Health Care
Disruption keeps the medical technology industry healthy
Najah Abouelafia
Capital Group Equity Analyst

For diabetics, blood testing is an element of daily life that they grudgingly learn to accept. The process is straightforward and life-saving but also widely despised. Patients must prick their skin several times a day to test the amount of sugar in their bloodstream. The procedure is unpleasant, leaves scars and carries the risk of infection.

But emerging medical advances may consign painful finger pricking to the history books. Continuous glucose monitoring (CGM) devices keep tabs on blood sugar levels by monitoring fluids just under the skin. Small CGM patches, replaced every week or two, wirelessly transmit information to an electronic display; some systems also issue alarms for dangerous blood sugar levels or automatically deliver medicine when necessary.

By sweeping aside the old paradigm, CGM has grown to a $3 billion market and is expected to continue growing by about 15% a year. About 35% of Type 1 patients use one of these devices, and the Type 2 population (both insulin- and noninsulin-dependent) can benefit from them as well.

Innovation is sweeping through much of the health care industry, with medical device technology, or medtech, as it’s called, a notable beneficiary. Clinical and technological advances are combining to bring about new products that improve patient outcomes. As with diabetes, some breakthroughs have the potential to recast existing treatments, while others target areas with few options.

Beyond making life easier for patients, the advances provide opportunities for companies that can lead the way technologically. Businesses that develop truly cutting-edge devices can carve out commanding and lucrative leads.

Established technology helps many people, but it can be hard to shield from competition.

Though sometimes overshadowed by more prominent areas of health care, medtech is responsible for devices that have improved the lives of generations of patients. In addition to diabetes kits, think of pacemakers for the heart and joint replacements for knees and hips. Overall, demand for these products is expected to increase as the global population continues to age. That should provide manufacturers with significant revenue and a solid foundation from which to build.

But the upside may be capped. Some devices have limited pricing power as patents have expired and competitors have zeroed in on their franchises. This is most challenging for products that are relatively easy to make or have little room for technological upgrades.

That’s where disruptive technology comes into play. When a new device redefines a treatment, it’s essentially reopening an existing market, and that can provide both explosive growth and a few years’ cushion from the inevitable price pressures as competitors scramble to catch up.

Of course, developing innovative products is easier said than done, and it’s essential to differentiate the most promising companies from rivals with less robust research capabilities and product pipelines. And new research doesn’t automatically translate to successful products; testing can turn what seemed to be a slam-dunk idea into a nonstarter. Patient-protecting regulation can make the journey to market difficult and costly. And though medical technology companies tend to have defensive earnings, their valuations can suffer in a market downturn.

The industry is also sensitive to changes in insurance coverage or regulation. Medtech stocks dipped in the early ‘90s on the mere idea of an insurance overhaul. They sagged again as the Patient Protection and Affordable Care Act — Obamacare — was hammered out and eventually approved. It appears that “Medicare for all” proposals are unlikely to gain traction in the near term, but the ongoing debate over universal health coverage could weigh on investor sentiment.

Replacement heart valves showcase medtech’s potential.

Still, there are promising areas of medtech. For example, heart surgery saves lives, but it’s complex and dangerous — in other words, exactly the kind of procedure that’s ripe for innovation. To that end, researchers and surgeons have been perfecting several procedures that are faster and inflict less trauma than those currently available, with an eye toward helping patients recover more swiftly and completely.

One of these new operations replaces faulty heart valves. Called TAVR — short for transcatheter aortic valve replacement — the minimally invasive procedure involves making small incisions in the femoral artery and inserting a replacement inside the faulty valve. The procedure lets surgeons avoid open-heart surgery.

The technology was initially approved for high-risk patients who were unlikely to survive open-heart surgery. Since then, it’s been expanded to intermediate- and low-risk patients. Research suggests that TAVR is superior to established techniques even for low-risk patients, meaning the market may have even more room to grow. Similar technology aimed at a different heart valve, the mitral, is a small market but growing rapidly.

As a minimally invasive procedure, TAVR tends to result in faster recoveries and fewer complications than traditional surgery. That’s good for patients, as they can get back on their feet faster. It’s also good for hospitals, as they can free up beds more quickly and reduce the number of patients requiring follow-up procedures or additional care.

There are many other segments in which researchers and scientists are racing to create better technology, such as specialized surgical robots that could limit trauma and speed procedures. There are dozens of areas in which the field can improve — and exciting ways to redefine patient care.

                              The above article originally appeared in the Spring 2020 issue of Quarterly Insights magazine.

Najah Abouelafia is a Capital Group equity analyst covering U.S. medical technology. She has nine years of investment industry experience and has been with Capital Group since 2015.

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