Investing in innovation: unlocking value in MedTech

For top performers, R&D investments fuel growth, increase investor confidence and unlock total shareholder return.

In brief

• An EY analysis of value creation among MedTech sector companies underscores the pivotal role of investment in R&D as a driver of long-term value creation.
• By investing in innovation, top performers increased total shareholder return by raising investor confidence while also fueling growth.
• Companies that proactively invest, particularly in novel and differentiated products, are those best positioned to outperform competitors.

In the fast-evolving world of medical technology, strong total shareholder returns (TSR) hinge not just on profits, but on strategic innovation — especially in R&D. These investments not only fuel growth but also create a TSR multiplier effect by reducing perceived investor risk.

Figure 1

Source: EY analysis

ROIC and its impact on TSR for MedTech

To get a deeper understanding of the relationship between growth, capital investment and TSR, we used a proprietary, forecasted cash flow model, as we did in our inaugural study, to analyze 40 companies in the MedTech sector. We divided the sample companies into high- and low-return on invested capital (ROIC) groups, based on average historical ROIC over a three-year period, 2022–2024, and then examined how each group fared with respect to TSR. The TSR decomposition by group reveals some unexpected outcomes that warrant closer analysis (Figure 2).

• First, the overall TSR is higher for those companies with low ROIC than for those with high ROIC. Meaning that, unlike our initial study, ROIC does not appear to be a strong predictor of TSR for the MedTech sector.
• Second, the low-ROIC/high-TSR group earned excess returns by deploying the seemingly wrong strategy. These companies deployed new capital and grew their balance sheets significantly. With a low ROIC, theory suggests such companies should be cautious in deploying capital and instead focus on fixing relative underperformance. However, in our MedTech example, we see the opposite.

Figure 2: Analysis of MedTech Sector Quadrants, by ROIC and TSR 

We explore these apparent inconsistencies below and the implications for how MedTech companies should view capital allocation.

Research and development, the missing link in the ROIC equation

In our initial study, high ROIC was a strong predictor of TSR. However, this relationship is less clear in the MedTech sector. One key reason is the central role of research and development (R&D), which is treated differently in financial accounting compared to other capital expenditures. Unlike most capital expenditures or acquisitions — which are included in deployed capital and amortized over time — R&D spending is expensed immediately and excluded from the balance sheet. As a result, traditional ROIC calculations systematically underrepresent the true investment base in R&D-intensive companies, leading to potentially misleading conclusions about capital efficiency. When we consider return on R&D investment , we see a consistent outcome in which high return on R&D translates to higher TSR.

As described in the EY Pulse Report, while it can be challenging to find high-growth investment opportunities in the current MedTech landscape in general, it is clearly achievable in certain therapeutic niches, such as neurotechnology, urology and digital surgery, and innovative areas like AI, robotics, miniaturization of devices, and monitoring and connected care. In fact, 2023 saw a record number of novel device approvals by the FDA, including the highest-ever number of 510(k) clearances and a 77% increase in premarket approvals.

The EY Pulse Report notes that although R&D spending remains robust (5%–6% of revenue), many MedTech companies struggle to convert innovation into revenue due to commercial execution gaps, training burdens, and reimbursement hurdles. Reverting to the four groups for TSR and ROIC from above, we measured each group’s ability to turn R&D investment into future growth (Figure 3).

Figure 3: R&D Efficiency

Source: EY analysis

The companies that were best at turning R&D investment into future expectations of growth are consistently rewarded by the market with higher TSR. Specifically, the low ROIC/high TSR group has the highest R&D efficiency of any quadrant (1.6x). Despite a low historical ROIC (excluding R&D), investors rewarded this group for converting R&D investments into growth. 

Alternatively, the other low ROIC group has the lowest average R&D efficiency (0.8x), and as a result, TSR declined. The relationship persists for the high ROIC groups as well, with an R&D efficiency of 1.3x for the high TSR group and 1.0x for the low TSR group. 

While the efficient deployment of R&D investment drives TSR by fueling growth, this efficient deployment of capital within the MedTech sector also has a clear secondary multiplier effect through investor risk perception which further accelerates TSR returns in the sector. 

The multiplier effect of investor risk perception

To understand the disproportionate TSR impact that MedTech companies can achieve by managing investor risk perception, it is first helpful to understand how risk perception affects company valuation. A company’s valuation can be computed as a function of the market’s expectations for future cash flows and the discount rate, which reflects the risk of achieving those cash flows (risk perception). For the former, there is a large ecosystem of companies providing their own guidance to investors, as well as third party equity analysts that publish estimates of future growth and margins. For the latter, finance theory relies on the capital asset pricing model (CAPM) to estimate the weighted average cost of capital (WACC) for discounting a company’s cash flows to determine value. However, our analysis reveals that the market discount rate reflecting the risk of achieving those cash flows often diverges significantly from WACC estimates. We define this discount rate as market implied discount rate (MIDR) — the discount rate implied by market consensus cash flows and the current stock price. 

