By Jane Sarasohn-Kahn

Medical technology is one of the most innovative sectors in the U.S. economy. The market is fueled by aging populations, expanding chronic conditions, and a forecasted growth in demand for companion diagnostics to use in concert with personalized, targeted therapies.

In its detailed update, Pulse of the industry: US medical technology report 2008, Ernst & Young describes the industry, its opportunities and challenges.

In summary: U.S. med-tech still leads the world, but the larger economy could compromise both the U.S. lead in the sector as well as health innovations.

Who are the medical technology companies? They include medical device, diagnostic, drug delivery and analytical/life science tool companies. In 2008, there are 301 such companies, which fell by 12 in the past year. Within the 301 are 14 conglomerates: 3M, Abbott, Agilent, Allergan, Baxter, BMS: ConvaTec and Medical Imaging, Cardinal Health, Danaher, GE Healthcare, Hospira, Johnson & Johnson,Kimberly–Clark, Pall, and Teleflex Medical.

As shown in the chart above, there are five segments in the sector, the largest of which is therapeutic — companies that develop products to treat patients. Other segments include diagnostic imaging and diagnostic non-imaging, research equipment (e.g., tools like lab equipment), and finally those that do ‘other’ things.

Therapeutic devices comprise over one-half of med tech, and 57% of industry revenues. Within therapeutic med tech, by far the largest therapeutic category is cardiovascular/vascular, with 42 of the 158 companies in the space. Other major categories are orthopedic, hematology/renal, aesthetics, oncology, and products that cover multiple conditions.

E&Y reports that med tech industry innovation cycles have been shortening, and consolidation/M&A/acquisitions have been busy. New entrants are in the space, especially private equity funds. VC and public equity, too, have supported the med tech market.

Jane’s Hot Points: Medical technology provides advanced jobs that pay 49% more per worker than the average manufacturing job, according to Advamed, the industry’s advocacy group.

While the industry drivers such as an aging population and expanding chronic conditions continue to be the ‘things we know we know’ in forecasting this market, the thing we know we don’t know is how the severely contracted credit markets will play out for this sector.

VCs have continued to fund these innovative companies in 2008. However, public equity has dried up. How will the med tech sector remain innovative, globally competitive, and continue to create the sort of ‘good jobs’ that they provide in the larger U.S. economy. After the day with the largest single drop in the Dow — a loss of $1 trillion to investors-at-large — there is cause for concern.