Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Luv Bhagria [Luv-Bhagria@uiowa.edu]

Medical Equipment and Devices February 8, 2017

Healthcare Sector Industry Rating Market Weight

Investment Thesis Key Industry Statistics We recommend a market weight for the Medical Equipment and Devices industry. A favorable regulation environment, coupled with an increase in healthcare spending will have an immediate positive impact on the industry. Moreover, the increasing focus on innovation and R&D, as well as potential growth opportunities in emerging markets, will serve as driving forces over a longer term. Drivers of Thesis Innovation: The healthcare sector is just entering a new innovation cycle.

Leading firms continue to invest in R&D to drive innovation and growth, in order to garner pricing power.

Favorable demographics: An increasingly aging population worldwide will further boost the demand for pacemakers, diagnostic equipment, monitoring devices and other medical equipment, which will drive revenues and earnings over a longer term.

Favorable regulations and policies: With the republican-led Congress and new President in power, speculation for favorable legislation and regulations, including repeal of medical device tax suspension, will be a huge driving force for Medical device firms.

Increasing healthcare spending: US Government healthcare spending per capita is expected to continuously increase over the next 5 years, at an

annualized rate of 3.34% to reach $4.1 trillion by 2022.1

Growth opportunity in developing markets: Increasing demand for healthcare equipment and services in emerging markets, including Asia, Middle-east and Latin America to provide overseas opportunities.

Risks to Thesis

Stringent guidelines by FDA and potential new regulatory constraints globally with respect to sales of medical equipment could hurt the margins.

Delay and uncertainty in implementing the new federal regulations might keep the investors away from investing in the industry.

Cybersecurity issues in digital medical devices pose a huge threat of security breaches and malware infections to customers and providers

Market Cap (top 6) (in $billions)

Medtronic Plc. $104.32 Abbott Laboratories Danaher Corporation Stryker Corporation Becton, Dickinson & Co. Boston Scientific Corp. Intuitive Surgical Inc. Baxter International

$73.25 $57.38 $45.81 $37.96 $34.23 $28.59 $28.13

Peer Company Statistics (avg.) (>$10 B MKT CAP)

Beta 0.875 ROA 6.88% ROE Operating Margin (mrq) Net Profit Margin (mrq) P/E (ttm) P/E (forward) PEG Ratio (5 yr. exp.) Price/Sales (ttm) Price/Book (mrq) EV/Sales EV/EBITDA

16.62% 20.47% 15.32%

37.43 20.19

2.02 4.54 4.40 4.84

17.40

12 Month Performance Industry Description

The Medical Equipment and Devices industry in the Healthcare sector includes companies that develop, manufacture and provide medical devices and products including diagnostic equipment, cardiovascular and orthopedic devices, surgical equipment, and other conventional as well as specialized medical products. Innovation, demographic, legislation and regulations are some of the industry’s major driving forces.

37.4

16.6 15.3

47.7

19.416.5

0

50

P/E ROE (%) Net Profit Margin(%)Source: Factset, Yahoo Finance

Peer Companies Sector

-10%

0%

10%

20%

30%

40%

F M A M J J A S O N D J

Source: Yahoo Finance

XHE S&P 500

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EXECUTIVE SUMMARY

The recommendation to market weight the Medical Equipment and Devices industry within the Healthcare sector is driven by number of factors, such as increasing innovation, favorable demographics, increasing healthcare spending and implementation of new healthcare regulations.

Innovation drives the topline growth and creates a solid foundation for sustainable long-term growth in the healthcare sector. Acceleration in scientific advancements, greater understanding of human body and introduction of new innovations, such as robotic surgeries, telemedicine and IoT (Internet of Things) devices can be translated as a start of new innovation cycle for the industry. We expect this industry to produce new technologies and products over the next few years, that will change the face of healthcare sector.

