Medical devices are obviously part of a highly regulated sector, and the upfront investments can be high with long capital retention rates. However, the exit values can also be higher - people will spend quite a lot of money on improving their quality of life!
As people age, joints and other body parts start to wear out and medical devices, as opposed to pharmaceuticals, tend to be the interventions that enable continuation of quality of life, for example, a knee replacement, cartilage replacement or stents inside of arteries.
Japan has already seen the heavier load a greying population puts on medical services with Europe and North America are not far behind which means that the demand for medical devices is only going to grow.
Medical device companies in the European mid-market, the €10-100 million revenue space, are often companies that have gone through the initial design phase and are now looking for investment for a number of reasons:
- to expand across Europe
- to ramp up marketing activity
- to expand to the USA
In all those cases, these companies have already done a lot of innovation and they are now poised to garner the back-end. The investment life cycles for those companies are longer, but that's good, particularly for European private equity, because that aligns more with their liquidity timelines.
The medical device market has very high barriers to entry. It requires a lot of economic investment, has a high (and complex) level of regulation and a long development time. It could be that the development time is so long that the regulations may well have changed by the time you’re done. Or, the device doesn’t work, or it does work but by the time you launch it’s 10 years down the line nobody wants it or needs it because something else has come along that obviates it.
There are also supply chain risks. A lot of the components and pieces of medical devices these days come from China. Organisations need to be able to validate quality, etc which adds a risk to the product development.
How to mitigate these risks
To mitigate these risks it’s important to investigate the technology practices of potential investments. Do they have good compliance? What do they have in the way of testing? What are their testing regimes? What are their testing numbers? How are the companies themselves vetting the technology of the companies in their supply chain? A specialist advisor, like Intuitus, will be able to investigate all these elements and give you confidence in your investment decision.