We asked three of our medical technology specialists to share their insights on new developments and areas for investment in the sector. They explain how key innovations are disrupting traditional markets and changing the way providers and patients approach healthcare around the world.
Q: How would you characterize the current healthcare opportunity set?
ANN GALLO: Overall, sector fundamentals remain solid, supported by strong volume growth and groundbreaking innovation across many therapeutic areas. Demographic trends such as aging populations and rising wealth in emerging market countries, along with tremendous pipeline innovation, are driving volume growth. In our research, we favor biopharmaceutical and medical technology companies that develop what we believe are innovative products to address unmet medical needs.
Within healthcare services, we focus on companies whose offerings facilitate the transition to a value-based, data-driven, outcome-oriented healthcare system. While global demand for healthcare is strong, in many countries around the world, government resources are insufficient to cover the costs of care. In this environment, it is increasingly important for new products and services to deliver innovation or value that surpasses previously available options.
Q: Could you elaborate on medical technology innovations?
ANN: Investors tend to focus on exciting innovations in the biopharmaceutical space, but the medical technology industry is booming with innovation as well. Medical technology encompasses several industries, including medical devices, life science tools, diagnostic equipment, and medical supplies, among others. Across these industries, new product cycles are driving growth and supporting valuations. Lower technology costs, breakthroughs in scientific discovery, and increased research and development (R&D) spending are among the factors supporting robust product innovation. Finally, the med-tech industry generally benefits from less regulatory scrutiny relative to the healthcare services and biopharmaceuticals industries. Over the last three years, medical technology and healthcare equipment and supplies have outperformed biotechnology and pharmaceutical sectors by a wide margin across global healthcare indices.1
Q: What areas of med-tech innovation are among the most exciting today, in your view?
FAYYAZ MUJTABA: The sector is experiencing a strong innovation cycle broadly, but two of the most intriguing areas are robotic surgery and genetic sequencing.
REBECCA SYKES: I agree that robotic surgery is a very important area of current innovation. I am also excited about innovations in structural heart disease and diabetes, as well as forms of connected or remote-access healthcare.
Q: Let’s start with robotic surgery. What are its uses and benefits?
REBECCA: Incisions are generally much smaller than with traditional surgery, accelerating recovery times. Robots also enhance accuracy and precision, making them particularly well suited for urology, gynecology, and laparoscopic surgery, but with benefits for many general surgical procedures.
FAYYAZ: In addition to being less invasive, robotic surgery often leads to better patient outcomes, with shorter hospital stays, less bleeding, less pain (and thus the need for opioids), and typically fewer overall complications. For providers, while the initial capital costs associated with robotic surgery are quite high, over time, the investment can result in lower costs and other benefits. Robotic tools improve ergonomics and reduce surgeon fatigue. Less experienced surgeons can be trained to use the equipment and gain proficiency faster, and the procedures often require fewer attending support staff. All of this helps level the playing field among physicians and hospitals, and can improve treatment consistency. The analytics captured through robotics can lead to shorter procedure times and better results. Finally, institutions can now compare data, enabling those that opt in to benchmark to peers better than they previously could.
REBECCA: One important new market for robotics is spine surgery. Just under 5% of spine procedures are robot-assisted today, but we think that number could grow to as high as 30%. Traditional back surgery is extremely invasive, with large, painful incisions, long recovery times, and inconsistent outcomes. Many patients need more than one procedure, so costs are very high. The surgery requires a high degree of precision, done in a small area where visualization is difficult. The coupling of robotics with surgical navigation seems to improve alignment and overall accuracy in spine surgery, while also reducing both the invasiveness and radiation requirements.
One important new market for robotics is spine surgery. Just under 5% of spine procedures are robot-assisted today, but we think that number could grow to as high as 30%.—Rebecca Sykes
FAYYAZ: Another new application is bronchoscopy for early lung cancer detection. Before a cancer patient can start therapeutics, doctors often need to take a tissue biopsy. With traditional equipment, only about a third of the lung is accessible in minimally invasive ways. With robotic surgery, doctors can use a flexible catheter to reach the peripheries of the organ and get a biopsy. This is an example of a market that did not exist before robotic surgery.
Q: Where are the areas of demand for robotic surgery?
FAYYAZ: This is a global market. Robotic surgery initially penetrated in the US, but is now used in other parts of the world. As adoption has increased, the debate is less about whether robotic surgery has value and more about how much, and for which use cases. Interestingly, adoption is not just occurring in countries with market-based insurance systems like the US, but also in constrained, single-payer markets such as Europe and Japan, which tend to focus more on cost. The technology is also widely used in China, where the long-term growth potential looks attractive given low penetration and increasing access to healthcare.
