Although excellent medical care is always in high demand, the healthcare sector continuously evolves. Companies aren't automatically worth investing in just because they provide essential medical services. Only those that can keep up with the changing nature of the industry can hope to deliver excellent returns over the long run.
There are many such stocks on the market. Let's consider two that specialize in developing medical devices: DexCom (DXCM -0.41%) and Intuitive Surgical (ISRG -0.73%). These healthcare leaders are both well-positioned to deliver outsized returns in the next decade. Let's see why.
1. DexCom
DexCom has encountered some issues lately. The company's results in the second and third quarters were not strong. Unimpressive revenue growth, partly due to more consumers taking advantage of rebates than projected, harmed its performance.
However, DexCom still has attractive prospects. Its continuous glucose monitoring (CGM) systems are much more convenient for diabetes patients than manual blood glucose meters. Yet worldwide penetration of CGM was as low as 1% at the beginning of the year.
With DexCom actively seeking to enter new territories to expand its addressable market, the company has a vast runway for growth. Also, it recently expanded its market in the U.S. with an over-the-counter CGM option, Stelo, for people not using insulin. Patients with prediabetes or type 2 diabetes are eligible for Stelo.
Furthermore, thanks to DexCom's leadership in the CGM market and its ecosystem of diabetes patients, other companies have developed devices and apps compatible with DexCom's, such as insulin pumps and diabetes pens. The more people within DexCom's ecosystem, the more attractive it becomes to third-party device and app developers, which will attract even more patients. In other words, it's building a network effect, a powerful competitive advantage.
The company's financial results and stock performance have been on a tear over the past decade, thanks to the increased adoption of CGM technology:
There's far more room to run in the next decade, so DexCom can still deliver market-beating returns. It's not too late to invest in the stock.
2. Intuitive Surgical
Intuitive Surgical is the leader in the robotic-assisted surgery (RAS) market. The healthcare leader is best known for its da Vinci system, a device that helps physicians perform minimally invasive surgeries thanks to tiny, highly maneuverable instruments. In March, the U.S. Food and Drug Administration cleared the fifth generation of Intuitive's crown jewel, a testament to the company's continued emphasis on innovation.
This latest major regulatory win and strong financial results explain the company's excellent performance on the stock market this year. In the third quarter, revenue increased by 17% year over year to about $2.04 billion. Intuitive's installed base of da Vinci systems increased 15% year over year to 9,539, while the number of procedures performed with the device was up 18% compared to the year-ago period.
The installed base should continue growing while most existing clients stay put. Da Vinci systems aren't cheap, and training medical staff to use them takes time and more money, so the company benefits from high switching costs.
There's also considerable room to grow in the RAS market. Medtronic, a medical device giant looking to challenge Intuitive Surgical in this niche, noted that less than 5% of RAS surgeries that could be performed as such currently are (or were as of last year). That means plenty of white space remains in the field. Despite potential competition from Medtronic and Johnson & Johnson, Intuitive Surgical has a lead. Medtronic's competing device isn't cleared in the U.S. yet, nor is Johnson & Johnson's.
Even once they hit that milestone, Intuitive Surgical's large existing ecosystem and switching costs should allow it to remain ahead. As it did in the past decade, the company is still well-positioned to handsomely reward investors.
