Many medtech firms are more like technology or consumer businesses than classical drug developers. In subindustry segments such as therapeutic devices, surgical tools and diagnostics (Display, above), companies build out installed bases of devices, associated consumables and services that are refreshed and upgraded over time. Incremental innovation—improvements in accuracy, ease of use or data integration—can extend product lifecycles and strengthen customer relationships rather than reset them. And they don’t have to worry about the patent cliff dragging down future earnings.
That distinction has important implications for durability. Devices with high switching costs and deep clinical integration can support recurring revenues and long-lived franchises, even when near-term sentiment turns against the sector.
Where Can Investors Discover Medical Innovation?
Recent skepticism has focused on the sector’s largest names: Abbott Laboratories and Boston Scientific. Their shares have been under pressure because of company-specific controversies.
But negative headlines at large companies shouldn’t cast a shadow over the industry, in our view. In fact, innovation is progressing in several high-impact areas at companies that are less prominent in the industry limelight.
Structural heart technologies are a case in point. Advances in valve replacement and minimally invasive procedures are expanding patient eligibility, accelerating recovery times and leading to better long-term clinical outcomes. Edwards Lifesciences’s significant market share in this medical technology segment, and advances in other types of valves position it well for profitable growth.
In diabetes care, continuous glucose monitoring (CGM) is a great example of compounding innovation. CGM products were first launched about 20 years ago and have extended the lives of millions of diabetics worldwide by offering patients the ability to continuously track blood sugar levels, helping to avoid dangerously low or high levels. DexCom, one of the two leading companies in this technology, has enjoyed steady, long-cycle growth from increasing patient adoption, and is expanding the concept into continuous sensing for other parts of the medical market.
These developments are rarely binary. Unlike many small biotech companies where outcomes can hinge on a single trial or regulatory decision, medtech innovations tend to compound gradually. That makes fundamental research particularly effective in identifying opportunities.
Capturing Innovation at a Reasonable Price
Today’s market conditions, viewed in historical perspective, are especially appealing for medtech stocks. In the early 2010s, medtech stocks were out of favor and growth projections were low. Today’s valuations suggest that investors are shunning medtech, yet growth expectations are much higher than they were 15 years ago. Current valuations backed by solid earnings-growth potential, forecast at 9.6% annualized through 2029 (Display), provide an attractive entry point for equity investors, in our view.