Moreover, the demographics forecast strongly favor the healthcare sector. Growing middle-class in emerging markets are demanding more state-of-the-art therapies. In the developed world, an aging population will drive growth, as older people are more prone to chronic diseases, and spend way more on orthopedic and surgical devices. According to US Census Bureau, the number of adults aged 65 or more is estimated to increase at an average annual rate of 3.3% from 45.8 million in 2016 to 55.62 million by 2022.2 Moreover, they estimate people aged 65 and more to represent around 12% of the total

population in 2030, up from 8.5% in 2015.3

Another important aspect to consider is the increasing healthcare spending worldwide, which is anticipated to

increase to $18.28 trillion by 2040, at a CAGR of 2.6%.4 According to Congressional Budget Office (CBO), the total health expenditure is estimated to increase from $3.36 trillion in 2016 to $3.41 trillion in 2017.1 Rising wealth and improving economic conditions of the middle-class in developing markets, especially Asia and Middle-East are the primary drivers. (See: Appendix 1,2 and 3)

The most significant factor that will determine the fate of the industry in the coming 12 months is the federal regulation changes for the healthcare sector. During the campaign for Presidential elections last year (2016), the ACA (Obamacare) and some major issues related to the healthcare sector, specially pricing, was a hot topic. Although, the medical devices industry received a huge

sigh of relief when the medical device excise tax was temporarily suspended for two years through 2017.5 The firms are hoping that the new administration will permanently repeal the tax regulation. While this is highly probable, uncertainty regarding the implementation of Health law replacement (replacement of ‘The Patient Protection and Affordable Care Act’) are keeping the firms and investors on the edge.6 Nonetheless, we believe that the overall tax regulation environment will favor this industry in the coming few years.

However, being a highly regulated industry, there are always operational and regulatory risks, such as longer product approval process and pricing pressures. Additionally, with new technological advancements, there is an increasing threat of malfunctioning of the devices, and cybersecurity risks for networked devices.

INDUSTRY DESCRIPTION

The Medical Equipment and devices industry consists of companies primarily engaged in manufacturing, development and distribution of medical, surgical, diagnostic and dental equipment. These medical devices include instruments, apparatus, machines, implant, in vitro reagent or other equipment used for diagnosis, cure, mitigation, treatment of prevention of disease.

Although, this industry is extremely diversified regarding the range of products, it can be classified into two broad categories: conventional products and high-technology products. Development and sales of any pharmaceutical drugs are not considered part of this industry.

Conventional products can range from basic equipment such as trays, surgical apparel, syringes, scalpels, catheters, anesthesia apparatus, imaging machines and blood transfusion equipment. These products are low-margin and high-volume devices generally sold on a

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contract basis to hospitals and physicians through bulk purchases.

High-tech products are more advanced devices with high margins, as they require premium pricing. These products require huge capital expenditure in terms of R&D funding. Companies in the medical equipment industry rely less on the patents and more on innovation, primarily due to the continuous development of next-generation devices and partially due to weakness of the equipment patents. As a result, most firms rely on sales of both the conventional, as well as high-tech products. Consequently, their profit margins are typically derived from the product mix they offer.

Hospitals, medical and dental services, also known as group purchasing organizations (GPOs), account for nearly two-thirds of purchases of the medical devices. This gives them a lot of bargaining power. Hospitals revenues are expected to increase at a CAGR of 3.3% to $1.2 trillion over the next 5 years.19 However, the industry is facing recruitment of skilled labor, which might result into increase in wages and incentives. Moreover, to mitigate the risks associated with medical devices, hospitals are looking to invest in IT security and risk management teams. Therefore, to offset the increase in costs, hospitals might want to bargain the costs of medical devices.

Over the last 12 months, the S&P Healthcare Equipment Select Industry Index outperformed both the S&P 500 and S&P composite 1500 Healthcare index by a huge margin, with an annual return of 25.36%.7

The medical equipment industry is majorly categorized into 7 segments, as indicated by the chart below. Nearly 3/4th of the industry revenues are from two major categories: Surgical instruments and Surgical Appliances.8

Surgical Instruments and Supplies

Surgical instruments include several basic surgical devices, tools and supplies used for specific actions while performing surgery or operation, such as syringes, catheters, scalpels, surgical clamps, trays and kits. It also includes medical diagnostic apparatuses, anesthesia apparatuses, and blood transfusion and IV equipment.8

This segment accounts for 43% of the total revenue and its revenue contribution has remained relatively stable over the last 5 years. This is primarily due to continuous stable demand for basic surgical supplies from hospitals.

