The cutting-edge medtech stocks worth owning

Much was made of the likely rise of the medtech industry during the pandemic, which was understandable given the circumstances. Covid-19 precipitated a marked increase in the number of related deals, and their representative value. But clinical and cost-related imperatives have not altered since then, even if they’ve become less immediate.

The lockdowns not only resulted in the widespread cessation of elective surgical procedures and screening programmes, but the consequent disruption to normal human interactions also altered our relationships with local GPs. Clearly, the pandemic upended existing norms, but there can be no doubt that we are witnessing a shift away from traditional inpatient settings.

This trend could support demand for medical devices that can be used outside the conventional setting of a hospital, including in the patient’s home. On top of this, prior to the pandemic, clinicians were already adopting virtual care platforms, along with wearable devices, biometric technologies and personalised treatment plans. And if you require any confirmation as to how advanced technologies overlap with commercial and clinical imperatives, you only need look at the growing popularity of peptide-1 drugs for weight loss.

Medtech was also ahead of the curve in terms of artificial intelligence (AI) and machine learning, the employment of which has already seen novel developments in diagnostics and drug discovery. Generative AI is enabling pharma groups to generate and synthesise vast amounts of clinical data derived from early-stage research through to clinical trials. Combined with recent breakthroughs in genomic medicine, the use of AI is opening up a data-driven bespoke approach to healthcare.

Cost benefits from medical technology

For cash-strapped public health bodies, the advantages of telemedicine and remote patient monitoring are easy enough to discern, even though virtual care models don’t always sit well with patients themselves. Rising demand from both primary and tertiary healthcare services hasn’t gone unnoticed in the investment community, although the appetite of venture capitalists has waned to a degree – a possible consequence of the surge in interest rates in late 2021.

Even though attitudes towards the industry aren’t quite so febrile as they were during the pandemic, HSBC data shows that the wider healthcare sector is attracting more venture capital than any other segment of UK industry, particularly in relation to AI-driven start-ups, even though we still lag China, Japan and the US.

Co-development and intellectual capital

You only have to look at the relative success of the fintech industry in the UK to realise that the country has the wherewithal to become a serious rival on the global stage. In terms of intellectual capital, many of the leading universities in the UK already have symbiotic relationships with the medtech industry.

That, in itself, provides a catalyst for the industry going forward. Funding challenges can always be addressed to a degree by co-development investment models, but the pursuit of profits will always provide the most effective catalyst where technological advances are concerned. This even applies to unmet clinical needs.

For retail investors, however, direct options are limited because, like fintech, most of the practitioners in the space have yet to go public. It is also the case that investors tend to target late-stage diagnostic and digital technologies – a preference that will have caught the attention of private equity types. Research by Deloitte shows that biotech investors tend to be less risk averse than those focused on medtech, suggesting that the latter industry is perhaps more reliant on pooled resources.

Build-to-buy models remain in vogue

Alternatively, by outsourcing development programmes to industry start-ups, established players in the medtech space can create an off-balance-sheet method to fund innovation. Structured finance options are regularly employed to meet the complicated financing needs of the entities involved. Early-stage developers are often funded by the founders, and/or angel investors, while ‘build-to-buy’ models have often been employed by private equity firms.

The adoption of hybrid financing strategies has had the effect of crowding out retail investors, at least in terms of capturing the benefit of early-stage growth. Yet it’s worth keeping in mind that investment flows are determined to a large degree by the cost of capital, and we are likely to see some changes in that regard as the year progresses.

The reality is, however, that beyond pooled investment vehicles, retail investors struggle to gain exposure to early-stage developments in medtech. It’s not that capital flows have silted up, it’s just that – with the exception of cardiovascular health devices and cancer diagnostics – there are fewer markets with the type of profit potential that attracts capital to, say, biotech and software developments.

An exception is gathering clinical demands in relation to therapies that address cognitive decline, Alzheimer’s disease and other brain-related issues, along with pain management functions. It’s clear that changing demographics will provide support to the investment case in future, even if the way that developments are currently funded limits exit opportunities for investors. Fortunately, there are also high-profile listed companies to consider. Below, we detail some of the main players, at home and abroad.

GE HealthCare Technologies

The table reveals that performance across the medtech sector has been mixed at best since the pandemic, although in the case of certain entities such as GE HealthCare Technologies (US:GEHC), it may still be too early to make a definitive call on the investment case given that it only began trading on the Nasdaq at the beginning of 2023.

The company was one of the three publicly traded entities spun out of its illustrious parent group at the beginning of the decade. It operates across four divisions, with its commercial activities heavily geared towards diagnostic medicine. This entails molecular imaging, magnetic resonance, diagnostic cardiology and X-ray systems.

