Great Tips for Investing in Medical Technology
Are you planning to invest in a sector that can give you strong results, has given above-average returns, and has government-imposed constraints on competition as well as products that can be necessary to maintain and enhance people’s quality of life? If your answer is “yes”, biomedical technology is the field having all these qualities. Most people shy away from this field because they think that it is very complicated and needs a huge investment. Here are tips for investing in medical technology.
Find an Innovator and Not a Follower
While planning a potential investment in medical technology, it’s often better to find a company committed to new innovations and technology. New inventions usually give better performance (in the form of better results for patients, ease in use for doctors and so on) and those enhancements typically dictate a premium price and make the market share move to the new product.
How will you do this? An excellent way to find whether the given company concentrates on innovation is to watch their product pipeline as well as R&D (research and development) efforts. This may be easy for you in case of small companies because they talk about their products as they want to advertise them. However, big companies prefer to hide their new products. A rule of thumb here is, if the company is using less than 10% of its income on R&D, understand that there is something fishy.
Don’t Put Much Efforts on Details
While investing in medical technology, you need not be a medical tech expert. Remember that even the most intellectual medical brains have a mixed record while seeing the future of medical technology; so, you should never feel panicky when a “medical expert” talks about a given therapy or stock.
However, it’s certainly useful to read and understand about the conditions and diseases that the company’s products are going to treat. The internet is a wealth of knowledge for this. And you can also know which medical condition makes a feasible market opportunity. From peer-reviewed journals to patients’ individual blogs, you as an investor can have a sense of the powerful factors in the treatment of a disease.
Know the Life Cycle of the Company
If you look at the life cycle of the company you are planning to invest in, there are many major factors that need your attention, and each stage of the cycle has some implications for you, the investor.
Startup firms encounter years of losses as well as cash outflows as their management tries to bring new products by way of clinical trials on the market, through the FDA (Food and Drug Administration). Here the crucial points are the amount on the balance sheet, product’s efficacy and the honesty of the members of the management team. If we assume that clinical results are positive, the company further faces the FDA and whatever decision that follows.
If the company gets FDA approval, marketing and sales ramp are next to follow. Here a solid marketing team is very important for the company. Your job is to look for powerful initial growth, but not to expect profits just then.
Once the company acquires profitability, the scenario changes. In simple words, there are very few med-tech firms that ever mature into big, independent businesses. In most cases, companies turn to acquisitions. So, you should keep a watchful eye on negotiations and be careful of companies that pay more while trying to grow by way of acquisitions.
Companies that get established as big, independent businesses have a life cycle that is known to investors. It consists of a constant process of maintaining the existing business, bringing in new products and guiding the increase in shareholders’ value.
Government plays an important role at multiple stages of the business.
In case of starters, the FDA determines if a company can do business of the said product. Before the product can be sold legally, the FDA should approve its sale. Although no extensive clinical trials are necessary for all the products, most products that bring sizable revenue growth need significant information on its safety and efficacy before FDA approves them.
It should also be noted that the story doesn’t end with the FDA approval. The FDA needs continuous watch and reporting, and even can order the product off the market if any hidden risks make their presence in the course of time.
While that may seem clear-cut, the FDA has an authorization that needs to be sensitive to various factors. Investors can minimize their risks by selecting companies that either have a set of already approved products on the market or have a powerful data of products in development process.
The government has also a role to play in deciding if medical tech companies can get payment for their products and therapies.
Valuation Methodology that is Different
Actually valuation standards are a bit different in medical technology. If you take a look at most leading medical tech stocks, you will notice historical ratios above the existing S&P 500 levels, like:
- Price-to-earnings ratio
- Price-to-sales ratio
- Price-to-cash-flow ratio
- Price-to-book ratio
- EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization)
However, in the course of time, medical tech stocks have often done better than the Standard & Poor’s 500 Index and maintained relatively well in difficult periods.
If you are new to medical technology, you should realize that whether it is better or worse, the price-to-sale ratio is a frequently used measure for these stocks. Actually, up-and-coming med-tech stocks that are trading lower than a price-to-sales ratio of 4 can be taken to be a “buy” and those trading more than 8 may be considered overpriced.