Medical device companies can be profit-making machines - one manufacturer of magnetic resonance imaging (MRI) machines and other high-tech products is up more than 250% over the past 12 months, for instance.
Most of them make their living by staying on the leading edge of innovation, producing some of the coolest gadgets you can imagine.
And, even better, they can deliver some of the most impressive gains in the bioscience industry to their shareholders.
The good performance of these manufacturers gives you some idea of the potential we're dealing with here.
Just look at these soaring share prices...
These Three Companies Have Easily Beaten the Markets
Boston Scientific Corp. (NYSE: BSX) develops, manufactures, and markets medical devices for the cardiology markets, including stents, balloon catheters, wires, and peripheral embolization devices, among many, many other items. The company also makes products to treat diseases of the digestive, urinary, and pulmonary (lung) systems. Boston Scientific is up 40% over its price this time last year.
Hologic Inc. (Nasdaq: HOLX) makes a broad array of diagnostics products, medical imaging systems, and surgical products for women, such as digital and film-based mammography systems, computer-aided detection (CAD) for mammography, invasive breast biopsy devices, breast biopsy site markers, breast biopsy guidance systems, and breast brachytherapy products (radioactive inserts). Hologic shares are currently up 64% over their value one year ago.
IRadimed Corp. (Nasdaq: IRMD) develops, manufactures, markets, and distributes magnetic resonance imaging (MRI) compatible products in the United States and internationally. It offers non-magnetic intravenous (IV) infusion pump systems and accessories, wireless remote displays/controls under the mRidium name, sidecar pumps, and dose error reduction systems, among many other products. IRMD stock is up a whopping 250% over the past 12 months.
This Is a Big Market - and It's Getting Bigger
Although medical device companies and biotechs that develop new drugs play on similar fields, there are significant differences both in the markets they target and in the regulatory process they undergo. It's important for investors to understand these differences when choosing where to put their capital.
Because drugs require repeated dosing, sometimes over the course of a patient's life, biotechs and pharmaceutical companies concentrate their sales efforts on prescribers, and more recently, on the patients themselves. Manufacturers realize profits on every dose.
According to the IMS Institute for Healthcare Informatics, Americans filled 4.3 billion prescriptions last year, spending nearly $374 billion on medicine.
The marketing model for devices is a bit different and more complex. Medical gadgets may diagnose or treat disease, monitor health, or deliver medication. For the most part, they're sold to clinics or hospitals, although there is also a physicians' market, and some products, such as lancets and test strips for diabetics, are sold directly to patients.
Many devices, such as monitors and imaging machines, are one-time sales. Manufacturers will realize a profit only once, without much reordering. So innovation - coming up with new devices that improve upon and replace the old ones - drives this market.
Other devices, such as infectious disease diagnostic kits, are used once per patient and then discarded. This is a broader market, driven in part by innovation, but more by reordering. Seven billion lab tests are done in the United States every year.
In total, the size of the device market is comparable to that of the medication market. Analysts estimate current global sales at $361 billion and expect the market to grow to $427 billion by 2018.
Understand the Regulatory Track and Book Profits
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The U.S Food and Drug Administration (FDA) classifies medical devices in three categories:
- Class I devices, such as bandages, tongue depressors, and examination gloves, present a low risk of harm to the user and are usually exempt from the regulatory process.
- Class II devices, such as CT scanners and contact lens care products, are more complicated and require special controls for labeling, guidance, tracking, design, performance standards, and post-market monitoring.
- Class III devices, such as pacemakers and breast implants, present potential risk of illness or injury. They have the toughest regulatory controls.
Before a manufacturer can test a new device to collect safety and effectiveness data, it must receive an investigational device exemption (IDE) for the product. Both the FDA and an independent institutional review board (IRB) must approve an IDE for Class III products before any study can begin. Class II products must gain approval only from an IRB. The 30-day review is intended to determine that the device is safe enough to test on humans and the proposed clinical study protocol is adequate to demonstrate safety and effectiveness.
Following clinical studies, a device can take one of three regulatory paths:
- Pre-Market Notification (510(k)). Required when demonstrating substantial equivalence to a legally marketed device, when making significant modifications to a marketed device, and when a person required to register with the FDA introduces a device for the first time.
- Pre-Market Approval Application (PMA). Required to evaluate the safety and effectiveness of Class III devices or devices that were found not substantially equivalent to a Class I or II predicate through the 510(k) process. This is both a scientific and regulatory review, evaluating benefit versus risk. Reviewable evidence includes controlled or partially controlled studies, historical controls, well-documented case, and clinical experience. Data about one device cannot be used as evidence to support another.
- Humanitarian Device Exemption (HDE). This designation is given to devices that benefit patients by treating or diagnosing a disease or condition affecting fewer than 4,000 individuals in the United States per year. It is the equivalent of orphan status in drug development. HDEs are exempt from requirements to demonstrate effectiveness but must pose no unreasonable risks. The device must be used at a facility with an IRB.
As with medications, news of positive data releases, approvals, and favorable FDA classification can make stock prices soar.
One Very Cool Device Bound to Make Big Gains
Of all the exciting new gadgets now on the market, one of the most impressive - and coolest - is the Argus II Retinal Prosthesis System, the world's first bionic eye approved by both the FDA and the European Union. It can restore some functional vision to people suffering from blindness.
The device is manufactured and sold by Second Sight Medical Products Inc. (Nasdaq: EYES).
Argus II has an HDE classification in the United States to provide electrical stimulation of the retina to induce visual perception in blind patients with severe to profound retinitis pigmentosa (RP) and little or no light perception in both eyes, though the effectiveness of this device for this indication has yet to be proven.
Here's how it works.
Some types of blindness are caused by damage to cells in the back of the eye called photoreceptors, which come in two types: cones for perceiving visual color images in bright light, and rods, which are not receptive to color, for seeing in dimmer light and for peripheral vision.
Argus II bypasses these damaged cells via interplay between a miniature camera, a patient-worn visual processing unit (VPU), and an implant in the eye. The camera, housed in the patient's glasses, passes an image to the VPU, which translates it into a set of instructions that are then transmitted, via the camera, to an antenna in the implant. The implant, in turn, follows the instructions by sending certain electrical impulses to remaining healthy photoreceptors in the eye, which then pass along the message through the optic nerve to be decoded as an image in the brain.
EYES is also exploring use of the device in people with blindness due to a condition called wet macular degeneration (WMD).
There Is Nearly Limitless Income Potential with EYES
About 1.5 million people around the world suffer from RP, and about 2 million from WMD. Cost for one system is about $150,000, excluding surgery and the cost of learning how to use the system.
The potential income for Second Sight is staggering.
And the company is living up to its promise. On Aug. 4, 2015, the company reported it had grown net revenue by 335% to $2.7 million in the second quarter of 2015, compared to $0.6 million in the prior-year period.
With a market cap of $492 million and shares selling for around $13, this is an affordable stock poised to take off like a rocket.
Action to Take: Buy Second Sight Medical Products Inc. (Nasdaq: EYES) at market and set a 35% trailing stop to protect your investment.
About the Author
Ernie Tremblay has more than 25 years of experience in following and analyzing the latest developments in health, medicine, and related technologies. He understands the FDA approval process, as well as the "hard science" behind new, experimental drugs and the market demand for them - and has a comprehensive grasp of the complex dynamics that determine whether a new drug will be a breakthrough winner, or just another casualty of the FDA approval process.