How to Invest in the Medical Device Industry

Technology is changing the way that we provide and receive healthcare. In fact, connected healthcare devices that can remotely monitor chronic conditions give patients more freedom from the doctors' office. Modern medical instruments make surgery less invasive, getting patients back on their feet faster. And many patients monitor their condition with a smartphone app these days.

And all of that is just the tip of the iceberg. The medical device industry is growing. In 2020 the industry sat at $432.23 billion globally, and over the next five years, it is anticipated to grow to over $700 billion. It's the perfect combination of rising demand thanks to the largest generation–baby boomers. They are reaching older ages and have more chronic health conditions along with new capabilities in technology that make new, less-invasive interventions possible.

What is a Medical Device?

Before you sit down and start looking at device technologies, let's talk about what the term medical device means. It refers to any instrument used to diagnose, treat, manage, or prevent disease or injury.

Some devices are used strictly in clinical or surgical settings by trained healthcare professionals. Some devices are implanted into patients and monitored remotely. And some devices are used directly by patients.

Examples of Medical Devices: (1) Bionic Hearing Aids, (2) Sharps Shields that Prevent Needlesticks, (3) Robotic Exoskeletons, (4) Brain-Computer Interface, (5) EDGe Surgical’s Electronic Depth Surgical Guide, (5) Magnetic Blood Purification, (6) Telemedicine Technologies, and (7) 3D Printing.

What to Know About MedTech Companies

A handful of big-name medical device manufacturers have the resources to fully develop market-ready devices, often competing with smaller companies that have fewer resources in the market. It's a complicated process. Before some innovative, higher-risk medical devices can go on the market, they may be put through several rounds of successful clinical trials to demonstrate that the technology works and is safe for its intended use. There are also strict regulatory approvals required from government entities that regulate the medical device industry.

With that being said, the share price of a MedTech company is directly impacted when successful clinical trial results are released, the device receives regulatory approval, or a patent is obtained.

Related: Medical Device Patents 101

Novel Products Offer Bigger Returns on Investment

There are two reasons to create a new medical device. Either you have come up with a way to use technology for a new purpose, or you are improving upon existing technology on the market. Between the two, new products tend to perform better. Without competition in the market, there is a lot of built-in demand driving premium prices. But at the same time, with something new, there is more risk.

Invest in Innovation

Suppose you are deciding whether or not to take a risk. In that case, it's a good idea to pay attention to the companies that are investing heavily in research and development, offering innovative ideas rather than simply their take on someone else's idea. If you focus on smaller MedTech companies, most are pretty open about their current projects, so it's not too hard to figure out how much they're putting into innovation.

But the larger companies tend to be tight-lipped about R&D projects. That doesn't mean they aren't investing in it; it just means they're not at liberty to discuss it. You should expect to see at least 10% of their revenue invested back into research and development. It should be a red flag that they aren't focused on the right priorities for a good investment if it's less.

These six questions can be useful when investigating whether or not to invest. If software or connectivity is involved, ensure the facility has the infrastructure to connect, use, monitor, and transmit information in a compliant manner.

Global Strategic Solutions consults on risk assessments in the medical device field. Learn more about our services today.

Life Cycle of a MedTech Company

Investing in the right MedTech company at the wrong time can be just as risky as investing in the wrong company altogether. Startups are brand new, and like any business, they face years of losses and potential cash flow problems. But in MedTech, the problem is compounded by the high costs associated with clinical trials, regulatory compliance, and patents. The end goal with a MedTech startup is to achieve FDA approval, which adds significant value. Investors should look for companies that can produce positive clinical trial results.

Related: 3 Medical Device Startups to Look Out For

Once a device has approval, the MedTech company focuses on promoting the device. This means that they'll need more capital for marketing and sales. Investors should look for companies that demonstrate strong sales, although profitability isn't common yet. These companies will put everything they have into growth, focusing on pushing their device. Once they pass the threshold of profitability, the focus shifts again.

Investors should pay close attention to acquisitions. Young MedTech companies that have achieved profitability then begin to capitalize on that profitability by expanding their reach. The most common way to do this is to acquire smaller, similar companies. If these deals support authentic growth, they're positive. However, companies that overpay for acquisitions and then close them down to snuff out their competition are another red flag for sustainable profitability.

Once a MedTech company reaches a sustainable size, the focus shifts to diversification, and growth occurs by expanding product lines and investing in additional research and development.

How to Get Started

Every new investment category requires a certain level of familiarization. Don't worry; you don't need to be a doctor or have a thorough understanding of medical terminology to gain a general understanding of how the medical device industry works.

1. Familiarize yourself with the medical device industry.

2. Read up on key trends that affect medical device stocks. A proper literature search strategy is essential in order to capture press releases, blog posts, and market dynamic publications.

3. Understand the risks associated with MedTech companies at different stages as well as those risks imposed by government regulation.

4. Choose your priorities when assessing a medical device stock (depends on the stage of the company).

5. Evaluate top-performing medical device stocks and exchange-traded funds (ETFs).

6. Use a broker to invest in one or more medical device stocks.

7. Watch the market and periodically re-evaluate your investment opportunities.

Related: What is the Difference Between Clinical Evaluation and Clinical Investigation

The Bottom Line on Investing in Medical Devices

Innovations in technology are revolutionizing the medical device industry. As a whole, healthcare is trending towards digital and remote. And any devices that make it possible to spend less time in the doctor's office, receiving treatments, or recovering from surgeries are going to get a lot of attention from providers and patients. The growth in the market makes MedTech an attractive investment opportunity. Still, there are big risks as with any technology investment, so it's essential to understand what you're investing in and make structured decisions.

Global Strategic Solutions is a risk management firm invested in ensuring safety in the medical field. Learn more about working with us today.

David R Rutledge, Pharm.D.

FCCP, FAHA

President & CEO

David.Rutledge@GlobalStrategicSolutions.com +1(630) 846-0350 cell