As adoption has increased, the debate is less about whether robotic surgery has value and more about how much, and for which use cases.—Fayyaz Mujtaba
Japan has also been a key market for robotic surgery, with approximately 300 robotic systems currently in use. Despite the large installed base, reimbursement has historically been limited to a few categories of procedures, such as prostatectomies and partial nephrectomies. That changed in January 2018 when Japan’s Ministry of Health, Labour, and Welfare added reimbursement coverage for 12 additional procedures. Over time, we expect to see gradual adoption of robotics across more procedure sets.
REBECCA: I agree that this is truly a global market. While most of the innovation in medical devices is still coming from the US and Europe, we are seeing rapid adoption of the technology in emerging markets. In China, the largest and fastest-growing emerging market, local companies are producing high-quality devices that are interchangeable with imported products. In the last decade, for example, Chinese companies have overtaken the market for coronary stents. This is likely to occur in other product categories as well, including implantable devices such as cardiac pacemakers, as well as less sophisticated medical supplies such as syringes and infusion bags.
Q: You mentioned devices used to treat heart disease. Tell us about that.
REBECCA: As people age, they are prone to develop structural heart disease, particularly a condition called aortic stenosis, which is the hardening and calcification of the aortic valve. On average, aortic stenosis kills a patient within five years of diagnosis, and the only treatment is to replace the valve. Today, instead of open-heart surgery, doctors are able to perform a minimally invasively procedure called transcatheter aortic valve replacement (TAVR), in which a small incision is made in the groin and a catheter is guided through the femoral artery to the heart.
Although the procedure has been in use for more than decade, it has primarily been reserved for patients considered at high risk for traditional surgical valve replacement. Recent studies have shown that TAVR is now able to achieve the same efficacy as open-heart surgery, with faster recovery times, improved safety, and lower cost. These benefits, combined with the ability of doctors to diagnose aortic stenosis earlier, are likely to result in increased use in patients of all ages, even those young and healthy enough to be candidates for surgery. Today TAVR is about a US$4 billion market, but we expect that to grow to $US10 billion or more over the next decade.
Q: And what is happening with the treatment of diabetes?
REBECCA: Today, we see a great deal of innovation in devices used to manage Type 1 diabetes. Two main product areas are involved: continuous glucose monitors (CGMs) and insulin pumps. With CGMs, greater accuracy and more comfortable form factors are driving rapid adoption by Type 1 diabetes patients. Insulin pumps, meanwhile, are becoming easier to use. In my view, the most exciting development is around closed loop or automated insulin delivery (AID) systems. We are in the early days of these new systems that use software to integrate CGMs and insulin pumps, dramatically simplifying and reducing the number of insulin-dosing decisions a patient needs to make each day. Two AID systems are currently FDA approved, and I believe more sophisticated systems that will be personalized, adaptive, and able to modulate insulin dosing according to daily activities and food consumption are not far off.
Innovations in CGMs, insulin pumps, and AID systems will significantly improve quality of life for Type 1 diabetes patients and are likely to reduce hospitalizations and overall healthcare costs. Down the road, certain technologies—particularly CGMs—should also prove useful for the management of Type 2 diabetes, a far more prevalent disease.
Q: Fayyaz, the first human genome was sequenced 15 years ago. Why are so many innovations happening now?
FAYYAZ: In a word: cost. The first genome took nearly a decade to sequence and cost close to US$3 billion. Today, we can sequence an entire genome in a few hours for around US$1,000. With prices so low, more medical uses become viable. Mass-market genetic sequencing will be game changing for healthcare. If we can determine an individual’s genetic makeup, we may be able to detect earlier if they are predisposed to develop certain cancers or other diseases, and understand which drugs and other targeted treatments would be most effective for them. Today, a tiny fraction of the population has been sequenced, but I think a decade from now, millions more people will be. Population-level data could lead to extraordinary solutions.
The first genome took nearly a decade to sequence and cost close to US$3 billion. Today, we can sequence an entire genome in a few hours for around US$1,000.—Fayyaz Mujtaba
Q: What types of companies make money from genetic sequencing?
FAYYAZ: There are multiple ways to invest in the genetic sequencing supply chain, as it is a relatively fragmented market. The most direct beneficiaries are manufacturers of genetic sequencing equipment and “consumables,” which are the parts and supplies that downstream users need to purchase—repeatedly—to conduct testing. Next are sample-prep companies that produce the tools and supplies used for preparing blood samples that are fed into the sequencing equipment. Last are bioinformatics companies, which capture and analyze the genetic data.
Once you have a genetic sequence, what do you do with the information? How do you know if you have a clinically relevant mutation in a gene? Until recently, those tests were extremely expensive to run, but today a number of startups are focusing on these genetics-based diagnostics. Finally, biopharmaceutical companies use the genetic data for research and development to create drugs used to treat diseases and enroll clinical trials with patients that are likely more receptive to certain drugs.