But its tech offering also extends to ultrasound service and remote patient monitoring. It’s very attuned to the trends under way in the clinical sphere. And it’s favourably rated across the sell-side, with ‘buy’ recommendations in place across two-thirds of the 21 institutions that cover the stock. At $71.67 (£52.96), its shares are changing hands at 17.7 times forward earnings, implying 17.5 per cent share price upside based on the consensus target price.  

Siemens Healthineers

Siemens Healthineers (DE:SHL) is another multinational that came into being via a spinout, in this case from the largest engineering group in Europe. Former parent Siemens AG (DE:SIE) still owns 75 per cent of the company, with another 7 per cent or so given over to institutional holders, but liquidity isn’t an issue.

The business encompasses several medical technology companies, which again provide a range of technologies that are in line with the industry zeitgeist. They range from point-of-care testing to medical imaging and ‘theranostics’ (therapy and diagnostics) for personalised cancer care.

As with any tech group of sufficient scale, Siemens Healthineers has been taking advantage of a fragmented marketplace, in addition to pursuing its R&D objectives. It’s not surprising, therefore, that intangibles constitute 77.9 per cent of its non-current asset base. This level is by no means uncommon across the subsector. And it’s widely held that valuable intangible assets often go unrecognised in financial statements. It’s a vexed question for corporate finance directors and auditors alike.

Companies with high intangible investments tend to have faster growth rates than counterparts that have a greater share of fixed assets

But investors would do well to take on board the potential downside implications. An elevated proportion of intangible assets on a balance sheet presents several risk factors. These include cyber security breaches and the age-old threat of obsolescence. In some cases, proprietary knowledge can be overly dependent on specific individuals within the company, hence the challenge from a valuation perspective.

For all this, companies with high intangible investments tend to have faster growth rates than counterparts that have a greater share of fixed assets – it’s reflective of the ‘knowledge economy’, in a sense.

Siemens Healthineers has certainly been tapping into modern trends, although its share price performance hasn’t set the world on fire in the post-pandemic era. The stock’s beta rating suggests that it is less volatile than the overall market. Occasionally, these types of shares can go unnoticed, particularly among growth-focused investors, but they hold attractions for those wishing to balance risk and reward without the distraction of volatile price swings. At any rate, the group’s share price is 26 per cent adrift of the consensus target rate, with an enterprise/trading profit multiple superior to the peer average.

Alcon

‘Specialisms’ is one of those annoying buzzwords favoured by investment analysts, but in the case of Alcon (CH:ALC), a Swiss-American medical device producer, its expertise (and pre-eminence) in the ophthalmic surgical and vision care markets demonstrates how a dedicated focus (no pun intended) can translate into commercial success.

The group, which is headquartered in Fort Worth, Texas, is the largest eyecare specialist in the word. A former subsidiary of Novartis (CH:NOVN), it was spun out into a separate publicly traded company in 2019. It operates through its surgical and vision care segments, the former of which contributes just under 60 per cent of revenues through the sale of intraocular lenses and surgical equipment, while the vision care business generates the remaining group revenues through the sale of contact lenses and over-the-counter ocular health products.

Alcon operates in highly specialised fields with high barriers to entry, although sales growth, pitched at the mid-single-digit rate, makes it suitable for investors looking to exploit the group’s long-term value creation in niche, albeit growing, corners of the medtech market.

The forward price/sales multiple of 4.1 times is appreciably lower than the historical average, as the share price has drifted lower through 2025. The current rating also appears underwhelming when set against expected free cash flow generation through to the end of the year. On top of this, Alcon closed out 2024 with both the net and free cash flow margins double those of its five-year average rates. The lion’s share of metrics are heading in the right direction, while 83 per cent of the institutions covering the stock have pitched either ‘buy’ or ‘overweight’ recommendations.

Advanced Medical Solutions

One homegrown medtech option, a relative flyweight by comparison to the selected cohort, has found share price support through periodic takeover speculation linked to Montagu Private Equity and Inflexion. Advanced Medical Solutions (AMS) develops and manufactures tissue-healing technology – essentially high-end surgical products and wound care dressings. Brands include LiquiBand, Resorba, Peters Surgical and Seal-G.

The group’s sales in 2024 increased by 42 per cent, although this predominantly reflected the contribution of acquired subsidiaries in the form of Peters Surgical and Syntacoll. Costs linked to the M&A spree weighed on reported margins, but adjusted cash profit growth mirrored the top-line expansion.

When the group’s preliminary figures were released in March, we noted that “the forward rating of 17 times consensus is slightly adrift of the historical average, while the price/earnings growth ratio of 0.9 suggests there is value still to be unlocked”. No doubt this is well appreciated in private equity circles, so don’t be surprised if this particular medtech option is taken off the table shortly – not least because it’s still trading 21 per cent below the consensus target rate.

Smith & Nephew

Smith & Nephew (SN.), a more venerable UK industry peer, has been battling with what might be described as a bout of ‘long Covid’. Among other medical equipment and services, the group’s orthopaedics segment produces a range of hip and knee implants. So it’s not difficult to appreciate what happened to sales volumes once the pandemic put the kibosh on all but the most pressing forms of surgery.