Rise in aging population and larger life expectancies will translate to increase in the number of surgeries and diagnosis, as older people are more prone to chronic and cardiovascular diseases. Elective surgeries are getting increasingly popular among this demographic, which might further boost up industry-wide revenues. Additionally, technological innovation and improved materials will be the other primary drivers in this segment. Shortcomings in the drug therapies will result in increasing demand for surgeries.

Global surgical equipment market is estimated to reach $14.73 billion by 2022, growing at a CAGR of 7.1%, with fastest growth coming from electrosurgical devices.20 Electrosurgical devices (or Radiofrequency devices) are used in surgery to cut/remove tissues or to control bleeding via electrical current.

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Medtronic (after the acquisition of Covidien) and Ethicon Inc. (subsidiary of Johnson & Johnson) are the dominant leaders in this segment.

Surgical Appliances

The Surgical Appliances segment collectively account for a 41.3% of the total industry revenue. However, this segment can be further categorized into orthopedic, therapeutic and prosthetic products, which accounting for majority of the revenues in this segment (34.9%).8 Other products in this category are surgical equipment and clothing (sutures, surgical gloves, respirators, wheelchairs, stents and other related equipment), and specialized hospital furniture, accounting for 4.5% and 1.9% of the total revenue respectively.

The three major sub-segments in this industry are:

Orthopedic Instruments

The orthopedic instruments are one of the largest segment in the medical equipment and device industry. Orthopedic instruments are used for treatment of conditions involving the musculoskeletal system, which is responsible for the human’s ability to move using the muscular and skeletal systems.

According to S&P Capital IQ industry report, the global orthopedic device market is estimated to reach $42 billion by 2020 at a CAGR of 3.2%.9

Demand in this sub-segment is primarily driven by old-age people who need spine surgery, joint-replacement surgeries and other musculoskeletal surgeries, and increasing percentage of obese population.

The chart below shows the market share of orthopedic sales by firm, as of 2015:

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Furthermore, according to S&P Capital IQ, the global spinal implant market is projected to increase at a CAGR of 6% over the next 4 years. While the spinal implant market is likely to grow to $11 billion by 2020.9

The combined market-share of the top 8 companies by 2020 is estimated to be over 85% in the orthopedics equipment sub-industry, with Zimmer Biomet, Stryker Corporation and Medtronic plc. expected to capture most of the growth.9

Diagnostic Apparatus

Diagnostic equipment includes medical imaging machines, which are used to aid in proper diagnosis. This sub-segment includes devices, such as Ultrasound and MRI machines, PET (Positron Emission Tomography) and CT scanners, X-ray machines, stethoscopes and electrocardiographs among others. This segment includes equipment ranging from low to high price ranges.

Rising healthcare standards for better quality of life in developing markets is the key driver for this sub-segment. Since most of the middle-class population in these markets are looking to spend less on surgeries and long-term treatments, they opt for preventive diagnosis.

According to EvaluateMedTech report (2015), the global market for diagnostic imaging is projected to cross $40 billion by 2020 at a CAGR of 2.3%.9 Asia-pacific region is expected to witness highest growth in terms of sales. Rising demand for advanced diagnostic techniques and increasing need for early stage diagnosis are few factors that might drive the diagnostic imaging equipment market in this area.

Key players in this segment include: Hologic Inc, GE Healthcare, Hitachi Medical Corporation, Philips Healthcare, Siemens Healthcare and Toshiba Medical Systems.

Cardiovascular Devices

Cardiovascular devices are used in the diagnosis and treatment of heart-related disorders. Heart diseases remain the leading cause of death in the US, with about 610,000 Americans dying from heart diseases every year.10

Due to aging population and demand for advanced medical devices from emerging markets, the sub-segment is projected to grow at a CAGR of 4.4% to reach $54.2 billion in 2020.9

It includes products, such as pacemakers, cardiac resynchronization therapy devices (CRT) and implantable cardioverter defibrillators (ICDs). Technologically advanced devices, such as CRT-defibrillators (CRT-Ds), a combination of pacemaker and ICD, are in much demand specially among people suffering from ventricular tachyarrhythmia, which was previously treatable only with expensive drugs.

