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A Checklist For Successful Medical Technology Investment

October 08 2008 | Filed Under Insurance, Stocks Would you be interested in investing in a sector that boasts above average historical returns, strong returns on ca!ital, govern"ent en#orced restrictions on co"!etition and !roducts that can be essential to "aintaining !eo!le$s %uality o# li#e& Would you still be interested i# you kne' there 'ere huge u! #ront develo!"ent e(!enses, a high #ailure rate, a constant strea" o# 'ould be rivals and a #ederal regulatory body that en#orces strict, and so"eti"es arbitrary, standards&

)here is no doubt that "edical technology o##ers all o# the above to investors* )he %uestion, though, is 'hat investors need to kno' to best avail the"selves o# the o!!ortunities in the sector* While there are no sure#ire guarantees and no shortcuts around due diligence +,,-, there are so"e !ointers that can hel! you "ake better investing decisions in this dyna"ic sector* .ead on to #ind out 'hat they are*

Look For an Innovator, Not a Follower When considering a !otential "edical technology invest"ent, it$s generally better to look #or a co"!any dedicated to ne' technologies and innovation* /e' !roducts ty!ically o##er better !er#or"ance +better outco"es #or the !atient, easier #or the doctor to use and so on-, and those i"!rove"ents ty!ically co""and a !re"iu" !rice and drive "arket share shi#ts to the ne' !roduct* +Great Expectations: Forecasting Sales Growth can !rovide ti!s on !redicting gains in "arket share*0dvertise"ent 0rticle continues belo'*

1 scri!t language234avaScri!t3 ty!e23te(t56avascri!t37 docu"ent*'rite+$1a hre#23htt!855o!s*investo!edia*co"5.eal9edia5ads5click:l(*ads5investo!edia*co"5!#5insurance5;2< 5202=2>?=8@5(>25Investo5IAFBCD20D:>E:>00(2=0:0F:.OS5IAFBCD20D:0D:>00(2=0:0F:.OS 20DDD2D?*ht"l5>2E2?#=>>E>0>E=<=a>D@D@D@>@2>E=a& htt!855clk*atd"t*co"5FB95go5>E0>=2=@?5directF'i*>00Fhi*2=050D5202=2>?=8@3 target23:blank371i"g src23htt!855vie'*atd"t*co"5FB95vie'5>E0>=2=@?5directF'i*>00Fhi*2=050D5202=2>?=8@35715a7$F1 5scri!t71noscri!t71a hre#23htt!855o!s*investo!edia*co"5.eal9edia5ads5click:l(*ads5investo!edia*co"5!#5insurance5;2< 5202=2>?=8@5(>25Investo5IAFBCD20D:>E:>00(2=0:0F:.OS5IAFBCD20D:0D:>00(2=0:0F:.OS 20DDD2D?*ht"l5>2E2?#=>>E>0>E=<=a>D@D@D@>@2>E=a& htt!855clk*atd"t*co"5FB95go5>E0>=2=@?5directF'i*>00Fhi*2=050D5202=2>?=8@3 target23:blank371i"g border2303

src23htt!855vie'*atd"t*co"5FB95vie'5>E0>=2=@?5directF'i*>00Fhi*2=050D5202=2>?=8@3 5715a715noscri!t7 )he best 'ay to assess 'hether a given co"!any is #ocused on innovation is to look at the co"!any$s !roduct !i!eline and research and develo!"ent +.G,- e##orts* S"all co"!anies are generally very u! #ront about the !ro6ects currently under'ay +o#ten it$s the only thing "anage"ent has to talk about 'ith investors-, but large co"!anies don$t o#ten disclose as "uch in#or"ation* In those cases, try this rule o# thu"b i# a co"!any is s!ending less than D0H o# its

revenue on .G,, be sus!icious* +For related reading, see Which Is Better: Dominance Or Innovation? and Buying Into !D*-

