October 30th, 2021

The Sub-Sector of Healthcare Every Retail Investor Should Consider

Dear Fellow Fed Up Investor,

On the outside, investing in healthcare sounds like a no-brainer. 

We all need healthcare services — at some point — and with the ageing of the baby boomer demographic and eventually even millennials, the largest demographic to date who are now pushing 40, this demand should only increase with time. 

The problem is, it’s tricky to know what to buy.

Biotech? Maybe

Biotech companies have been a starting point for many investors looking at the healthcare space, as they have the lure of incredible upside.  

The winners have been on a real run lately, in part due to COVID, which created massive opportunities for testing mechanisms and vaccines.  

Just look at Moderna, up over 1,500% from around $20 to over $300 per share in the last five years, with its breakthrough mRNA technology set to pave the way for further growth. 

 . . . But to be fair, we are slightly cherry-picking with Moderna. Ask any investor what they think of biotech opportunities and chances are you will hear mixed reviews. 

This is because finding promising companies in an increasingly crowded space is not easy, especially when it comes to small-caps. 

Even if you do find a company that seems promising, the clinical trial process can take a decade or more, during which time companies can burn through millions of dollars while their stock price languishes.

That’s enough to test the patience of even the hardiest investor.

On top of that, you have to deal with the ongoing consolidation in the sector, with multinationals stamping out competition. 

But that’s the point: biotech is a tough nut to crack. The pathway to profitability is often long, and consolidation is making it tougher for smaller players. But when you win in biotech, you win big. 

However, there is an alternative . . . 

And that alternative is medical devices.

Healthcare relies on a constant stream of products which complement medical procedures, offer less invasive alternative treatments, create long-term cost savings, and improve patient outcomes. 

These products, known as medical devices, cover a very wide range of health and medical products used in the treatment, diagnosis and prevention of disease or physical ailments. 

Basically, medical devices help improve health –  they also help nurses, doctors and surgeons do their jobs. 

But what exactly are they?

The list is very diverse, and includes simple products — from bandages, thermometres, and disposable gloves to more complex equipment like pacemakers, diganostic imaging equipment, synthetic skin, life support machines, patient management software — and much more. 

But while the definition is broad, there are some general advantages that come with investing in medical devices companies. 

First, unless health issues magically go away, the demand for medical devices will remain very strong. 

Second, the industry is backed by massive and growing public and private spending worldwide — and this will only increase. 

In 2019 the global medical device market was valued at a staggering $410 billion, with the US accounting for 43% as the world’s leading supplier. 

Of particular note, the industry has a low level of concentration, and this creates a supportive environment for small companies to specialize in developing niche technology.

The result is a lot of innovation, which attracts early-stage investment capital. 

Plus, the majority of medical devices companies are small and medium sized. The sector is also export-focused, drawing on the expertise of world-class research institutes, universities and hospitals.

The opportunity: so much choice

From an investment perspective, medical device companies can be cash cows. Their business model is generally quite simple: manufacture and sell products to facilities that need them – hospitals, doctor’s offices, private and public medical clinics – the list goes on. 

These products could be anything from syringes that are used in hospitals thousands of times a day, to complex surgical machinery. 

If the medical device has a diagnostic analysis service attached to it, such as a sample kit that needs to be sent for analysis, it can sometimes mean an additional revenue stream. Boom – now you’re talking. 

In fact, the medical device sector may be set for considerable growth. 

There’s a growing number of publicly traded small-cap companies that are working to advance their products, vying for space in lucrative international markets. 

The challenge: so much choice

There is no shortage of investment ideas when it comes to the medical device industry. 

It’s as diverse as they come, with a broad range of products and services from micro and mega-cap companies, targeting many different market segments. 

As a whole, the outlook is promising, with strong demand, low concentration and a significant presence of small and medium sized companies, which is always a good sign of market health. 

For investors looking at getting in, the best starting point is to narrow down the search to specific areas of expertise that you believe are set to grow in the coming decades. 

For example, we like devices that could help healthcare providers prevent diseases. Disease prevention has become a focus of public, private and government funded healthcare companies in recent years, as preventing the onset of disease vastly reduces the costs associated with treatment after-the-fact.

An example of this would be devices for the detection of early-stage cancers or Alzheimers disease, two of the most prevalent and costly ailments afflicting ageing populations worldwide today. 

Second, look for companies that are already in revenue, meaning they have already gained approval to sell their products in some parts of the world, even if not in the USA just yet. If you can find a company that has gained approval to sell its product in one part of the world and is in the final steps of its application for FDA approval, pay close attention. These kinds of stocks can go from small-cap to large-cap in the blink of an eye once they’re FDA approved. 

Another option of course is to play it safe and ride the industry as a whole through an ETF like the iShares U.S. Medical Devices ETF (NYSE: IHI). 

Bottom line – the medical devices industry is well worth looking into – we love the unlimited upside potential this sector holds and we’ll be doing our best to find you another pick that fits our criteria in the coming months. 

Dear Retail Investors Editorial Team

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