Firms in this industry have a wide variety of products, with a diverse product mix making them a lucrative investment opportunity, especially over the next decade. Market leaders in this industry are Medtronic Plc, Abbott Laboratories and Danaher Corporation.

RECENT DEVELOPMENTS

Changes in Regulations

The Patient Protection and Affordable Care Act (PPACA) began in 2010, and in the beginning of 2013, an excise tax of 2.3% was imposed on domestic sales of all medical devices.5 This tax caught a lot of controversy from medical device firms as the additional costs hurt their margins. As a result, many workers were laid-off, which restricted innovation and growth for the industry for a couple of years. It was a difficult period for smaller device firms that could not afford the high taxes and high R&D costs. This made most of these smaller firms lucrative for acquisition by larger firms, less affected by the regulation. As a result, 2014-15 witnessed two big acquisitions in the Healthcare Equipment industry; Zimmer acquiring Biomet,11 and

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Medtronic acquiring Covidien.12 (See Mergers and Acquisitions)

However, the tax was criticized for raising less money than expected. As a result, in December 2015, the then President of the US, Barack Obama, passed a law that included provisions to suspend the sales tax for 2 years (till December 2017).5 This came as a huge relief for the medical device firms, as the leading firms witnessed a huge boost in their margins. Not only will this encourage the firms to hire more people, but they can also spend more on innovation and R&D. They are likely to reap benefits in 2017 as well.

Furthermore, the industry might enjoy this benefit for a longer term, with the Republican administration in power. One of the primary agenda of the new administration is to repeal the Affordable Care Act, and reduce the taxes.

The only risk for the healthcare companies is the delay and uncertainty regarding the implementation of the new healthcare regulation. According to the recent comments by the new administration, the repealing of ACA will take longer than expected; probably in 2018. This might keep the investors on the edge. Nonetheless, the suspension of the medical device tax will be more profitable to smaller medical device firms in the industry, eventually benefitting their bottom line performance. In that case, most of the low-cap and mid-cap firms will be more lucrative for investments.

Transparent FDA Guidelines

In December 2016, U.S. Food and Drug Administration’s (FDA) Center for Devices and Radiological Health (CDRH) announced its priority list for medical device guidance

documents for the fiscal year 2017.13 These documents provide transparency and insights to medical equipment and device industry regarding what the FDA is concerned about. Getting a clearer idea about the requirements will not only aid the companies in promoting innovation, but also protect them from stringent consequences of non-approval of any product.

However, the FDA is yet to release final statements on 9 out of 12 final selected A-list guidance topics. Moreover, FDA has posted final recommendations for Medical Device User Fee Amendments 2017 (MDUFA IV).14 Stricter guidelines might hamper the current progress of some firms seeking device approvals in 2017. A product non-

approval for any small size firm nullifies the effort and costs put by the company into the product. Not only does it negatively impact the bottom-line performance, the stock price also generally faces a hit.

Physician-Hospital Consolidation

Over the last couple of years, the Medicare program has encouraged physicians to join forces with hospitals to improve healthcare efficiency. However, this integration gives the consolidated market stronger power to dictate prices.

This trend is negatively affecting the medical devices industry. Individual physicians have more freedom to purchase medical equipment than when they are a part of a hospital. As hospital networks gain higher pricing power, the order size increases and customer base decreases for medical device firms, further diminishing their margins.

With changing regulation scenario and changing employment dynamics, the basic struggle for the firms in this industry will be to safeguard their margins. Only companies with consistent margins and greater operational efficiency will gain a larger share of the pie.

INDUSTRY TRENDS

Mergers & Acquisitions

Mergers and acquisitions activity has increased tremendously in the healthcare sector over the last 5 years, both in number and size. (See Appendix 4 and 5)

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With tepid economic growth, the healthcare equipment and device firms are struggling to post significant organic growth, and hence, are looking at acquisition as a strategy to drive growth and to gain market share. The larger firms are looking to diversify their product mix by acquiring companies with innovative products in booming segments, instead of developing a new in-house segment from the scratch. Furthermore, it provides a great platform for firms to tap into lucrative markets with strong potential, such as Asia, Latin America and Middle-East.

