Medical

Medical Technology Investments

Would you be interested in investing in a sector that boasts above-average historical returns, strong returns on capital, government-enforced restrictions on competition, and products that can be essential to maintaining people’s quality of life? Would you still be interested if you knew there were huge upfront development expenses, a high failure rate, a constant stream of would-be rivals, and a federal regulatory body that enforces strict, and sometimes arbitrary, standards? There is no doubt that medical technology offers all of the above to investors. The question, though, is what investors need to know to best avail themselves of the opportunities in the sector. While there are no surefire guarantees and no shortcuts around due diligence, there are some pointers that can help you make better investing decisions in this dynamic sector.

Look for an Innovator, Not a Follower

When considering a potential medical technology investment, it’s generally better to look for a company dedicated to new technologies and innovation. New products typically offer better performance (better outcomes for the patient, easier for the doctor to use, and so on), and those improvements typically command a premium price and drive market-share shifts to the new product.

Don’t Sweat the Details

There is no need for expert-level medical knowledge in med-tech investing. In fact, even the smartest medical minds have a mixed record when it comes to seeing the future in medical technology, so investors should never feel intimidated by a “medical expert” opining on a given stock or therapy.

Accept a Different Valuation Methodology

Simply put, the valuation standards in medical technology are a little different. If you look at many of the bellwether medical technology stocks, you will see historical ratios above (and sometimes well above) the prevailing S&P 500 Index levels, including:

• Price-earnings ratio
• Price-to-book ratio
• Price-to-sales ratio
• Price-to-cash-flow ratio
• EV/EBITDA (EV = enterprise value)

Yet, over time, medical technology stocks have generally outperformed the S&P 500 and held up relatively well in periods of difficult broader-market performance.

Bottom Line

Medical technology is a dynamic sector, with new technologies and products emerging virtually every year. Many investors shy away because they mistakenly think it’s too complicated, and so there are often overlooked investment opportunities. There’s no doubt that it takes a little work to get up to speed on medical technology companies and their stocks, but no more so than for any other industry. If investors take a methodical approach to researching and assessing the stocks in this sector, they should find that investing in medical technology is certainly within the capabilities of the individual investor.