Bellevue Medtech & Services

Global stocks (MSCI World Net Index +2.8%) began the new year in positive territory. The healthcare industry as tracked by the MSCI World Healthcare Net (+5.7%), the global medtech sector (MSCI World Healthcare Equipment & Supplies Net +8.7%) and the Bellevue Medtech & Services Fund (+8.7%) delivered even better returns. This outperformance can be traced, among other things, to the relative weakness of leading tech names with a focus on AI (Nasdaq 100 +1.6%). The debut of the new Chinese AI-powered “reasoning model” dubbed DeepSeek R1 triggered a sector rotation in the stock market: The market value of stocks such as Nvidia and Microsoft (which are not in the fund's portfolio) plunged, making investors more willing to pull their money out of the tech sector and invest it in healthcare stocks instead.

President Donald Trump imposed new tariffs on imported goods from several countries, including China, during the month under review. Once again it was generally acknowledged that, for structural reasons, medtech companies would be not as affected that much, if at all, by a trade war. For example, during Trump's first term of office, medical technology products were exempted from tariffs. But even without such exceptions, the medical technology sector is still at an advantage compared to other industries: 1) medtech manufacturing costs are low relative to selling prices (import duties are based on the former, which dilutes the impact of any tariffs), 2) a high percentage of total manufacturing cost originates in the US (most of the leading medtech companies are based in the US), and 3) the negative impact of any retaliatory action is low (China accounts for a relatively low percentage of total sales and Western medtech products sold in China are often manufactured in China too).

Medtech’s outperformance in January was amplified by solid 4Q earnings announcements and confident outlooks for 2025. Innovative new products have created fast-growing blockbuster markets and surgical procedure volumes are at high levels. An increase in M&A activity also buoyed the medtech sector’s performance. Just before and during the J.P. Morgan Healthcare Conference, the premier healthcare investment symposium, the takeover of Inari Medical by Stryker and of Bolt Medical by Boston Scientific was announced.

Fourth-quarter results from Abbott (+12.9%), Intuitive Surgical (+8.8%) and Stryker (+7.9%) beat investor expectations and had a positive impact on the stock performance of other large-cap medtech names such as Boston Scientific (+13.8%) and Becton Dickinson (+8.4%). Dexcom (+10.9%) reported key 4Q results and 2025 guidance that pleased investors. Many of its self-caused sales problems that led to a big markdown in its share price last year have since been resolved and sales growth is picking up again. EssilorLuxottica (+12.8%) rose on the reports of brisk sales of Ray-Ban Meta smart glasses. Other brands (Oakley) are expected to launch smart glasses later this year, and products with additional features (display feature) are moving through R&D pipelines.

Only a handful of portfolio companies such as Edwards Lifesciences (-2.8%), Terumo (-3.1%), Danaher (-3.6%) and Procept BioRobotics (-10.6%) had a negative impact on performance. Procept BioRobotics was marked down due to a short-seller report based on false allegations. Investors were also surprised that the company did not publish any preliminary results for the fourth quarter and therefore worried that the quarterly results would be weak. All performance data is in EUR / B shares.

According to the executives we spoke with at the J.P. Morgan Healthcare Conference, surgical procedure volumes are still growing at a fast rate. The first two weeks of the Q4 reporting season for medtech companies have confirmed this too. We expect procedure growth rates to remain at a high level in 2025.

The approval and subsequent launch of relevant new products will continue to bolster sales growth, too. Examples here are Abbott’s Lingo, Libre Rio, Libre 3, TriClip and AVEIR products, Boston Scientific’s Farapulse PFA and Watchman FLX Pro systems and the new da Vinci 5 surgical robot from Intuitive Surgical. We expect sector pricing power to remain above historical levels in 2025, too. Margins should improve thanks to the above-average sales growth and a wave of new product launches with high margins. In the healthcare services space, we see considerable upside potential for hospital operators, health tech players and health insurers in the US. Hospital operators should benefit from high patient volumes, higher prices, and only moderately higher personnel costs. We expect health insurers to report solid member growth and significantly higher profit margins in Medicare Advantage and Medicaid business lines. Continued high US Treasury yields could also have an accretive effect on earnings. Of greater importance for the performance of healthcare services stocks is whether the current cloud of uncertainty hanging over the industry will lift and more clarity about the long-term framework conditions will emerge after Donald Trump’s inauguration.

Meanwhile there are already signs of a significant increase in M&A activity after the appointment of a business-friendly director for the US antitrust authority and that the large-cap companies will use their strong balance sheets to drive external growth. The currently attractive valuation levels are enticing from this angle too. The anticipated repositioning of investor assets out of stocks that made strong gains last year is yet another factor in favor of investing in the Bellevue Medtech & Services (Lux) fund.