By Sean Williams, The Motley Fool
Filed under: Investing
You would think that the medical-device sector would be rife with big gainers thanks to an aging population, but it’s not quite as simple as that. Just as we saw when we examined the biotechnology sector last week, there are pros and cons to investing in medical devices.
The pros and cons of medical devices
On the positive side, medical devices should make a logistically smart play for an aging population. As technologies and manufacturing processes improve — and health-care insurance becomes a mandate because of the full implementation of the Patient Protection and Affordable Care Act, known loosely as Obamacare, in 2014 — the demand for medical devices ranging from implantables to simply disposable-use products in hospitals is bound to increase.
Conversely, medical-device companies walk a fine line when it comes to product efficacy sometimes and must now deal with a 2.3% medical-device excise tax that comes straight off their total revenue to help pay for the Medicaid expansion under the PPACA. St. Jude Medical, for instance, has dealt with two recalls in the past three years because of the long-term durability of its implantable products. In 2010, it recalled its defibrillator leads known as Riata, and in February, it recalled its Amplatzer TorqVue FX Delivery System for fear of fracturing in the device over time. On top of this, St. Jude will fork over 2.3% of its revenue because of the medical-device excise tax.
The Buffett factor
Warren Buffett, as my Foolish colleague Brian Orelli has pointed out, tends to shy away from the health-care sector as a whole — save for a few very large and diverse companies — because he doesn’t have the time or energy to follow the developing pipeline of a company, whether it be biotech or medical devices.
But, just as we saw with regard to biotech, I think Buffett and Berkshire Hathaway are missing a crucial component in their investment portfolio by predominantly passing up the medical-device sector. It’s true that Buffett and Berkshire do have some medical-device exposure thanks to ownership in shares of Johnson & Johnson , which purchased Synthes last year for nearly $20 billion. Synthes has a large spinal implant operation, which will give J&J plenty of fast-growing emerging market exposure and will probably put big smiles on Berkshire shareholders’ faces. But overall, J&J is a diversified conglomerate with only partial exposure to medical devices.
Instead, I propose we once again focus on Buffett’s key investable points — sustainability, growth, and income — to deliver the best possible medical-device company for Buffett’s and Berkshire’s portfolio.
Sustainability
When talking about sustainability, I’m hitting on Buffett’s penchant for seeking out well-established product lines that can essentially run themselves. Buffett’s set-it-and-forget-it investing philosophy requires that cash flow and profits remain relatively consistent. In this category, I’d say there’s only one pure-play example and two other companies that somewhat fit the bill.
The pure play, as I see
From: http://www.dailyfinance.com/2013/04/14/the-1-medical-device-company-warren-buffett-should/
