How to Invest in Medical Devices

How to invest in medical device stocks?

Before investing in medical device stocks, it helps to understand their goals. Medtech companies will often seek to show investors that their products are ready to enter the market and will be in demand right away — whether it be by serving a large demographic or by targeting a specific ailment in the population that has an unmet medical need.

Like firms pursuing drug approvals, medtech companies must conduct clinical trials to bring their products to market; they have to refine their technology and confirm efficacy and safety to get regulatory approvals.

Successfully completed clinical trials and product approvals are usually major catalysts for a company’s share price. A medical device stock can experience a large jump when announcing positive results from a recent trial or approval from a regulatory body such as Health Canada, the US Food and Drug Administration or an equivalent agency in Europe or Asia. On the other hand, poor results can have a negative impact.

Patentability also plays a big role in a medical device company’s value. Once a product has been patented, the company controls its every move and can choose to license it or make other deals to expand device reach.

The sector is dominated by a handful of big medical device manufacturers, such as Thermo Fisher Scientific (NYSE:TMO), Abbott Laboratories (NYSE:ABT), Stryker (NYSE:SYK) and Medtronic (NYSE:MDT). That means investors interested in large-cap companies will have no trouble finding what they’re looking for.

Investors will also find smaller-cap companies amid the heavyweights — it’s just a matter of risk tolerance. Some medical device companies in the micro-cap range are Theralase Technologies (TSXV:TLT,OTCQB:TLTFF), Izotropic (CSE:IZO,OTCQB:IZOZF), Aurora Spine (TSXV:ASG,OTCQB:ASAPF) and Fonar (NASDAQ:FONR).

How to invest in medical device ETFs?

For those who prefer to mitigate risk, exchange-traded funds (ETFs) are a safer way to put money into the market. With exposure to various companies, any potential decrease in one stock won’t significantly drive down overall ETF returns. ETFs hold assets such as stocks, commodities and bonds, and trade close to their net asset value.

Typically ETFs track an index. In the medical device arena, there are two indexes that can be followed: the S&P Health Care Equipment Select Industry Index (INDEXSP:SPSIHE) and the Dow Jones US Select Medical Equipment Index (INDEXDJX:DJSMDQ).

The largest ETF in the medical device sector is the iShares US Medical Device ETF (ARCA:IHI), which has a focus on US companies that manufacture and distribute medical devices. This passive ETF tracks the Dow Jones US Select Medical Equipment Index. There are 69 holdings in the ETF; the five biggest in its portfolio are Thermo Fisher Scientific, Abbott Laboratories, Medtronic, Intuitive Surgical (NYSE:ISRG) and Stryker (NYSE:SYK).

The other ETF for investor consideration is the SPDR S&P Health Care Equipment ETF (ARCA:XHE).

It tracks the S&P Health Care Equipment Select Industry Index, and out of its 80 holdings, the top companies are Shockwave Medical (NASDAQ:SWAV), FIGS (NYSE:FIGS), Heska (NASDAQ:HSKA), Omnicell (NASDAQ:OMCL) and Lantheus Holdings (NASDAQ:LNTH).

What is the outlook for the medical device market?

According to Precedence Research, the global medical device market is projected to grow at a compound annual growth rate (CAGR) of 5.5 percent between 2022 and 2030 to reach US$850 billion.

A report from BCC Research is even more optimistic, estimating that the medical technology industry will cross revenue of almost US$953.4 billion by 2027, growing at a CAGR of 7.1 from 2022 to 2027.

Driving that growth will be an increase in diseases, particularly cancer and diabetes, plus cardiovascular, neurological, orthopedic and respiratory diseases, which are on the rise due to an aging population.

Chronic diseases are also growing in prevalence. The United Nations has said that by the end of 2050, the ratio of deaths per year due to chronic diseases is expected to rise to around 86 percent of total deaths, representing a 90 percent increase since 2019.

In short, with the future growth of the market anticipated to be in the billions, there are many opportunities for investing in the medical device industry.