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The medical device manufacturing sector is a highly diversified industry that generates an assortment of products designed to diagnose and treat patients worldwide. Progress in medical technology that allows for earlier detection of diseases and more effective treatment options are daily occurrences. Medical devices range in nature and complexity from simple cotton swabs and tongue depressors to pacemakers and sophisticated imaging systems. The major manufactured goods that make up the medical devices industry include; electro-medical equipment, surgical and medical instruments, surgical appliances, and dental and ophthalmic devices.

For investors, the news is good. The medical device sector persists in benefiting from a new generation of technology and as such is a prime target for investors today. In fact, investment in medical device research and development has more than doubled over the past two decades The industry is fueled by innovation and the continuing pursuit for better ways of treating and diagnosing medical issues and impending growth potential for this sector remains positive. Actually, the medical device sector is better positioned than some other industries to weather economic downturns as the purchase of such devices are not tied to the vagaries of discretionary spending. However, the industry may have to contend with new challenges such as a multi-billion dollar tax as part of healthcare reform legislation, strengthened regulatory oversight, and efforts at cost control.

To facilitate expansion, medical device companies must look increasingly at developing countries to drive future growth. Canada, the U.S., European Union, and Japan are all extremely large and profitable medical device markets; however, they are established markets with constant but relatively low (3%-5%) annual growth rates. Demand for medical devices in emerging growth markets, such as China and India, is growing at double digit rates compared to developed countries, although from a short base.

One of the rules of investing is that the riskier the bet, the higher the payoff. Small to medium-cap enterprises in the medical device sector present a higher investment risk, but conversely, these are the firms that are creating the next, best devices on the market. Volatility in such stocks is generally high, but if you can stomach the roller coaster ride, these companies invariably represent the best return on your money. With limited earnings in the early stages of development, small-caps are particularly reliant on venture capital funding. Having said that, venture capitalists require an expected system in order to gauge risk, and when uncertainties prevent access to funds, there is apt to be a reduction in innovative activity. As a result, some small-caps are in a constant state of flux, searching for money to fund their medical devices.

Following are a few medical device companies, that though they may have reported losses, they are positioned well to catch the tailwinds of the expanding sector. Each is worthy of evaluation based upon several factors; unique patented products that change the way in which medical procedures are implemented, ample room for growth within the sector, and strong pipelines.

Endologix Inc. (ELGX) is a medical device company that develops and markets products for the treatment of coronary and vascular diseases. The company has developed a distinctive method for the delivery of radiation to prevent restenosis following the treatment of atherosclerosis. ELGX recently reported a net loss for the fourth quarter ended December 31, 2012 of $6.52 million, or $0.11 loss per share. This is compared to a net loss of $3.66 million, or $0.06 loss per share, for the same quarter ended December 31, 2011. ELGX anticipates a GAAP loss per share of $0.14 to $0.17 in 2013. Total revenue was up for the fourth quarter ended December 31, 2012; $29.22 million compared to $23.39 million year-over-year. Even taking into consideration the losses reported by the company, ELGX is still well positioned to continue gaining market share. The company is in the first stages of leveraging its expanding product pipeline. Market cap is $969.38 million. The stock has been showing support at around $15.42 and resistance in the $16.22 range. Technical indicators for the stock are Bullish.

LED Medical Diagnostics Inc. (OTCQX:LEDIF) is headquartered in Burnaby, British Columbia, Canada. Its wholly-owned subsidiary, LED Dental Inc., is the manufacturer of the Velscope Vx Enhanced Oral Assessment System. Velscope Vx devices are the first medical devices to apply tissue fluorescence visualization technology to conduct screenings for oral cancer and other oral diseases. LED medical is a small player in the sector but its most recent earnings report was characterized by a healthy increase of revenues; 181% over the third quarter of 2011. Gross margins were relatively high at 63% for the three months ended September 30, 2012 compared with 62% for the three months ended June 30, 2011. This is a good indication that LEDIF is able to pay distributions to shareholders, general and administrative expenses, and interest expenses.

LEDIF is particularly well positioned within the sector to gain traction. The company has recently leveraged its VELscope Vx technology out of the dental vertical into the mainstream medical metric. Its fluorescence visualization technology is being studied for use by surgeons and dermatologists in delineating the margins of skin cancers. The company is also actively engaged in R&D. The stock is undervalued at this time and presents a good entry point for prospective investors.

MELA Sciences Inc. (MELA) is a medical device company focused on the design and development of non-invasive instruments to assist in the early diagnosis of melanoma. The company's product, MelaFind, features a hand-held imaging device that emits light of multiple wavelengths to capture images of suspicious skin lesions. Insider buying is usually a good indication of management's faith in a company. Recently, Joseph V Gulfo, who is Chairman, CEO and President of the company bought 20,000 shares at a price of $1.15 per share for a total value of $22,974.

The company has had some trouble of late but is currently trending up. Share prices have moved between a 52-week high of $6.96 and the current low of $1.08 and are currently at $1.17 per share. Based on this metric, the stock has a potential upside of 124%. The 200-day and 50-day moving averages dipped 0.8% lower and 2.6% lower last week, respectively. Watch for a continued uptrend in this stock based on insider trading and the release of a new study confirming the company's MelaFind as an important tool in the diagnosis of melanoma.

The medical device sector is growing daily as new appliances are patented and brought to market to aid in our fight against diseases such as cancer and heart disease. Whether it's the latest pacemaker or, as in LED Medical's case, tissue fluorescence visualization, cutting edge technology translates into rewards for investors who find the right company. All three of the companies mentioned in this article have plenty of room for growth, fill commendable niches within their specific device fields and offer good opportunities for financial gain.

Source: Investing In The Medical Diagnostic Device Sector In 2013