The group’s sports medicine and ear, nose and throat product lines also felt the pinch as the number of procedures performed by NHS trusts almost halved between March and November 2020. Surgical backlogs dragged on, thus presenting medtech suppliers such as Smith & Nephew with a dilemma as to what constituted optimal inventory levels given that a rebound in demand was inevitable.

It wasn’t as though the group got its sums wrong on the scale of the potential market turnaround, it’s just that it took any number of managerial mis-steps in response. The elective backlog eventually broke, but “poor operational systems and commercial execution” weighed on financial performance, resulting in falling market share in orthopaedics, the implementation of a 12-point recovery plan, a raft of board changes and the attention of activist investors.

Smith & Nephew, a more venerable UK industry peer, has been battling with what might be described as a bout of ‘long Covid’

The remedial measures now appear to be having the desired effect, although the group’s operational struggles dragged on for much longer than management might have hoped. Headcount has been pared back, while the underlying operating margin is on the rise. Among several operational improvements, the group has also registered a much-needed increase in cash conversion, proof positive that matters have improved on the ground.

And yet the practical improvements have not been reflected in share price performance. Indeed, the shares have more or less flatlined since August 2023; the market doesn’t appear to have bought into the turnaround plans. The good news is that, although bosses have kept the lid on R&D expenditure, a high proportion of the group’s sales growth is being generated by products launched in the past five years, including new releases linked to robotics, shoulder arthroplasty and negative-pressure wound therapy.

When we outlined the investment case towards the end of 2023, we noted that “while the company’s own recovery process won’t be linear, market negativity has created a potentially compelling opportunity for investors”. Attitudes towards the stock are yet to improve to any significant degree, and shareholder pressure (in certain quarters) to break up the group hasn’t provided a fillip either. But based on consensus estimates, underlying earnings are projected to rise by 7.7 per cent in the current year, and by another 13.5 per cent through to December 2026. Free cash flow is also projected to increase by similar increments over the period. The group’s share price is down by a quarter based on the peer average enterprise/cash profit multiple, with half of the institutions covering the stock pitching a ‘buy’ recommendation.

Convatec

Not every UK medtech provider has had to endure comparable trading and operational challenges in the wake of the pandemic. Convatec (CTEC) provides a case in point, although it hasn’t been all plain sailing here either.

The group’s product offering, which sits somewhere between the personal care and medtech markets, has been developed with chronic conditions in mind.

Clinical demand for products such as diabetic dressings tends towards the price-inelastic end of the scale. Admittedly, the group, in common with industry peers, had to contend with supply chain and related inventory challenges brought about by the pandemic, prompting it to withdraw from hospital care activities in 2022, and implement successive audits of its key suppliers. But it still managed to drive sales and underlying profitability subsequent to the market disruption of 2020.  

The group’s advanced wound care and ostomy product groupings have experienced rapid sales growth since 2022, although the former business segment has now received news that its InnovaMatrix products (used to control diabetic ulceration) will no longer be covered by the US national health insurance scheme, Medicare. But as we pointed out at the end of last year, “the relative flexibility of medical technology compared with pharmaceutical products means Convatec has plenty of opportunities elsewhere”.

The group’s share price has risen by 17 per cent over the past 12 months, due, at least in part, to dissipating price inflation across its supply chains. It remains on target to achieve its medium-term guidance of 5-7 per cent annual organic revenue growth, along with double-digit compound annual growth in adjusted EPS and free cash flow to equity. Technical signals on the share price turned positive at the end of February, but its valuation metrics are approaching the top end of its peer range, suggesting that further value may only be unlocked over the medium to long term.

All of the medtech plays we have highlighted sell into global markets, and there is no denying that what happens in the US tends to have an outsized impact on financial performance within the industry. The ongoing tariff controversy represents an immediate risk factor, with potential outcomes far from certain. Yet external influences always play a part in valuations given that the industry is heavily regulated and bears hefty compliance costs. Industry bosses will doubtless be concerned about the prospect of a global trade impasse, but it’s unlikely that they will be overly surprised by unfolding events.

Medtech investments and deal activity may have peaked in 2021, but in the light of contemporary market conditions, that period can be viewed as something of an aberration. The reality is that this corner of the healthcare market still holds considerable promise given that demand for remote patient-monitoring devices, diagnostic tools and other digital innovations will invariably build over time due to changing demographics and clinical approaches.

This is one of the main areas of the economy that will benefit strongly from the rollout of AI technologies. We have only scratched the surface here, but over time we are likely to witness profound changes to diagnostic medicine, personalised treatment plans and decision-making, all of which have the potential to significantly improve clinical outcomes in areas such as oncology and cardiology – our two biggest killers. Insensitive as it may sound, this represents a huge opportunity for practitioners and investors alike.