For opportunities in the medtech sector, look for high barriers to entry and disruptive technologies

Anthony Petrone
Anthony Petrone Senior Medical Devices, Diagnostics and Therapeutics Equity Research Analyst
November 23, 2022

Investors have historically found the healthcare sector attractive during times of economic uncertainty. We need access to healthcare solutions regardless of macroeconomic conditions. As a result, rising concerns about a potential recession have some investors looking at healthcare stocks as a potential hedge in their portfolios. 

However, not all healthcare stocks provide the same potential defensive qualities. We believe medical devices and technology companies may offer greater resilience compared to other healthcare stocks due to their association with necessary and emergency procedures. The Medtech sector hasn’t been immune to the market correction of 2022, and offers attractive entry points for many high-quality stocks, in our view. 

We recommend looking for two types of opportunities: Established companies with leading solutions in areas with a higher barrier to entry, and companies developing disruptive technologies that leapfrog current treatments or diagnostic techniques. 

Current economic conditions support stable demand 

Most patients rely on employer-sponsored health insurance, and consequently demand for Medtech solutions typically fluctuates more in line with employment levels than other macroeconomic indicators. The current market contraction has been led by rising energy prices, broad inflation, rising interest rates and slowing growth, while employment remains strong – therefore, demand for certain types of medical devices and technology should remain stable.

Stock performance may not be consistent across the entire medical technology sector, with companies that offer critical care solutions likely to benefit from the more consistent demand. In contrast, an uptick in unemployment could decrease demand for elective or non-critical treatments and therapies, putting pressure on companies in areas such as aesthetic surgeries.

Companies with large portfolios that meet critical care needs are best positioned to ride out a potential recession. Even better, companies that offer a mix of critical and non-critical solutions offer the combination of potential stability in choppy markets with upside opportunities if unemployment remains low or market conditions improve.

Strength and stability: Mature companies with balanced portfolios

Medtronic (MDT) checks the boxes of a mature company with a large and varied portfolio. Its leadership position in the production of stents and pacemakers provides a solid foundation in a critical care area with a high barrier to entry. MDT has multiple technologies either already on the market or within its R&D pipeline that could disrupt high-growth industries, including transaortic valve replacement (TAVR), robotic surgical solutions, and renal denervation for treatment-resistant hypertension. From a capital allocation standpoint, Medtronic is committed to funding its deep research and development pipeline from both an organic and inorganic standpoint, which should allow it continue producing additional breakthrough technologies over time.

Disruptive solutions coming to market

Investors looking for greater upside potential in the medtech space can look for companies with innovative alternatives to traditional treatments. Establishment Labs (ESTA) has developed a new minimally-invasive breast implant platform, Motiva MIA, which reduces procedure time by nearly half, only requires local anesthesia (not general) and has been associated with lower patient pain levels both post-surgery and into recovery. Other companies with paradigm-shifting innovations include Dexcom (DXCM) in the area of continuous glucose monitoring (or CGM), Edwards Life Sciences (EW) in the area of structural heart solutions, Intuitive Surgical (ISRG) in the area of robotic surgery, and Lantheus Imaging (LNTH) in the area of radio-isotope cancer diagnostics. With each company now established as a category leader in their respective end-markets, we continue to see the potential for the market to award premium multiples and returns in spite of the mixed macro backdrop heading into 2023. 

Abiomed (ABMD), the leading provider of mechanical circulatory heart pumps, is a leading example of a company with the favorable characteristics of having disruptive technology that has quickly established a high barrier to entry. The company’s Impella family of mechanical heart pumps reduces the risk of organ failure during a range of cardiac surgeries, which in turn allows for more complete interventions and hence better patient outcomes. The value of these leapfrog technologies is evidenced in Johnson & Johnson’s (JNJ) recent bid to acquire Abiomed for an all-in offer equating to an $18 billion enterprise value, or roughly a 65% premium to the company’s 30-day historical average stock price. 

Investors need to pick their spots 

The combination of consistent demand and rapid technological advancement makes medical technology an attractive opportunity for investors, particularly during a recessionary cycle. However, we would caution investors to pick their spots with care. 

Volatility in the Medtech space has risen in recent years, though it still remains lower than areas such as biotechnology. Likewise, the dynamics of the current market downturn remain unclear, as does the outlook for the economy in 2023. 

In an environment where volatility remains high and valuations may continue to decline, we believe the best places to seek opportunity are among companies with high barriers to entry, disruptive technologies in areas of critical care, or a combination of the two. Many companies in our coverage universe fit the bill – including Medtronic, Intuitive Surgical, and Lantheus Imaging to name a few. Good luck trading into the New Year!

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