Med-Tech stock may seem a mixed bag for a new investor. Its performance is great and one of the best in its sector, but the industry is perceived as quite complicated and one which requires deep knowledge of healthcare. But it’s certainly worth it if you take a closer look. Med-Tech boasts above-average returns. The 2016 returns in healthcare show that the sector is in very good shape. And that was the first year in which the expected indicators were underachieved after several consecutive years of impressive growth. Meaning we could likely be due to go another big leg higher in returns.
A strong majority (about 90%) of 3,000 companies which participate in 2017 Global Medical Device Industry Outlook saw sales increase in 2016. And it’s not only about major players with global reach. About one-third of the smaller stocks, the firms with fewer than 50 employees, reported sales increases of 15% or more. Read on to find out the tips that can help you make better investing decisions in this dynamic industry.
- Know the scope
Med-Tech and healthcare, in general, will grow as far as the economy grows. And even if the economy slows down, this is one of those sectors that resist the cooling particularly well. There’s also the emerging markets which are hungry for Western products. It’s an advantage but a burden too because Med-Tech is closely watched literally by the whole world. You shouldn’t consider prospective companies only in the context of the local market. Advanced products are evaluated globally and can be distributed worldwide just in the course of several years.
Example: Two Western companies that develop and manufacture sugar level monitoring devices were purchased last year by a big Chinese rival, Sinocare. Sinocare is a biosensor technology company based in China and listed by Forbes as one of Asia’s ‘200 Best Under a Billion’ companies. Sinocare also acquired PTS Diagnostics and Trividia Health for approximately $500 million combined.
- Catch the pioneers
When considering an investment, it’s better to watch for innovators, the startups that are close to a breakthrough. Due to the traditions of thorough testing before launching on the market, it is relatively easy to find them and follow the preparatory stages, while stocks are cheap. Once roughly in 10 years healthcare comes through with a big change, a breakthrough which can make huge profits for such pioneers.
Example: Canadian startup ChroMedX is in the final stage of refinement of its major product, the HemoPalm handheld blood analyzer. With this product the company aims to get into the next med-tech revolution: the big arrival of the point of care devices for medical testing. They will make tests available near every patient. The HemoPalm can be a harbinger of the first real wave of such an equipment, the one that is developed to be highly effective inside the workflow. It also can be very lucrative because ChroMedX have chosen a classic ‘razor and razor blades’ business model with the one-time cartridges which should be used with the handheld terminal the size of standard credit card reader.
- Watch the government
One of the considerable risks in this sector of the economy is the significant influence of the government. This applies to many aspects of the business including general regulations, subsidies or special taxes, market admissions and certification procedures. As a rule, big changes in the playbook are discussed in advance, but in some cases the life cycle of product development exceeds the political cycle. It is wise to ask which of the political promises are in the way of introducing a new technology or promoting a new product.
Example: The new U.S. administration is eager to cancel or to replace some Med-Tech regulations and to halt at least one specific tax, the 2.3% excise tax on medical devices. This doesn’t apply only to U.S.-based companies. It is going to lead to bigger investments into research and development. It can also accelerate the introduction of some products previously planned for later periods or the start of work on projects that were recognized as being too ambitious in the short term. This effect will be most noticeable in large companies with a wide range of products. Investors should pay close attention to the announcements of such stocks.
- Watch for disruptors, too
In the med-tech sector, a more thorough and slow approach to research and development is adopted. This isn’t surprising because a poorly made product can threaten the health of patients or even their lives, and lead to significant losses to its manufacturer. Some of the consumer electronics companies sometimes try to bite off med-tech pie. These attempts can be successes or failures, but they certainly need to be monitored. In recent years the small start-ups were able to win market share from companies that produced pulse rate monitoring wristbands.
Example: Manufacturers of equipment based on continuous glucose-monitoring technology can be at risk right now. The Apple CEO Tim Cook has been spotted with a device that tracks blood sugar level, which was connected to his Apple Watch. Rumors that the consumer electronics giant is developing such a technology has already influenced the market for some time. This led to uncertainty about the performance of the two major manufacturers of such devices: DexCom and Medtronic. While their equipment is more scalable and compatible with professional workflow, the impact from the arrival of a consumer tool that will be released under a famous brand and available in millions of devices throughout the year should not be underestimated.
- Financial health
While med-tech companies with a new promising product lines are a preferable stock, investors should watch for company risks. The use of debt can help a company grow and to invest in research and development. But too much debt can consume the cash generated from sales. In addition, there are specific sources of risk associated with more complex certification and production requirements. New products may not prove to be profitable enough, its certification may take much longer, and production may require more staff or additional resources.
Example: Promising Nevro stock, which worldwide sales grew 64% year over year and U.S. sales advanced 80%, collapsed recently after the med-tech company reported Q1 losses that were twice as much as predicted. It is also missed sales expectations. The company is the manufacturer of medical equipment to provide relief to chronic-pain sufferers. While such performance was expected for a company that’s on its way to really ramp up sales of its major pain control device, the missed targets are also evidence that Nevro can produce wider losses as it attempts to build its personnel.