The biotechnology industry was a substantial outperformer between early 2011 and the middle of 2015, but since then has been a significant underperformer. Exhibit 1 shows a 10-year chart of the relative strength of the small cap-heavy S&P biotech ETF (XBI) relative to the Russell 2000 Growth Index.

Exhibit 1: Relative strength of the S&P Biotech ETF (XBI) relative to the Russell 2000 Growth Index

Source: FactSet, Driehaus Capital Management

We’ve suggested many reasons for biotech’s outperformance over the years, including a positive regulatory environment, a positive pricing environment, and R&D engines that generated a generous amount of positive news. If we distill these positive tailwinds into one factor, it would be revenue growth. In Exhibit 2, we’ve plotted the biotech industry’s revenue and revenue growth going back to 2011. The industry’s growth began accelerating in 2011 and, on an annual basis, topped out in 2014. It has since continued to decelerate. The XBI’s underperformance during that period of revenue growth deceleration likely isn’t a coincidence.

Exhibit 2: Biotech industry revenue and revenue growth

Source: FactSet, Driehaus Capital Management

With biotech in the doldrums relative to years past, where in health care are there opportunities to find the same topline acceleration and, hopefully, the performance that we saw in biotech? In Exhibits 3-6, we provide charts of the other health care industries’ revenue and revenue growth, and there is one clear stand-out: medical technology.

Exhibit 3: Services to the health industry revenue and revenue growth*

*Includes health care IT, pharmacy benefit managers, care outsourcers, contract research organizations Source: FactSet, Driehaus Capital Management

Exhibit 4: Hospital & nursing management revenue and revenue growth

Source: FactSet, Driehaus Capital Management

Exhibit 5: Managed care revenue and revenue growth

Source: FactSet, Driehaus Capital Management

Exhibit 6: Medical technology industry revenue and revenue growth

Source: FactSet, Driehaus Capital Management

We are invested in many micro and small cap companies with new product cycles in the medical device industry. Outside of our market cap range, the large cap device companies have some significant new product cycles as well. These new product cycles, alongside several additional factors such as cyclical tailwinds, recent weakening of the US dollar, the medtech tax holiday, and subsiding pricing pressure, are likely key to the accelerating topline of the medical device industry.

The medical device industry is the single industry within health care that is seeing accelerating growth. This benefit should cause multiple expansion given that health care investors are likely to shift capital to the industries experiencing improving growth. With the many attractive, new-product cycles underway and the limited sources for strong, sustainable growth in health care, we believe the medical device industry should outperform other industries within this sector.