MAKO Surgical Corp. (MAKO), Johnson & Johnson (JNJ): The Market For This Company is Set to Explode

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After World War Two, The United States of America witnessed the largest population increase in its history. Birth rates reached 25 per 1000 people, while death rates hovered at 9.5 per 1000, resulting in what came to be known as the baby boomer generation. Born between 1946 and 1964, the age range of this generation is currently between 49 years and 67.

Johnson & Johnson (NYSE:JNJ)76 million strong, second only to millennials, and arguably the richest and most influential age group with control of three-quarters of the country’s wealth, the combined size and purchasing power of this generation makes it a very lucrative market for any company to tap into.

The oldest of this generation have already hit the retirement age in the United States, and the youngest ones are not that far behind. So what type of company and which type of product will benefit from this Great Retirement mega-trend?

Rewinding the clock

There is a paragraph in Kotler Keller Marketing Management which reads

With many baby boomers moving into their 60s and even the last and younger wave bearing down on 50; demand has exploded for products that turn back the hand of time. According to one survey nearly one in five baby boomers was actively resisting the aging process driven by the mantra “50 is the new 30.” … Boomers are less likely to see retirement as the beginning of the end and see it as a new chapter in their lives with new activities, careers, interests, and relationships.

So, according to the above, products and services that can “turn back the hand of time” are going to face increased demand in the coming years.

Joint Replacement is one such service. It is often said that no single procedure can impact the quality of life as much as a joint replacement.

Mark Figgie chief of the Surgical Arthritis Service at Hospital for Special Surgery in New York said

Osteoarthritis, which causes the cartilage in joints to wear away, is the usual culprit when knee pain has made walking painful. Even sleeping can be very uncomfortable—sometimes unbearably so—because a day’s worth of moving around has inflamed the joint. And being unable to enjoy the activities you once did—say, golf or cycling—also can be a quality-of-life factor

One boomer who underwent the surgery once said “The idea of getting old and not being able to function by yourself is terrifying — I’d go nuts.”

A numbers explosion

600,000 knee surgeries are conducted annually in the United States. That represents nearly a 161% increase from 2 decades ago. The average age for conducting knee surgery in the US is currently 66 years old, a drop from 68 a decade earlier. This means that the oldest of the baby boomers are currently hitting the average age where knee surgery is conducted.

Some experts predict that knee surgery procedures may increase to 3.5 million by the year 2030.  Total hip surgery is expected to increase to 570,000 in the same time frame from a current count of 200,000.

As people get older they are more likely to get this operation. A study showed that 4.9% of women and 4.1% of men aged 60 to 69 have had at least one knee replaced. The numbers jumped to 8.2% in women and 7.1% in men aged 70 to 79. The fact that a very large segment of the population is about to hit their 70s is a very strong tailwind for these operations.

The leading companies commonly associated with knee & hip replacement include Zimmer Holdings, Inc. (NYSE:ZMH), Johnson & Johnson (NYSE:JNJ), and Stryker Corporation (NYSE:SYK) .

Of the three companies mentioned above Zimmer Holdings, Inc. (NYSE:ZMH) is the most focused on joint replacement and it also happens to be the leader in both knee & hip implants with a whopping 26% market share. It generated $4.5 billion in sales last year with 70% of that coming from knee & hip implants. Other business segments include extremities, trauma, dental, spine, and surgical.

J&J is a giant healthcare conglomerate with exposure to everything from oncology to mouthwash. Its exposure to the knee and hip market is through its subsidiary Depuy Synthes which trails Zimmer Holdings, Inc. (NYSE:ZMH) in joint replacement. Knee & hip implants are a part of J&J’s Orthopedics segment which last year generated $7.8 billion, representing 34.3% and 11.6% of its Medical Devices and Diagnostic segment and its total corporate revenue, respectively.

Stryker Corporation (NYSE:SYK), a medical equipment manufacturer which generated $8.7 billion in revenue in 2012, has 3 business segments: Reconstructive, Medsurge, and NeuroTechnology & Spine, with each generating $3.8 billion, $3.3 billion and $1.6 billion, respectively, in 2012. Knee and hip implants, part of the reconstructive segment, accounted for 16% and 14% of total revenue, respectively.

Even though Zimmer Holdings, Inc. (NYSE:ZMH) is currently the market leader, it is currently not a fast growing company with revenue growth of only 0.44% and 0.54% in the last 2 years. J&J and Stryker Corporation (NYSE:SYK) offer traditional knee and hip implant as part of their overall healthcare portfolio. Their size and exposure to several business segments makes them a more conservative and more stable investment.

There is, however, a newer smaller and more focused contender that is armed with the latest in cutting edge technology which may be the best bet for capturing growth in this market.

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