wide diversity is reflected in the U.S. Food and Drug Administration's (FDA) definition of a medical device, which includes any "instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory" that is used in diagnosing, curing, preventing, or treating a disease and isn't a pharmaceutical drug.
As you might expect with such a wide range of products, the medical device industry is big. There are at least 32,000 medical device makers in the world. However, most of them are small, with fewer than 50 employees. The 10 biggest medical device makers, on the other hand, all have thousands of employees and make billions of dollars in revenue annually.
All medical devices in the U.S. are regulated by the FDA. Some devices that pose little risk to patients only have to be registered with the FDA without the requirement for a review. Other devices that involve moderate levels of risk require premarket notifications to be reviewed by the FDA. The FDA requires clinical testing to demonstrate safety and effectiveness for medical devices that carry the most risk for patients. Most of the 10 biggest medical device makers market products that fall into this last category.
What are the biggest medical device stocks in 2019?
Several of the 10 biggest medical device stocks focus their efforts on areas other than only medical devices. Others specialize in niche markets. And while they're all large-cap stocks (with market caps of $10 billion to $200 billion), the three biggest stocks on the list have combined market caps (shares outstanding multiplied by the share price) that are much greater than the combined market caps of the other seven big medical stocks.
|1. Johnson & Johnson (NYSE: JNJ)||$356 billion|| |
Medical devices focusing on orthopedic, surgical, cardiovascular, neurovascular, diabetes care, and eye health markets; pharmaceuticals; consumer healthcare
|2. Abbott Laboratories (NYSE: ABT)||$148 billion||Medical devices focusing on cardiovascular, neuromodulation, and diabetes care; diagnostics; nutritional products; pharmaceuticals|
|3. Medtronic (NYSE: MDT)||$134 billion||Medical devices focusing on cardiovascular, diabetes care, minimally invasive therapies, and restorative therapies|
|4. Stryker (NYSE: SYK)||$77 billion||Medical devices focusing on orthopedics, medical-surgical, and neurotechnology and spine|
|5. Becton, Dickinson and Company (NYSE: BDX)||$68 billion||Medical devices focusing on medication delivery and management, diabetes care, diagnostic systems, surgery, peripheral intervention, and urology|
|6. Intuitive Surgical (NASDAQ: ISRG)||$61 billion||Robotic surgical systems|
|7. Boston Scientific (NYSE: BSX)||$59 billion||Medical devices focusing on cardiovascular, medical-surgical, electrophysiology, and neuromodulation|
|8. Illumina (NASDAQ: ILMN)||$44 billion||Genomic sequencing systems|
|9. Baxter International (NYSE: BAX)||$42 billion||Medical devices focusing on medication delivery, renal care, and surgery; pharmaceuticals|
|10. Edwards Lifesciences (NYSE: EW)||$40 billion||Medical devices focusing on heart valves and advanced monitoring|
Data sources: Yahoo! Finance, company regulatory filings. All market caps as of July 15, 2019.
Here are some key highlights for each of these big medical device stocks.
1. Johnson & Johnson
Johnson & Johnson isn't just the biggest medical device stock on the market; it's the biggest stock in the entire healthcare sector. J&J is a holding company that operates more than 260 companies across the world. These companies are organized into three business segments: medical devices, consumer, and pharmaceuticals.
Based on 2018 revenue, J&J's medical device segment ranks as the third-largest medical device maker in the world. The company's medical device segment makes most of its revenue from surgical products, with growth fueled primarily by wound care and advanced sterilization products.
But while its medical devices segment contributes around one-third of Johnson & Johnson's total revenue, the company's biggest segment in terms of sales and revenue growth is its pharmaceuticals business. The pharmaceuticals segment generates roughly half of J&J's total revenue. Its top products include immunology drugs Remicade and Stelara and cancer drugs Darzalex, Imbruvica, and Zytiga.
2. Abbott Laboratories
Like Johnson & Johnson, Abbott Laboratories isn't focused only on medical devices. The company has four reportable business segments: established pharmaceutical products, diagnostic products, nutritional products, and cardiovascular and neuromodulation products.
Abbott's cardiovascular and neuromodulation products segment ranks as the top revenue source for the company. This segment's products include a broad lineup of medical devices for rhythm management, electrophysiology, heart failure, and vascular and structural heart devices, plus neuromodulation devices for the management of chronic pain and movement disorders. Another medical device with fast-growing sales that isn't included in any of Abbott's segments is the FreeStyle Libre continuous glucose monitoring (CGM) system.
