Medtech 101: An overview of the medical device industry

Category: [Finance & Investing]


9min read

In this post, I will be doing a 101 dissection of the medical device industry. It’s a somewhat not-so-popular industry from the perspective of retail investing, but I have had some prior experience in this space, so it’s a tad easier for me to conduct some levels of analysis on companies in this space.

I will work through the following pointers in this piece, and hopefully at the end of it, allow the reader to have some level of appreciation for the industry as a whole.

Unless otherwise stated, all facts and information are obtained from my desktop research from BMI Research and Fitch Solutions.

Introduction to the medical device industry

Medical devices refer to a variety of mostly hardware instruments used in the diagnosis, treatment or prevention of a multitude of diseases. These instruments range from surgical gloves and masks, to advanced devices like drug-eluting stents (DES). Technologically simple products are competed in the market via price and volume, just like any other household or everyday products.

Boston Scientific Synery Drug Eluting Stent system. Source

What we are more interested in is the opposite end of this spectrum. Products like DES or other implantable medical devices (IMD) are technologically advanced and provide differentiated ways in treating complex diseases like heart arrhythmia and chronic arthritis. They are costly devices and are rarely paid for by individual patients – that is, their usage is co-paid or reimbursed by insurers or government healthcare schemes.

By definition, a medical device is different from a drug in that the successful use of the device is not dependent on the absorption or metabolism of the device. In this sense, a wheelchair is a medical device in the same way as a pacemaker.

The industry at a glance

Following table illustrates the size of the medical device industry (Source: Fitch Solutions, Global Medical Devices Report Q2 2019).

  2018 2019 forecast 2020 forecast 2021 forecast
Total sales USDmn 387,393.61 408,173.28 434,477.48 461,548.71
Totals sales %y/y 7.6 5.4 6.4 6.2
Total sales 5-yr CAGR 5.9 6.0 5.8 5.7
Totals sales per capita USD 61.6 64.3 67.9 71.6

Following is an infographic published by Technavio.

Technavio Global Medical Devices Report 2018-2022. Source

According to both the Fitch Solutions Global Medical Devices Report Q2 2019 as well as the Technavio Global Medical Devices Report 2018 -2022, the industry is forecasted to grow at a CAGR of about 5% or more, up to a forecasted market size of 460 billion by 2021.

The US Market

The US is both a dominant player and consumer in the medical device industry. On top of having the world’s highest health spending as percentage GDP and per capita, the US medical device market accounts for over 40% of the global market and has the world’s highest per capita medical device expenditure. The US is also home to many of the world’s largest medical device companies. The following table illustrates the top 12 players in the industry, which is dominated by the Americans. Most of these companies have a presence in California, Massachusetts, and Minnesota (the so-called “Medical Alley”) (Source: Medical Product Outsourcing 2018 Top 30 Global Medical Device Companies).

Rank Company Country Medical device revenue USDbn Market cap USDbn Price-to-Sales Ticker symbol
1 Medtronic US 29.7 125 4.21 MDT
2 Johnson & Johnson US 26.6 369* -* JNJ
3 GE Healthcare US 19.1 82.4 4.31 GE**
4 Royal Philips The Netherlands 16.3 37.5 2.30 PHIA
5 Siemens Healthineers Germany 16.3 40.4 2.48 SHL
6 Abbott Laboratories US 16.2 136 8.40 ABT
7 Cardinal Health US 13.5 13.7 1.01 CAH
8 Stryker US 12.4 69.1 5.57 SYK
9 Becton Dickinson US 12.1 63.4 5.24 BDX
10 Baxter US 10.6 38.4 3.62 BAX
11 Boston Scientific US 9.0 53.5 5.94 BSX
12 Essilor France 9.0 52.0 5.78 EL

* Johnson & Johnson’s businesses extend well beyond that of medical devices.

** GE Healthcare remains to be a healthcare unit within GE. While GE has filed for IPO to spin off GE Healthcare during December 2018, a 2019 IPO “looks unlikely after Danaher deal”.

The medical devices themselves

Classification of devices

In the US, the primary regulatory body that governs the entire medical device industry is the Food and Drug Administration, or FDA. By FDA standards, medical devices are classified into three classes, namely Class I, II and III. A device falls into one of these classes by virtue of their risk level to patient, Class III being the riskiest. The following table illustrates examples of these classes. Most if not all major countries follow similar standards, e.g. Class I to IV in Japan, Class A to D in Singapore.

  Level of risk Examples
Class I Low Surgical gloves, scalpers, wheelchairs
Class II Moderate Powered wheelchairs, infusion pumps, surgical drapes
Class III High Heart valves, silicone breast implants, stents and balloons

Segmentation by device type and diseases

Medical device companies typically tackle conditions in the following areas of specialty, like this example from Medtronic, with example conditions in each of them. Going into each specialty would be too much here.

  Example condition Device/therapy
Airway and lungs Pulmonary valve disease Transcatheter pulmonary valve (TPV) Therapy
Brain Epilepsy  Deep brain simulation
Diabetes Type 2 diabetes Continuous glucose monitoring (CGM)
Digestive and gastrointestinal Crohn’s Disease Disease visualization
Ear, Nose, Throat (ENT) Thyriod conditions Minimally invasive video-assisted thyroidectomy
Heart and Vascular Bradycardia, Tachycardia Pacemakers
Pain Management Chronic pain Spinal cord stimulation
Spine and Orthopedic Cervical herniated discs Cervical disc replacement
Urinary Overactive bladder Bladder control therapy

Key features of the industry

Being a retail investor in the medical device industry

Short of being an entrepreneur, a private equity, a venture capital or even a medical researcher, investing in the medical device industry would mean investing in stocks or investing in index ETFs. Suppose due diligence is done and fundamental analysis validates that a company is suitably priced in the market. It would be reasonable then to approach stock picking in this industry based on events such as the following:

Being aware of who’s who in specific areas is critical in assessing changes in the competitive landscape. For example, Boston Scientific continues to dominate in the left atrial appendage closure (LAAC) market with Watchman, while Johnson & Johnson has fallen from grace in the DES market, giving up space to Abbott Labs, Boston Scientific, and Medtronic.

Alternatively, the best bet on the space as a lay retail investor is probably the iShares US Medical Devices ETF (IHI), listed on NYSE. IHI tracks the Dow Jones U.S. Select Medical Equipment Index, with its current top holdings including Abbott Labs, Medtronic, and Strkyer. At an expense ratio of 43 basis points, it’s a fairly reasonable ETF to hold on to for broad medical device exposure.

And that’s all for this 101! Hope you have gained a little something from it. Thank you for reading :)