The fourth quarter sell-off hurt big medtech less than big pharma

Medtech stocks, traditionally a bit of a refuge when things go wrong on the broader exchanges, did indeed have a better year than biotech or even pharma. But the poor fourth quarter still took a toll.

A look at the indices of US-listed medtech stocks shows a now-familiar pattern – rising value until late September and then a jagged decline to the end of the year. In Europe the picture is different: the fourth-quarter fall is present, it’s just that the first three quarters weren’t that great to begin with.

The following analyses covers only companies who obtain more than 40% of their revenues from the sale of diagnostic or therapeutic medical technology.

Fortunately for Nasdaq-listed Dexcom, leader of the big-cap risers, the gains it made in its extraordinary third quarter far outweighed its fourth-quarter retrenchment. The blood glucose sensor maker ended the year with a share price increase of 109%, enabling it to leap categories from its previous mid-cap status (Fireworks among the small and mid-cap device makers, July 5, 2018). 

This is mostly down to the launch of its G6 device. In March this became the second continuous glucose monitor to gain US approval without the requirement for regular fingerstick calibration – but the first whose approval specifically permits its interoperability with devices from other developers. Sales of the G6 drove Dexcom’s second-quarter revenues materially higher than analysts’ expectations, and its shares soared 30%. 

Its acquisition of algorithm developer Typezero Technologies in late August confirmed to investors that Dexcom was thinking long-term, with an eye to developing a closed-loop insulin regulation system (Typezero takeover puts Dexcom closer to an artificial pancreas, August 24, 2018). 

Often, the spectacle of a company chasing acquisition after acquisition is an alarming one for shareholders, speaking as it sometimes does of a need to try anything to forestall falling sales. Not so Boston Scientific, investors in which appear to have been delighted by its nine takeovers in the last 12 months. 

Not even the takeover of BTG, which at $2.4bn conferred a higher valuation on the fairly lacklustre target than it had enjoyed for 17 years, was capable of harshing Boston’s backers’ buzz (Boston bid for BTG shows dreams can come true, November 20, 2018). 

Insulated

The fourth-quarter sell-off was not confined to Western markets. Japanese stocks had a pretty dismal conclusion to the year, and Olympus, whose medical technologies focus on imaging, leads the fallers. 

It is more of a surprise to see Align Technology among the fallers. Across 2017 Align recorded the greatest rise by a big-cap medtech since Vantage started tracking the performance of these companies, more than doubling its valuation. Last year, though, it suffered a more precipitous drop than most, shedding 47% of its value in the final three months. That it was only 6% off from the start of the year is a testament to its excellent second and third quarters. 

Overall in 2018 there was more for big-cap medtech to celebrate than bemoan. Only five groups in this cohort lost value, and the average fall, 9%, was less than the average gain among the risers, 25%. Moreover the increases were greater and the decreases less than in the biopharma sector. 2018 was a rocky year for large medtech, but its reputation as a sanctuary – relatively speaking, anyway – remains intact.