The media hype around booming demand for glucagon-like peptide 1 (GLP-1) drugs, and their weight-loss abilities, has distracted the attention of healthcare investors from the potential of medical-device companies. However, we see an opportunity in mispriced businesses that are benefitting from long-term trends such as ageing populations.
Prices for drugmakers such as Novo Nordisk, which markets the Ozempic and Wegovy Type-2 diabetes drugs linked to weight loss, have soared over the past year. Indeed, the Danish pharmaceutical business is now the largest company in Europe by market capitalisation as a result of the popularity of its two blockbuster drugs. Barclays has forecast that sales of Wegovy will reach US$7.3 billion this year, while Ozempic sales are expected to be worth US$16.5 billion,1 up from US$874 million and US$8.5 billion respectively in 2022.2
Yet while investors’ attention has understandably been focused on the exploding demand for these drugs, they may be missing other developing opportunities in the healthcare sector, namely in the medical-device sector. We believe this area should enjoy strong outperformance in 2024, particularly among small to medium-cap businesses.
Positive demographics
Medical-device companies benefit from a number of supportive factors, including the ageing demographics seen in many parts of the world. That trend is increasing demand for healthcare services and for higher-value-added devices, such as wearable products that can monitor a patient’s health remotely, as well as increasingly sophisticated devices to tackle the chronic ailments associated with ageing.
This year, the likelihood of monetary easing as inflationary pressures abate should also reignite merger-and-acquisition (M&A) activity in the sector. Many large companies rely on M&A, acquiring smaller, innovative businesses to drive growth. Medtech M&A was down for the second consecutive year in 2023. Cash balances at large companies have surged to around US$5 billion, up US$1.5 billion since early 2019. Allied with lower borrowing costs, this should provide businesses with the firepower to stake out new targets this year.3
Alcon is one of the medical-device stocks that we favour. Alcon is a global leader in surgical eye care devices (e.g. those used in cataract surgery) and vision care (e.g. contact lenses and drops). An aging population will see an increase in the rate of cataract surgeries particularly in developing markets, and spending on vision care/preservation is arguably less discretionary than other medical spending.
Recent results have weighed on the stock, with some setbacks around growth in the latest quarter. Last November, the Swiss company reported third-quarter sales that were slightly below expectations, due to inflation and negative currency effects. That caused the business to lower its full-year outlook guidance.4
However, we believe that the pessimism surrounding the stock is excessive. Margins are recovering following the negative impact of years of high cost-inflation. We anticipate cost pressures will ease in 2024 and that the existing high-cost inventory will work its way through the system. Consequently, we expect margins to rise in 2024, with the potential for acquisitions to provide a further boost to growth.
1 https://www.ft.com/content/ee322048-a7f1-4762-8533-a700262c8409
2 https://www.pharmalive.com/company-of-the-year-2023-novo-nordisk-riding-the-semaglutide-wave/
3 https://www.medtechdive.com/news/medtech-deals-mergers-2023-review/702724/
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