Don't Sweat the Details )here is no need #or e(!ert level "edical kno'ledge in "ed tech investing* In #act, even the s"artest "edical "inds have a "i(ed record 'hen it co"es to seeing the #uture in "edical technology, so investors should never #eel inti"idated by a 3"edical e(!ert3 o!ining on a given stock or thera!y* +.ead about 'hen inside in#or"ation can be !ro#itable in "an Insi#ers $elp %ou &a'e Better (ra#es?-

It is certainly 'orth'hile to read u! on the diseases or conditions that a co"!any$s !roducts treat +or intend to treat-, and the Internet o##ers a 'ealth o# in#or"ation on al"ost every "edical condition that constitutes a viable "arket o!!ortunity* Fro" !eer revie'ed 6ournal !a!ers to individual !atient blogs, any investor can get a sense o# the driving #actors in the treat"ent o# any "edical condition* Understand the Life Cycle )here are several key !oints in a "ed tech co"!any$s li#e cycle, and each stage has certain ra"i#ications #or an investor*

Start u! co"!anies #ace years o# losses and cash out#lo's as "anage"ent tries to lead ne' !roducts through clinical trials, through the Food and ,rug 0d"inistration +F,0- and onto the "arket* Iere, the a"ount o# cash on the balance sheet, the e##icacy o# the !roduct and the candor o# the "anage"ent tea" are crucial* 0ssu"ing that the clinical data is !ositive, the co"!any 'ill eventually #ace the F,0 and the thu"bs u!5thu"bs do'n decision that #ollo's* +.ead &easuring (he &e#icine &a'ers #or "ore in#or"ation*-

I# a co"!any secures F,0 a!!roval, the ne(t stage is the "arketing launch and sales ra"!* Iere it is critical #or the co"!any to have a solid "arketing tea" +or !artnershi!- in !lace* ;ook #or strong initial sales gro'th, but don$t e(!ect !ro#its 6ust yet* +;earn ho' e##ective "arketing creates co"!etitive advantage in )#vertising* "roco#iles )n# &oats *-

Once a co"!any achieves !ro#itability, the ga"e changes* Si"!ly !ut, very #e' "ed tech co"!anies ever "ature into large, inde!endent !layers* For the "ost !art, co"!anies are ac%uired or try to bulk the"selves u! by turning to ac%uisitions* )hat "eans investors should kee! a care#ul eye on deals and 'atch out #or co"!anies that over!ay in their atte"!t to gro' through ac%uisitions* +For "ore on "easuring !ro#itability, read Spotting +ro,ita-ility With O"E*-

For those co"!anies that do establish the"selves as large, inde!endent !layers, the li#e cycle here is a #a"iliar one to investors8 it is a continuous !rocess o# "anaging the e(isting business, introducing ne' !roducts and she!herding the gro'th o# shareholder value* +.ead "ore on the i"!ortance o# shareholder value to co"!anies in Why Do "ompanies "are )-out (heir Stoc' +rices?-

Don't Forget the Government I# there is a risk #actor to "edical technology that$s not co""on to other co"!anies, it is the signi#icant role o# the govern"ent at "ulti!le levels o# the businesses*

For starters, the F,0 e##ectively deter"ines 'hether a co"!any can do business in the U*S* Je#ore a device can be legally sold, the F,0 has to a!!rove its sale* While not all !roduct a!!rovals re%uire e(!ensive clinical trials, "ost o# the !roducts that drive signi#icant revenue gro'th #or the sector do re%uire signi#icant data on e##icacy and sa#ety be#ore the F,0 !er"its their sale* +.ead about the i"!ortance o# clinical trial data in Investing In (he $ealthcare Sector *-

It is also 'orth noting that a!!roval does not end the storyF the F,0 re%uires ongoing "onitoring and re!orting and can order devices o## the "arket i# hidden dangers reveal the"selves in subse%uent years*

