FTSE 350 Review: Why healthcare stocks are stable bets

While replacement knees, insulin devices and surgical dressings may not be the kind of high-tech products that excite growth investors, they are perennially in demand. However, there was a moment last year when investors seemed to think the mass adoption of GLP-1 weight-loss drugs would shrink sales of key products at ConvaTec (CTEC) and Smith & Nephew (SN.). In hindsight, these fears appear to have been greatly exaggerated. 

Among other things, ConvaTec is a maker of insulin pumps that help diabetics manage their condition. Although GLP-1s have become renowned for their health benefits, they were originally approved for the treatment of type 2 diabetes. More effective treatments could, in theory, reduce patient demand for insulin pumps. But given that these solutions are used predominantly by type 1 diabetics, the impact is likely to be minimal for now. 

A further concern has been that that Smith & Nephew, which manufactures artificial joints, could see a drop in the widespread need for these devices as populations slim down. But those requiring knee and hip replacements have accumulated damage over a long period, suggesting demand isn’t going to vanish overnight. 

Investors have nonetheless been cautious over the company in recent quarters. There are a variety of reasons for this, including the anticipation of falling sales in China as the result of legislation designed to cut the cost of medical consumables. Smith & Nephew has also been dealing with supply issues in its wound-care business following a shift in production facility. Despite these factors, the company revealed a set of better-than-expected Q3 figures in early November, suggesting it may be slightly undervalued at its current forward price/earnings (PE) multiple of 15 times for FY2024.

ConvaTec has undergone something of a re-rating in recent months following successive guidance-beating performances. Its 2024 PE multiple is now nearly 21 times – making it appear pricey next to its sector peer. But some might argue that’s merely the cost of a business delivering the goods.