Medical Technology Stocks: Innovation Endures as Valuations Reset

How can medical technology companies diversify an equity allocation to healthcare? 

Investors are questioning the staying power of medical technology (medtech) stocks, which have fallen from grace since the COVID-19 pandemic. Yet we think innovation continues to create exciting opportunities in companies that march to a different beat than the rest of the healthcare sector.

For much of the past decade, medtech stocks outperformed the broader healthcare sector (Display). The popularity of medtech stocks—represented by the MSCI World Healthcare Equipment and Supplies industry—peaked during the pandemic, driven by accelerated spending on medical equipment. Since 2021, medtech shares have lagged, and in recent months, sentiment further soured amid struggles at key industry bellwethers.

Beneath the surface, a more nuanced picture is emerging. Valuations have reset while the underlying innovation and business drivers that have long supported medtech remain firmly in place. For equity investors willing to look past recent disappointments, the divergence within the industry deserves attention.

Medtech vs. Pharma: Distinct Business Models

The starting point is to distinguish between medtech and other healthcare industries. Medtech makes up 17% of the broader MSCI World Healthcare Index, which is dominated by pharmaceuticals companies (Display). For pharma companies, economics are often defined by patent cycles: drugmakers enjoy periods of strong growth and high profitability followed by abrupt cliffs as exclusivity expires. Medtech, by contrast, tends to evolve through continuous product iteration.

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.

Medtech’s post-COVID normalization has removed many distortions that clouded analysis. With procedure volumes and hospital budgets closer to equilibrium, active investors can evaluate those businesses that truly have durable advantages—and those that were beneficiaries of temporary conditions. And rather than treating medtech as a monolithic allocation, investors can focus on discrete technologies, platforms and clinical areas where innovation, execution and valuation align.

To be sure, the risks haven’t vanished. Healthcare budgets remain under pressure in many regions and sentiment can stay negative longer than fundamentals might justify. But we think viewing medtech firms based on recent disappointments is shortsighted.

Improving Patient Outcomes and Efficiency

As we see it, medtech’s long-term appeal has never been about pandemic spikes or short-term multiple expansion; it rests on the sector’s ability to embed itself in clinical practice through innovation that improves patient outcomes and system efficiency. That foundation remains intact.

The current moment provides an opportunity to reassess where sustainable value creation is taking place, driven by compounding innovation and recurring demand. Active investors will find that the pulse of select medtech companies is beating much louder than the headlines suggest.