ARTICLE | August 24, 2023

Capital markets outlook

We compared the S&P 500 to the S&P 500 health care equipment index, which drills down on the S&P medtech, medical device and health care equipment companies. The following chart highlights their performance, normalized for 10 years of appreciation. Convergence of the two indexes began in 2022, with values for health care equipment rising more slowly than the broader S&P 500.

However, despite its temporary underperformance, the health care equipment index has remained ahead over the 10-year period. We expect volatility will remain high and valuations will continue to shrink if the Federal Reserve maintains its tightening of fiscal and monetary policy. However, performance in the medical device sector over the long term is expected to continue to outperform the broader S&P 500, as both demand for and sales of medical devices are predicted to remain at all-time highs.

European regulatory changes could drive medtech investment in the U.S.

The European Medical Device Regulation (MDR), established to ensure a high standard of safety and quality for medical devices produced in or supplied to member countries of the European Union, presents potential challenges for makers of new medical devices. Any new devices launched since May 26, 2021, must meet the stringent new requirements, while existing certified devices must be recertified under the new rules by May 2024.

Although the European Parliament and Council approved a transition delay to 2026 through 2028 based on the class of device, the new certification is much lengthier and costlier than the prior process. While we have yet to see an increase in applications by EU member countries for clearance under section 510(k) of the Food, Drug and Cosmetic Act or premarket approval (PMA) by the Food and Drug Administration (FDA), we could see an uptick in the future. 

Increased data helps medtech serve customers, but companies must ensure cyber compliance

Many medtech companies collecting data are working to improve its accuracy, integrate it into patient-centric electronic health records and share it among interdisciplinary teams to improve patient care, increasing the value of their medical devices to consumers. At the same time, however, companies must ensure their data collection is in compliance with new FDA cyber regulations. In March, the FDA announced that if it receives submissions lacking cybersecurity plans related to medtech data, it will not immediately issue a “refuse to accept,” decision, but rather will work with companies to ensure compliance. However, this is an interim policy, and by Oct. 1, companies should have sufficient time, according to the agency, to fully comply with the regulations.

The FDA regulations require that every new applicant seeking approval for a medical device must present a comprehensive strategy outlining the measures to "monitor, identify, and handle" cybersecurity concerns. Additionally, companies are required to verify that they have a systematic procedure to record the device's protection, which includes regular security updates. Lastly, companies must furnish the FDA with a "software bill of materials" to reflect the technology utilized in each device.

Venture capital deals are decreasing, but patented technology strengthens opportunities

Venture capital deals have been down every quarter since 2022, with the biggest reduction in activity for early-stage companies. As venture capital deals account for over half of the capital raised in the medtech space, this significant continued decrease presents challenges for startup and early-stage companies. But companies that have patented their technology, or at least applied for patents, have had stronger opportunities for venture capital funding. While there is still dry powder, the amount appears to be shrinking. 

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