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Pharmaceutical vs medical device investment

andy-smith

Andy Smith

Senior Principal, ICON plc

Most investors understand the mechanics of investing in a new pharma or biotech company. It usually starts with a group of scientists identifying a drug molecule with potential therapeutic effect. Investors are then found and pump in cash so that the drug can go through pre-clinical and subsequently clinical testing. It takes a lot of money and the rate of attrition is quite high, but it is well known that big pharma will pay handsomely for promising new drugs.

Medtech on the other hand is less easy to understand and hence the investment community tends to view it differently and more cautiously. This may sound like a gross oversimplification but familiarity with a market sector plays a huge role in investment decision making.

Spreading the risk

A “typical” medical device company is difficult to describe. The sector covers a broad spectrum, from orthopaedic joint replacements, cardiovascular stents and insulin pumps, to the monitoring devices used in hospitals and point of care diagnostics.

When I used to run biotechnology funds, their remit was wide enough for me to spread the risk by investing in both specialist and large pharmaceutical companies. However, to construct what the finance professors describe as “a well-diversified portfolio”, I broadened my investments beyond the life sciences, by swapping some big pharma for some medical device companies.

This added some necessary diversification, largely because there is a significant difference in the commercial, regulatory and even clinical dynamics of medical devices and small or large molecule drugs. Should the biopharma sector have a bad day, medical device stocks may hold up the combined portfolio. In addition the dynamics of medical device companies provide a contrast with those of drug development companies and can, with sufficient research, be nearly as profitable.

Should the biopharma sector have a bad day, medical device stocks may hold up the combined portfolio.

Time to market

For medical devices such as cardiovascular stents and pacemakers, pre-clinical testing generally leads to proof of principle and the improvement of an existing design far more quickly than is the case for drugs. Clinical studies can therefore start much sooner, reducing the time and cost involved in bringing a product to market.

This is partly because stents, pacemakers, neurostimulators and orthopaedic implants, for example, have very a localised function, and don’t present the same risk of off-target effects as pharmaceutical products. For local ethics committees, principal investigators and regulators to approve the first human administration of a new chemical entity drug, any effects must be monitored in large pharmaco vigilance studies.

Medical device trials are smaller. My guess is once 10 pre-clinical trials have been done successfully clinical trials can begin. An orthopaedic implant, or even a continuous glucose monitor – by virtue of its essentially mechanical nature – will work in a similar way during trials. While drug companies will try to lure investors by describing how close their clinical model of disease is to the human patient, experience has shown, in Alzheimer’s disease or schizophrenia for example, that this isn’t always the case. Our brains are a little more complicated than those of mice, whereas our joints and blood vessels are more comparable. This all serves to help bring medical devices to market far more quickly than drugs.

Reimbursement

If I were still running a fund today,medical device companies might have an even greater appeal as they have avoided the political criticism (and social media bombshells) that have been levelled at biopharmaceutical companies for their perceived aggressive price increases. The medical device sector has not been without its pricing issues however. The Affordable Care Act (ACA) included a medical device tax that had companies celebrating at its temporary suspension and salivating at the prospect of ACA’srepeal under the Trump administration.

medical-device-companies-less-backlash

But even with high sticker prices, medical device companies receive
less backlash from payers than drug companies. The $1,000 gross price per pill of the anti-HCV medicine Sovaldi (sofosbuvir) was met with howls of objection from pharmacy benefit managers and US senators. Conversely, a similarly priced orthopaedic implant or pacemaker generates little reaction.

Another small but potentially helpful advantage for medical devices over pharmaceuticals is that (outside the case of special licenses in the UK) a charge cannot be made for an unapproved drugs in a clinical trials, whereas devices can be charged for.
The rationale for this may be that, once implanted, devices are expected to be long-lasting and spare the patient the cost and side-effects of drugs.

Access to talent

Medical device development is a highly specialised industry and, in order to succeed, medical device companies need access to a skilled workforce with first-hand experience. This means that medical devices companies tend to form around geographic clusters. The same is also partially true for biopharmaceutical companies but I would suggest that the range of skills needed to get a biopharmaceutical into Phase 1 are slightly more widely accessible than those needed to get a medical device into the clinic. This is something which investors and entrepreneurs should bear in mind when investing or building new device companies.

medical-device-companies-skilled-workforce

A rosy picture?

Medical device companies do not always represent a lower risk investment option compared with pharmaceuticals. However when the underlying technology is proven (even in principle), the market need is understood and quantified, and a team with sufficient experience has been assembled, then I would argue that a medical device business can provide an investment opportunity which is more transparent than a new drug candidate.

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