The company's diagnostic products and nutritional products segments jockey for position as the second-largest contributor to the top line. Abbott has enjoyed especially strong growth in the diagnostics products segment thanks in large part to acquisitions. Its nutritional products segment doesn't kick in as much revenue, but it's still a multibillion-dollar business that continues to grow with aging populations across the world and expanding middle classes in developing nations.
Medtronic is the third-largest medical device stock in terms of market cap. But based solely on sales of medical devices, the stock holds the No. 1 spot. Unlike Johnson & Johnson and Abbott Labs, all of Medtronic's revenue stems from the medical device market. Medtronic has four operating segments: cardiac and vascular group, minimally invasive therapies group, restorative therapies group, and diabetes group.
The cardiac and vascular group contributes around 38% of Medtronic's total revenue. This segment develops and markets a wide range of cardiovascular products, including cardiac monitors, coronary stents, heart valves, and pacemakers.
Medtronic's minimally invasive therapies group and its restorative therapies group each generate a little more than one-quarter of the company's total revenue. The former markets products including surgical staples and meshes used in hernia repair, while the latter markets products such as bone grafts and robotic surgical systems added with the 2018 acquisition of Mazor Robotics. While Medtronic's diabetes group contributes less than 10% of total revenue, sales for its insulin pumps and CGM systems are increasing significantly.
Stryker is another company that makes all of its revenue from medical devices. It's organized into three business segments: orthopedics, medsurg, and neurotechnology and spine.
The medsurg segment is Stryker's biggest moneymaker, generating around 44% of total revenue in 2018. Medical-surgical products sold by the segment include surgical equipment and navigation systems, endoscopic systems, patient handling systems, and emergency medical equipment.
Stryker's orthopedics segment isn't too far behind, contributing 37% of total revenue. This segment primarily markets implants used in hip and knee joint replacements and trauma and extremities surgeries. The company's neurotechnology and spine segment kicks in the remainder of Stryker's total revenue. It focuses on developing and marketing neurosurgical, neurovascular, and spinal implant devices.
5. Becton, Dickinson and Company
Becton, Dickinson and Company (BD) ranks relatively high on the 2019 list of top medical device stocks thanks in large part to its 2017 acquisition of C.R. Bard. BD operates three business segments: BD medical, BD life sciences, and BD interventional.
The BD medical segment generates more than half of the company's total revenue. This segment sells a wide lineup of products including intravenous (IV) catheters, syringes and needles, infusion pumps, and medication dispensing systems.
Around 27% of BD's total revenue stems from its BD life sciences segment. Medical devices sold by this segment include blood collection systems, blood culturing systems, and molecular testing systems. The BD interventional segment contributes close to one-fifth of the company's total revenue. This segment markets medical devices including grafts, angioplasty balloon catheters, stents, and urinary catheters.
6. Intuitive Surgical
Intuitive Surgical focuses on developing and marketing robotic surgical systems for use in minimally invasive surgery. The company launched its flagship da Vinci system in 1999. Since then, Intuitive Surgical has rolled out four generations of da Vinci robotic surgical systems.
The company makes more than 70% of its total revenue from recurring sources. These include the sale of instruments and accessories that must be replaced after surgical procedures are performed, services, and operating leases. Intuitive Surgical's business model is changing in that a larger percentage of its customers are choosing to lease robotic surgical systems rather than buy them. This should boost the company's recurring revenue over the long run.
In addition to the da Vinci system, Intuitive also now has another robotic surgical system on the market. The company launched its ION system after receiving FDA clearance in February 2019. This system is used to obtain tissue from within the lung for analysis to determine if a person has lung cancer.
7. Boston Scientific
Boston Scientific currently ranks at No. 7 on the list of the top 10 medical device stocks, but its acquisition of United Kingdom-based medical device maker BTG could bump the company into the No. 6 spot. The company has three business segments: medsurg, rhythm and neuro, and cardiovascular.
The cardiovascular segment contributed nearly 39% of Boston Scientific's total revenue in 2018. This segment focuses on structural heart devices, including transcatheter aortic valve replacement (TAVR) and percutaneous coronary intervention (PCI) products.
Boston Scientific's other two segments each bring in around 31% of total revenue. The medsurg segment sells endoscopy products as well as urology and pelvic health products. The rhythm and neuro segment markets medical devices including catheters used in electrophysiology, defibrillators, and neuromodulation devices for treating movement disorders and managing chronic pain.
