Healthcare companies receive plenty of media attention. Unfortunately, it’s often negative attention directed at pharmaceutical companies accused of price gouging, insurance companies withdrawing from public exchanges, or small, speculative biotech companies experiencing volatility. But within the mid-cap healthcare sector, much of the growth takes place away from the public eye, at innovative companies that are disrupting the industry and revolutionizing patient care. 

Medical technology companies tend to operate on the periphery of the healthcare sector. Currently, they are few in number, court less controversy than their sector peers, and are often acquired quickly by competitors or larger healthcare companies attracted to their growth potential. These companies make a wide range of products such as medical devices like implants and catheters, and machines like surgical robots and body sculpting tools. Many of the products created by these companies are things that patients may never notice or see.

A Bright Spot Within Healthcare

In our view, medical technology companies experience fewer structural challenges compared with other areas of the healthcare sector. Biotech companies, for example, are often small and inherently risky, service providers such as hospitals and insurance companies are at the mercy of policy decision-making in Washington, and pharmaceutical companies experience significant pricing pressure and are often on the receiving end of public outrage.

Consider the fraught lifecycle of a new prescription medication: A pharmaceutical company devotes considerable resources to research and develop a new brand-name medication, submits it to a lengthy approval process and then has a limited window during which to market and sell the drug before facing competition from generics. By contrast, medical technology companies create lower-profile products that generally receive quick regulatory approval, the products themselves often face little (and sometimes no) competition for an extended period, and the concept of generics is nonexistent in this space.

We believe medical technology products may also experience less pricing pressure than other areas of healthcare while potentially benefitting from demographic trends that are lifting the entire sector. In the U.S., for example, we have an aging population that requires more healthcare interventions and has the financial resources to seek out additional, optional treatments that can help them age well. This is helping to drive volume growth for medical technology companies.

Finding Long-Term Growth Opportunities

Among the medical technology companies in the small and mid-cap healthcare space, we believe that a handful may represent potential investment opportunities. These companies typically began as small start-ups that created innovative products, and then built the market awareness and demand for them. They fought vigorously to protect their intellectual property and, in certain cases, now own their respective markets. Importantly, these companies are reshaping how hospitals operate and how doctors care for patients. Some have established themselves as the standard of care and are taught in medical schools, further helping to cement their market position. The following are examples of medical technology companies that we find attractive today.

Customized Orthodontics for the Masses

Fifteen years ago, the orthodontics industry was upended by a company providing an alternative to the metal braces in use for more than 100 years. The company, which delivers a series of clear aligners that shift teeth over time, has diligently built its market, driven awareness within the medical community and the general public, and secured hundreds of patents that have helped protect its intellectual property. It has succeeded in capturing significant market share from metal braces, particularly among adults, and its procedure is currently taught in dental schools.  

The Rise of Surgical Robots

An innovative medical technology company has also disrupted the surgical suite. In 2000, the FDA approved a four-armed robotic assistant for general surgical use in hospitals. The device offers a minimally invasive approach that uses incisions as small as one centimeter and, through cameras mounted on the arms, provides surgeons a better view into the body than they can get in a traditional open surgery. The procedures also generally may result in less blood loss, and patients typically experience less pain and shorter recovery times.

The company has found success in U.S. hospitals, which employ more than 2,000 of the robots, while penetration outside the U.S. may offer a growth opportunity. In addition to the robotic systems themselves, the company sells accessories and consumables, such as disposable surgical instruments, which create an additional revenue stream.

Transforming Diabetes Care

Continuous glucose monitoring (CGM) systems have disrupted diabetes care in recent years, to the benefit of patients and their caregivers. These monitors allow type 1 diabetics to track their blood sugar levels using a small subcutaneous sensor that transmits data to a smart phone app.  When the user’s blood sugar level travels outside of a designated safe zone, the monitor alerts the patient, who can then take action.

Several companies are in market today with CGM systems, and the competition can contribute to share price volatility. Within our portfolio, we have owned an innovative CGM company that has formed partnerships with leading technology companies and is currently developing a product targeting the larger type 2 diabetes market. Additionally, its flagship product received Medicare approval earlier this year, significantly expanding its potential patient pool.

Medical technology companies fly under the radar, but they are transforming the healthcare industry. Within the category, we believe that a handful of solid players are positioned to experience consistent revenue and share price growth as a result of demographic trends, pricing power and limited competition. In our view, this is generally a noncontroversial area within the healthcare sector, and one that is helping hospitals and doctors achieve better financial performance while improving patient outcomes. As such, our outlook for medical technology companies remains positive for the foreseeable future.

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