The chart below shows the market size and annual growth rate of the Medical Device market in all the operational markets.15

From 2012 to 2015, the global healthcare M&A growth has significantly outpaced growth in overall M&A deals.16

With expectations of rising interest rates, we might see a decline in both the size and number of M&A deals. An increase in the federal funds rate increases the cost of borrowing. Therefore, it impacts the value of M&A deals, especially if major portion of the deal is being financed through loans.

Here are some of the top Mergers and Acquisitions YTD (as of September 30, 2016)

Increasing R&D spending

Challenging and competitive market in the medical device industry has encouraged the firms to focus more on innovation rather than expanding applications of the existing technologies. The iteration Vs innovation issue has been a huge struggle for the companies in the past 4-5 years. However, with suspension of excise taxes and more favorable regulations, companies have more capital and freedom to weigh in on innovation.

Some of the key advancements have been in the robotic surgery segment, which is projected to grow at 20% over the next 7 years.9 Despite the potential growth prospects, patient safety, cost effectiveness and success ratio still remain a topic of concern.

Below is chart showing the R&D expenses as a percentage of sales for some of the leading firms in this industry.

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Growing demand for digital healthcare

Medical Equipment and Devices industry is at a cusp of innovation cycle and one of the key upcoming trend is the digital/virtual healthcare. Virtual reality is already a hot topic in the technology industry, but this innovation has fascinating possibilities in medical field as well.

Conducting operations through virtual reality, diagnosing chronic patients with this technology and even reducing stress among traumatic patients, are all possible now through this scientific technology.16 These VR devices are not only user-friendly, but also aid the physicians, doctors and surgeons to monitor complex procedures with ease. Increasing demand for VR devices will boost up the top-line performance of the industry.

However, there are few risks associated with this technological advancement. Firstly, there is an increased risk of cybersecurity breaches and malware, which puts the safety of private medical information into question.

Another factor is that many patients do not feel that virtual appointments and online visit justifies the same payment or insurance that they would be willing to pay for an in-person visit. This is a huge issue considering that physicians and other health providers are already struggling with decreased reimbursement rates.

Finally, there is a strong concern regarding the patient safety and effectiveness of some of the procedures done using VR technology.

MARKETS AND COMPETITION

Medical Equipment and Devices industry is a highly regulated and diversified industry. It is a fairly defensive industry in terms of revenue and share price volatility. It is less economically sensitive and generally has inelastic demand for its goods and products.

Power of Suppliers in the industry is low, due to large number of players in that space with high intense competition among themselves. Most of the surgical tools and equipment, such as catheters, syringes and scalpels, require relatively inexpensive raw materials. Moreover, forward integration for suppliers is tough in an already competitive environment. As a result, medical device firms have an upper hand and can sustain their operating margins effectively.

Power of Buyers is low to moderate. In terms of demand, this industry has fairly stable demand curve, with hospitals and other healthcare providers accounting for majority of the sales. With continuous demand for new and advanced medical devices and supplies by hospitals and physicians and large number of hospitals, the buyers have limited power to bargain. Due to continued innovation, most of the products are available through few players in the market. However, there is a potential risk from buyers due to physician-hospitals consolidation, which might lead to price sensitivity. In the Medical Device industry, it is vital that hospitals and physicians continue to be reimbursed appropriately, as they may be less likely to recommend procedures or devices that seem expensive.

Threat of new entrants in the industry is medium, primarily due to high initial capital requirements for research and development, as well as heavy regulations. Patent protection further limits new competition in the industry. Thus, a new company generally enters the industry through a new innovative product. Most of the firms in the industry invest heavily on their R&D, and still faces declining returns on those investments, as the markets for several products saturate quickly. As a result, requirement for large economies of scale to sustain margins, as well as fast rate of technological changes pose huge challenge for new competitors.

Due to continuous innovation and improvements in technology, there is significant threat of substitutes. For instance, new surgical procedure or a competitive drug for the treatment can minimize the demand for a specific device. Thus, the firms not only need to stay on top of their competitors within the industry but stay aware of advancements within the whole healthcare ecosystem. However, an improved substitute generally comes at higher cost.