While that "ight see" straight#or'ard, the F,0 has a "andate that re%uires it to be sensitive to a variety o# #actors* )he agency "ust !rotect the sa#ety o# the general !ublic, but the !ro!er trade o## bet'een the risk and re'ard o# a ne' device or thera!y is sub6ective* Co"!licating "atters, the attitude o# the F,0 regarding that trade o## see"s to ebb and #lo' over ti"e* Investors can "ini"iKe the risks to their !ort#olio by choosing co"!anies that either have a suite o# a!!roved !roducts already on the "arket, or that have very strong data #or !roducts under develo!"ent* +For ti!s on evaluating co"!anies in this situation, read .sing D"F In Biotech /aluation*Click Iere to 6oin )raders ;aboratory )he Aro#essional )raders Co""unity

)he govern"ent also !lays a role in deter"ining i# "edical technology co"!anies can get !aid #or their devices and thera!ies* 9edicare is a "a6or #actor 'hen it co"es to ho' 0"ericans !ay #or their healthcare, and i# the govern"ent !ulls back on ho' "uch it$s 'illing to !ay #or various thera!ies or devices, that can have a "a6or i"!act on the sector* In #act, !rivate insurers 'ill

o#ten take a cue #ro" 'hat 9edicare decides 'hen they #or" their o'n coverage !olicies* +For "ore in#or"ation on !rivate coverage, read Buying +rivate $ealth Insurance* For "ore on 9edicare, check out What Does &e#icare "over?-

cce!t a Different "al#ation $ethodology Si"!ly !ut, the valuation standards in "edical technology are a little di##erent* I# you look at "any o# the bell'ether "edical technology stocks, such as 0lcon +/LSM80C;-, Stryker +/LSM8SLN-, Joston Scienti#ic +/LSM8JSB- and 9edtronic +/LSM89,)-, you 'ill see historical ratios above +and so"eti"es 'ell above- the !revailing SGA =00 levels, including8

!rice earnings ratio !rice to book ratio !rice to sales ratio !rice to cash #lo' ratio MO5MJI),0 +MO 2 enter!rise valueLet, over ti"e, "edical technology stocks have generally out!er#or"ed the Standard G Aoor$s =00 Inde( +SGA =00- inde( and held u! relatively 'ell in !eriods o# di##icult broader "arket !er#or"ance* +For "ore on this sub6ect, read Is (he +0E and Is %our +ort,olio Beating Its Benchmar'? atio ) Goo# &ar'et1(iming In#icator?

It$s not that there aren$t argu"ents in #avor o# "ore robust valuationsF this industry s!orts above average "argins and return on invested ca!ital +.OIC-, doesn$t #ear generic co"!etitors and o##ers !roducts 'ith !retty inelastic de"and* 0#ter all, a !erson "ay be able to delay buying a ne' )O or a ne' car, but they can$t delay treating a heart attack or broken hi! until the econo"y gets better*

Investors ne' to "edical technology should also realiKe that, #or better or 'orse, the !rice to sales ratio is a co""only used "etric #or these stocks +!articularly at the s"all ca! and "id ca! levels-* In #act, e"erging "ed tech stocks trading belo' a !rice to sales ratio o# @ "ay be regarded as a 3buy,3 and those trading above 8 or so "ay be regarded as over!riced or at least overheated* +)ake a look at ho' this e##ective ratio can be in#luenced by certain critical #actors in .se +rice1(o1Sales atios (o /alue Stoc's*-

%ottom Line 9edical technology is a dyna"ic sector, 'ith ne' technologies and !roducts e"erging virtually every year* 9any investors shy a'ay because they "istakenly think it$s too co"!licated, and so there are o#ten overlooked invest"ent o!!ortunities* )here$s no doubt that it takes a little 'ork to

get u! to s!eed on "edical technology co"!anies and their stocks, but no "ore so than #or any other industry* I# investors take a "ethodical a!!roach to researching and assessing the stocks in this sector, they should #ind that investing in "edical technology is certainly 'ithin the ca!abilities o# the individual investor*

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