Tech companies entering the health market may receive far more attention for their gadgets than traditional medical-device firms – but both will depend on new ways of using data to deliver the biggest gains both for patients and investors.
In September 2018, Apple launched an updated version of a smartwatch that aims to do far more than keep you on time and organize your day – it might help to improve your health and prolong your life as well. It is the first consumer device to include an ECG heart monitor approved by the US Food and Drug Administration, as well as having the ability to detect if the wearer falls over and to call the emergency services automatically if they appear to be non-responsive.
The addition of this technology marks a major advance on the now-ubiquitous fitness features such as step counters and activity monitors already included in previous versions of the Apple Watch and in wearable devices from other companies such as Fitbit. We can expect further functionality to be added to these types of lifestyle product in the near future, and also the arrival of increasingly sophisticated standalone devices that communicate with smartphones and other systems.
For example, specialist devices such as wearable glucose monitors for diabetics and temperature sensors for babies are now readily available. And a wide range of ‘lab on a chip’ devices – very small-scale systems for sampling and testing blood, metabolic gases or other indicators – are being developed to help medical professionals make quicker and more accurate diagnoses of their patients’ conditions and health risks.
Demand is rising for innovative medtech solutions as the population ages and consumers expect more from technology
The full commercialization of these increasingly sophisticated tools should help the medical device market grow strongly in the years ahead. According to research by KPMG, global revenues for the sector, which stood at $370bn in 2017, are expected to double by 2030. That’s partly a consequence of continuing advances in technology that make it possible to miniaturize and integrate medical devices in a cost-effective way; but robust demand will also be a crucial factor.
The percentage of the global population aged over 65 is set to rise from 8.3% in 2015 to 15.8% by 2050, according to projections by the United Nations Population Division. An ageing population will put an increasing burden on healthcare systems around the world. Technologies that can help to reduce this, through prevention, earlier intervention or more efficient interactions between doctors and patients, will play a key role in mitigating the pressure.
What’s more, a generation of consumers that has grown up expecting technology to streamline their lives in fields such as retail, finance and communications will expect the same when it comes to managing their health. Consumers are likely to include large numbers in emerging markets such as China and India, where healthcare expenditure as a percentage of GDP is set to rise faster than in developed markets and where the adoption of new technologies often leapfrogs their use in the West.
Tech’s platform providers could pose a threat to traditional medical-device companies
However, as the example of the Apple Watch illustrates, the companies that are best placed to capitalize on this demand might not be those that are traditionally classified as medical-device manufacturers. We believe that real value creation will lie in data rather than devices – specifically, the integration and processing of information from multiple sources to create clinical insights and deliver a far more personalized form of healthcare.
This will play to the existing strengths of technology firms such as Apple and (potentially) its peers such as Amazon and Google. One key lesson from the success of these tech giants is that the first companies to succeed in building large networks of users for their services tend to take a dominant share of the overall market and are extremely difficult for later entrants to dislodge.
Incumbent medical device firms are increasingly aware of the potential for digitization to reshape the dynamics of their industry, and they are attempting to respond to the challenge. To do this, they will need to shift from their traditional focus on products to an approach centred on the holistic solutions that clients (consumers, patients, doctors and others) require.
Consolidation will be critical, as well as innovation, in the new medtech business environment
Consequently we believe that many firms in the sector will need to invest in higher levels of research and development spending, as well as pursuing opportunities for consolidation and acquisitions. Mergers and acquisitions activity is likely to include the purchase of medical device firms by technology firms and vice versa, as companies seek to bring in-house the capabilities that they currently lack.
These trends mean that the medical device market could offer enormous opportunities for investors in the years ahead. However, it will not be a straightforward task to keep track of this fast-moving environment and identify firms that are likely to benefit the most from the changes. Investors should be aware of certain risk factors, including market volatility and specific company risks associated with single-stock investments.
Index-based strategies are generally a good way to build exposure to medtech, since existing medical-device sector indices are extremely broad and feature a wide range of companies in different market niches and with differing prospects. However, highly selective investment by skilled active managers will be key to capturing fully the potential rewards of the digitalization wave that has reached the medical-device sector. Investors should also consider holding those technology firms that may grow to become significant players in the medtech field.