Most of the larger companies in the industry have a diverse portfolio and do not entirely operate in the medical devices category. Generally, medical devices account for only a portion of the sales. Market share of some of the major players in this industry are shown in the chart below:

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Peer Comparisons

The table below shows peer comparisons for some leading industry firms:

P/E RATIO:

The industry average for P/E ratio (both TTM and forward) is higher than the top 5 larger players since this industry has large number of smaller businesses with large P/E ratios, driving up the industry average. On the other hand, the P/E ratio for the medical device industry is lower than that of the healthcare sector. This is primarily due to the fact that healthcare sector is dominated by biotechnology firms that have high P/E ratios currently and are overvalued. Most of the biotech firms saw tremendous increase in their stock price in 2016 during the presidential elections. Some of the growing medical device firms also witnessed increase in the stock price during the same period. However, firms such as Medtronic Plc (MDT),

Abbott Laboratories (ABT), Hologic Inc, (HOLX) and Stryker Corp (SYK) have P/E ratios below the industry average, and are well positioned in the industry to grow in the coming years.

MARGINS:

The margins for this industry as a whole are lower than the sector average, primarily due to low margin conventional equipment segment, which include surgical tools and equipment. On the other hand, other industries in healthcare sector include pharmaceutical and biotechnology firms with high premium drugs. Over the past 3-4 years, operating and net profit margins of the leading medical device firms, such as Medtronic, Hologic and Abbott Laboratories have been fluctuating due to the acquisition activities. In terms of profitability, Medtronic, Edward Lifesciences and Stryker Corp are well positioned in the industry, due to stable and diverse product mix. Margins in this industry depend on the company’s expenditure on R&D and volume sales of their premium products.

R&D AS PERCENTAGE OF SALES

Driven by innovation, as well as technological advancements/improvements, most of the firms in this industry spend heavily on their research and development. Thus, R&D as a % of sales is a critical metric in determining the position of a firm within the industry. Most of the stable and well positioned firms in the industry have fairly strong R&D as a % of sales. Smaller new firms have relatively higher R&D as % of sales to drive innovation.

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SALES BY GEOGRAPHY

With increasing demand for quality medical care facilities in other developed countries (except US) and emerging markets, most of the leading medical device firms have started looking for international expansion options. The dominant players in the industry have widespread reach in emerging markets, considering them as growth opportunities.

ECONOMIC OUTLOOK

Increasing global population

World population is expected to increase to 8.5 billion by 2030 from the current figures of 7.3 billion, reflecting a CAGR of 1%. However, the interesting fact is that Africa will account for more than 50% of the population growth over the next 34 years.17 It is evident that since most of the growth will occur in developing nations, where healthcare facilities are still in its embryonic stage, there will be huge demand for quality healthcare facilities in the coming few years. Although, healthcare spending in these areas in not even close to that in United States, these markets act as new potential growth opportunities for healthcare firms.

Aging Population and Life Expectancy

Among the increasing global population, one of the fastest growing demographic is people aged 65+. Not only are they estimated to increase in number, but are also projected to increase in proportion. In most of the developed nations, older people demand greater medical

attention and more healthcare services.3 According to US Census Bureau, the number of adults aged 65 or more is estimated to increase at an average annual rate of 3.3% from 45.8 million in 2016 to 55.62 million by 2022.21 Moreover, they estimate people aged 65 and more to represent around 12% of the total population in 2030, up from 8.5% in 2015.22

Additionally, technological advancements in the healthcare sector over the past few decades resulted in increase in average life expectancy rates worldwide. Both the factors translate to increase in number of people that would require access to healthcare.

Increasing global GDP

According to IMF, economic activity is estimated to gain momentum in 2017, after a fairly sluggish growth in 2016. Advanced economies are expected to grow by 1.90% in 2017 and 2.00% in 2018.18 However, the key driving factor will be the economic growth in emerging markets and developing economies (EMDE), which is estimated to be roughly 4.5% in 2017.

Much of the economic outlook depends on the new US administration and its policies with foreign nations. On the other hand, fluctuating oil prices will have major impact on capital markets.

Unemployment Data

According to Bureau of Labor Statistics, the unemployment rate in US has declined steadily over the last 5 years and currently sit at 4.8%, as of January 2017.23

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Employment increased in retail trade, construction and financial activities. Most importantly, employment in the healthcare sector increased in January 2017 by 18,000, following a rise of 41,000 in December.23 Statista research estimates the unemployment rate to further decline in 2017, indicating a steady rise in labor costs. However, the estimate forecasts the rate to increase gradually to 5% by the end of 2020.