Q: Can you give an example of genetics-based diagnostics?
FAYYAZ: One of the most exciting is liquid biopsy for early cancer detection. Rather than relying on surgical biopsies of a tumor, the advances in genetic sequencing have allowed diagnostic companies to develop blood-based tests to help detect cancer much sooner, before the patient shows clinical symptoms. The hope is that we will be able to identify tumors before a person’s cancer reaches an advanced stage at which treatment options become limited.Suppose there is a tumor in your body right now. That tumor is actively shedding cells, which enter the blood stream just like other cells. This is called circulating tumor DNA or ctDNA. Future tests will be able to detect ctDNA and/or combine that information with other potential parameters. Diagnostic companies can then leverage artificial intelligence to correlate various biomarkers across large data sets and develop a probability score for patients based on their individual genetics. Advances in sequencing equipment have made these applications possible and economically feasible and represent an exciting intersection between healthcare and technology.
Q: What do you foresee in this field over the next several years?
FAYYAZ: I believe genetic sequencing will grow rapidly and that the potential benefits of future applications are sizable. If we get commercially viable assays that can detect early or recurring forms of cancer, we can avoid expensive downstream costs in surgery, therapeutics, and patient care. We will be able to increase survival rates while lowering costs. Just as we get annual checkups to test cholesterol levels, for example, we will be able to screen annually for cancer with a simple blood draw. That is the “holy grail” of liquid biopsy. It is difficult to say when the industry will reach this goal, but its pursuit should lead to further innovations in patient care over the next decade.
I believe genetic sequencing will grow rapidly and that the potential benefits of future applications are sizable.—Fayyaz Mujtaba
Q: What is “connected care,” and how are medical devices advancing that?
REBECCA: Connected care refers to the use of technology to provide healthcare services remotely. It encompasses a number of products and technologies, but I am most interested in wearable patches for cardiac monitoring. One company makes a waterproof patch that is cheap, portable, and comfortable, and can be worn by a patient with suspected arrhythmias for up to two weeks. This is a cost-effective and convenient diagnostic for atrial fibrillation, which is associated with an elevated risk of ischemic stroke. As physician awareness of this product continues to grow, we expect the addressable market to increase substantially. Evidence suggests that monitoring patients with cardiovascular risk factors (but no suspected arrhythmias yet), such as obesity, Type 2 diabetes, or a prior stroke or heart attack, is effective for prevention of costly outcomes such as stroke and heart attacks.
Q: How do you expect companies in your coverage to hold up through a market cycle and longer term?
FAYYAZ: In my view, robotic surgery and genetic sequencing represent attractive long-term trends and feature a range of innovative companies with long runways for growth. In both industries, companies along the value chain sell equipment that produces downstream recurring revenues. This resilient business model, as well as relatively consistent demand trends, should reduce share price volatility through economic cycles. In most cases, if a patient needs a procedure during a recession, they will still get it.
Longer term, the shift toward value-based care means lowering total healthcare costs. These types of companies should benefit from that trend. Genetic sequencing in particular has huge potential to reduce costs through diagnostics. A US$1,000 early-cancer detection test is vastly less expensive than the hundreds of thousands of dollars’ worth of drugs, treatment, and surgery that a patient may need later on. And if that test helps target appropriate care or avoid expensive therapy for likely nonresponders, then it represents an attractive value proposition for the entire healthcare system.
Q: How would you sum up the opportunities in this industry?
REBECCA: Medical technology can address many unmet needs. Apart from cardiovascular disease, innovations that help treat diabetes patients are becoming more affordable. Advances that address chronic pain though electrical stimulation—reducing the need for opioid drugs—should see enormous demand growth. Devices for many forms of cardiovascular and peripheral vascular treatment also have great potential. Medical devices can even improve wound care by speeding up healing through cutting-edge vacuum-seal technology. This is an amazing field with seemingly endless possibilities to treat more people, more effectively, and effect better long-term outcomes.
ANN: This is an exciting time to be a healthcare investor. In my opinion, the future opportunity set for the medical technology industry remains robust. As companies continue to develop more efficient and cost-effective solutions to treat and manage disease—including TAVR procedures and continuous glucose monitoring products—innovators should continue to thrive.
1Data sources: S&P, MSCI, 9/30/19. The medical technology and healthcare equipment and supplies subsectors within the MSCI World Healthcare Index and the S&P 1500 Healthcare Index outperformed the pharmaceutical and biotechnology subsectors within both of those indices. Past performance does not guarantee future results. Investors cannot directly invest in indices.
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