Illumina is the leading maker of genomic sequencing systems. These systems are used to map DNA sequences. The company's technology played an important role in helping reduce the cost of mapping a human genome (the complete set of genes) from $200,000 in 2009 to less than $1,000 today.
Like Intuitive Surgical, Illumina claims a high level of recurring revenue. In 2018, 83% of Illumina's total revenue stemmed from recurring sources -- 65% from sales of consumable chemicals and reagents used in sequencing and 18% from services.
Illumina's sequencing systems range from high-throughput products like HiSeq to small desktop systems such as iSeq. The company's NovaSeq system, introduced in 2017, continues to drive much of Illumina's growth as existing HiSeq customers convert to the system and new customers begin performing genomic sequencing.
9. Baxter International
Baxter International has three geographical business segments. But the company is also organized into seven global business units (GBUs):
- Renal care
- Medication delivery
- Clinical nutrition
- Advanced surgery
- Acute therapies
The renal care GBU generates roughly one-third of Baxter's total revenue. This unit primarily focuses on peritoneal dialysis and hemodialysis products. Baxter's medication delivery and pharmaceuticals units contributed 24% and 19%, respectively, of total revenue in 2018. The company's medication delivery products include IV therapies and infusion pumps, while its pharmaceuticals products include cancer drugs and anesthesia products.
Baxter's other four GBUs combined pull in nearly one-quarter of the company's total revenue. Products marketed by these units include parenteral nutrition therapies, medical devices used in surgical procedures, and continual renal replacement therapies.
10. Edwards Lifesciences
Edwards Lifesciences has at least one thing in common with Baxter International: It's organized into geographical rather than product segments. However, Edwards focuses on four key product groups: transcatheter aortic valve replacement (TAVR), surgical structural heart, critical care, and transcatheter mitral and tricuspid therapies.
TAVR is by far the biggest moneymaker for Edwards Lifesciences, contributing roughly 60% of total revenue. The Sapien 3 heart valve has been a huge hit for Edwards. But the fastest sales growth is coming from Edwards' surgical structural heart products. These products, which primarily include aortic tissue valves, generate more than 20% of total revenue.
Edwards Lifesciences' critical care product group brings in around 18% of total sales. This group includes the company's HemoSphere advanced monitoring platform. At the bottom is the transcatheter mitral and tricuspid therapies product group, which adds less than 1% of total revenue. These products include Edwards' transcatheter valve repair systems.
Risks for these big medical device stocks
Investing in any stock involves risks. When it comes to medical device stocks, those risks are likely to take on certain attributes. Key risks for the 10 biggest medical device stocks include:
- Competitive threats
- Regulatory hurdles
- Product liability risks
- Macroeconomic risks
The competitive dynamics in the medical device industry are constantly changing. These large players in some cases compete against each other. They also face the possibility of being disrupted by new technology developed by some of the thousands of smaller medical device makers.
Each of the 10 largest medical device companies develops complex products that require approval by the FDA in the U.S. and by other countries' regulatory agencies. Failure to obtain the necessary approvals to go to market could negatively impact these companies' growth prospects.
Many of the products developed by the largest medical device makers potentially pose safety risks to patients. As a result, these companies face product liability risks if patients are harmed in any way by the use of their medical devices.
Like stocks in nearly every industry, these medical device stocks could be pulled down by macroeconomic issues such as an economic recession. Also, because many of these large medical device makers generate significant revenue in international markets, particularly China, trade barriers or the threat of such barriers can hurt these stocks.
Why consider buying these large medical device stocks?
One key reason for considering buying these large medical device stocks is the worldwide aging demographic trend. As more individuals age, the need for many of the medical devices made by these companies will increase.
Beyond the aging populations across the world, there's also likely to be a significant increase in chronic conditions among individuals who aren't as old. Factors such as diet and lack of physical activity are contributing to this increase. Medical device makers that make cardiovascular and diabetes care products could especially benefit from this trend.
Two of these large medical device stocks stand out as particularly promising investing candidates: Illumina and Intuitive Surgical. Illumina should deliver strong growth as demand for genomic sequencing expands, especially in the areas of cancer diagnostics and treatment. Intuitive Surgical should also be a long-term winner as more minimally invasive procedures are performed using robotic surgical systems.
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Keith Speights owns shares of Illumina and Intuitive Surgical. The Motley Fool owns shares of and recommends Illumina and Intuitive Surgical. The Motley Fool recommends Becton Dickinson and Johnson & Johnson. The Motley Fool has a disclosure policy.