Nine Reasons to Invest in Medical Technology Companies

At Borna Health Fund, we typically have 80% of our assets invested in Medical Technology (Medtech) companies. Here is why.

1. The Medtech Sector has significantly outperformed the S&P 500 over the past 13 years. Since 2010, the IHI medical device index is up 546% which is 210 percentage points better than the S&P 500. (See Yahoo graphic below.)

2. Medtech has great secular growth drivers. In addition to population growth, the senior citizen population is growing even faster, and as people age, they need more medical technology-based procedures. Obesity has expanded from a US problem to a global challenge and this condition also contributes to the need for device-based treatments. These factors support an aggregate Med-Tech market growth of 4-7%. [1] Within that market are dozens of faster growing sub-sectors.

3. The high barriers to entry and engineering driven competition allow incumbent companies to enjoy sustainable competitive advantage. These markets are hard to enter through extensive clinical trials, patent fences and rigorous regulatory oversight. Investing legend, Warren Buffet aptly pointed out “The fundamental basis of above-average performance in the long run is sustainable competitive advantage.”

4. Medtech companies often have attractive financial profiles with recurring revenues. They are efficient manufacturers with gross margins routinely above 70%. With a concentrated customer base, operating margins can reach 30%.

5. The US is the dominant country in medical technology and is a net exporter. US exports of medical devices exceeded $45 billion in 2019. [2]  These exports improve the vitality of the nation’s economy. Commerce Secretary Gina Raimondo recently called US Medtech our “last bastion of advanced manufacturing.”

6. The US Medical Technology Industry employs 519,000 people directly and another 1.5 million indirectly. [3]  These attractive jobs pay well above the national average, teach manufacturing skills, and involve clean, healthy working environments.

7. The Medtech industry funds research in products that improve our health. Companies spend an average of 6-7.5% of revenues on R&D according to research by Boston Consulting Group. In hundreds of cases, it is much higher. Importantly, this research is developing groundbreaking treatments for debilitating conditions such as epilepsy and Parkinson’s Disease.

8. Medtech offers investors opportunities across the gamut of market caps and investment styles with over two hundred to choose from. The sector has companies growing by over 30%. There are steadily growing dividend aristocrats. And, for those with a value bent there are dozens of slower growing companies striving to revitalize themselves and generate healthy returns for investors.

9. Merger transactions frequently reward Medtech investors with profitable surprises as large companies acquire small companies to boost their growth rates or add products to their sales channels.

[1] Statista.com

[2] DOC Trade Policy Information System (TPIS) data run, February 24, 2020, as quoted in Official Website of the International Trade Administration Official Website of the International Trade Administration

[3] ADVAMED