CATALYSTS FOR GROWTH

The primary growth catalysts specific to Healthcare Equipment and devices industry is innovation and development of new state-of-the-art technologies, as well as improvements in the existing products.

In terms of expansion areas, emerging markets and developing nations offer large growth opportunities for healthcare device firms. Increasing GDP, rising standards of living, more purchasing power per capita and increasing demand for better healthcare facilities will drive growth in these areas.

Finally, increasing public and private health expenditures, along with favorable regulations will be other key driving factors for healthcare equipment industry.

INVESTMENT POSITIVES

• Healthcare Equipment and Devices is a defensive industry and is economically insensitive most of the times, due to indispensable nature of the service it offers to people. In this period of uncertainty regarding the economic outlook, healthcare is one of the best bets in terms of investments.

• Strong financials (balance sheet) of the industry leaders, with solid returns over the last couple of years

• New administration in the US to repeal ACA act, which will favor the companies financially in the healthcare sector

INVESTMENT NEGATIVES

• Firms in this industry have operations outside the US, and unfavorable currency operations might adversely affect the bottom-line performance of some companies.

• Recent comments by some US government officials indicate delay and uncertainty in implementing new healthcare legislations.

VALUATION

While analyzing and evaluating companies in this industry, one has to keep in mind that the company has a wide and diverse portfolio of products. R&D expenses as a percentage of sales is a good indicator, and should be compared with peer firms, as well as industry average. Additionally, firms that have operations internationally, especially in emerging markets offer a great investing opportunities. One such company in this industry is Stryker Corporation because of its low P/E ratio compared to the industry, higher ROE and high dividend yield.

KEYS TO MONITOR

1. FDA’s update on 510(k) review and MDUFA IV for medical devices.

2. Regulations regarding the medical device excise tax and repeal of ACA

3. Mergers and Acquisitions, especially by the industry leaders

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4. Any new healthcare regulations by the Trump administration, especially for the medical devices firm

REFERENCES

1. IBIS World: Total health expenditure report (Business Environment Profiles)

2. IBIS World: Number of adults aged 65 and older 3. U.S. Census Bureau- “An Aging World: 2015” 4. Institute for Health Metrics and Evaluation: Global

spending on health is expected to increase to $18.28 trillion worldwide by 2040

5. IRS- Medical Device Excise Tax 6. The New York Times – Trump says Health Law

replacement may not be ready until next year 7. S&P Dow Jones Indices - S&P Healthcare Equipment

Select Industry Index (www.us.spindices.com) 8. IBIS World: US Medical Instrument & Supply

Manufacturing report 9. S&P Capital IQ- Health Care Equipment and Supplies

report 10. Centers for Disease Control and Prevention- Heart

Disease Fact Sheet 11. Bloomberg- Zimmer to buy Biomet for $13.4 billion

adding orthopedics (Apr 2014) 12. Medtronic Investor Relations - Medtronic completes

acquisition of Covidien (January 26, 2015) 13. U.S. FDA- CDRH Fiscal Year 2017 proposed guidance

development and focused retrospective review of final guidance

14. U.S FDA- Medical Device User Fee Amendment 2017 (MDUFA IV)

15. Liorancaite, Giedre “Medical Device Market in 2016” Euromonitor International. 2 Feb 2016.

16. Medical Futurist- 5 ways medical virtual reality is already changing healthcare

17. UN Department of Economic and Social Affairs- World Population forecasts

18. IMF- World Economic Outlook January 2017 19. IBIS World, Hospital Industry 20. Allied Market Research, Surgical Equipment Market,

November 2016 21. IBIS World: Number of adults aged 65 and older 22. U.S. Census Bureau- “An Aging World: 2015” 23. Bureau of Labor Statistics, Unemployment Data

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

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APPENDIX: 1

PER CAPITA HEALTHCARE SPENDING PER REGION

Source: The Lancet

APPENDIX: 2

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APPENDIX: 3

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APPENDIX: 4

APPENDIX: 5