We found that there are significant differences between the MIDR and the WACC for most of the MedTech sector companies, and that these differences persist over extended periods. Specifically, roughly half of the companies have an MIDR below their WACC (often significantly below). A MIDR below the WACC, indicating a more favorable investor risk perception, drives the value of a company higher, thus increasing TSR. Alternatively, the other half of companies have an MIDR above their WACC (here too, often significantly above). A MIDR above the WACC, meaning unfavorable investor risk perception, lowers company value, thus decreasing TSR.

While some differences between the MIDR and WACC are surely expected, the magnitudes of the differences in the MedTech sector are large, indicating that investor risk perception has a disproportionate role in driving TSR for the sector. 

The table below (Figure 4) shows how a favorable risk perception (low MIDR) vs. the unfavorable risk perception (high MIDR) drives significant differences in TSR. 

Figure 4: Average MIDR for each of the quadrants

Source: EY analysis

• Average MIDR of the high-TSR companies is 1.8 to 2.2 points lower than that of the low-TSR companies, indicating the market’s more favorable risk perception of the high-TSR companies’ ability to achieve their cash flow forecasts.
• The correlation to the R&D efficiency above shows that high R&D efficiency results in a favorable risk perception, and low R&D efficiency in an unfavorable risk perception. While the efficient deployment of R&D investment fuels growth that drives higher TSR, it is clear there is secondary multiplier effect impacting TSR returns in the sector.
• While such differences in MIDR may seem minor, if the low TSR group were to reduce their MIDR to that of the corresponding high TSR group, it would represent average increases of 43% and 57% in TSR for high ROIC and low ROIC, respectively. 

The clear path for Med—Techs to increase TSR

The MedTech sector TSR performance underscores the pivotal role of strategic growth investment in R&D as a driver of long-term value creation. Top-performing companies have demonstrated that consistently investing in innovation not only fuels growth but also has a multiplier effect by elevating investor confidence, as reflected in a favorable risk perception. In contrast, those that underinvest or allocate capital inefficiently risk stagnation and unfavorable investor perception, creating a widening gap between leaders and laggards.

Put simply, efficient investments in novel and differentiated products are given a valuation premium. Those willing and able to invest, particularly in strategic areas such as structural heart, renal denervation and robotics, have left their competitors behind. Whether it be internal capital allocation or large-scale acquisitions, it is imperative that company leaders view their investments through this market lens. 

How companies can maintain favorable investor risk perception:

The companies that achieved high TSR did so in large part because of their favorable investor risk perception. They invested significantly in R&D and translated those investments into expected growth. This execution also helped lower their MIDR and generated significant TSR relative to peers. The downside for these companies is that any missteps could lead to a quick reversal in investor risk perception and lower TSR performance. (For example, an increase in MIDR, closer to the underlying WACC, for this group would result in a negative 36% TSR impact on average.) 

For such companies, execution on all levels is critical, whether it be seamless integration of M&A, deft R&D allocation strategies, or ensuring that financial planning and investor relations teams continue to provide the confidence the market expects.

One of the lowest TSR performers in our study fell victim to these risks. The company was among the industry leaders in 2022, with good earnings and favorable investor risk perception. However, its failure to meet projected earnings and reductions in R&D efficiency caused investors to lose confidence (MIDR increased from 6.1% to 7.7%) in 2025. This increase in risk perception caused TSR to fall by 33%. 

The EY Pulse Report outlines additional examples, as companies lost their favorable investor perception after missing earnings due to low growth execution or cost pressure, resulting in a compounding fall in TSR.

How companies can reverse unfavorable investor risk perception:

Likewise, massive opportunities exist for low-TSR companies to improve outcomes by making the right moves to invest and grow, and in effect also improve investor risk perception. Executing strategies to bring the MIDR down to the WACC, for this group, would increase TSR by a staggering 66% on average. 

The EY Pulse Report provides examples of how disciplined capital allocation and strategic execution can drive superior TSR. Over the past decade, we see examples of how companies were able to transform from a reliance on low-growth segments (like stents and cardiac rhythm management) to diversified portfolios across high-growth areas such as electrophysiology, endoscopy and urology. Pivots such as this were achieved through a blend of aggressive R&D investment and well-integrated acquisitions.

Another success factor has been the willingness of some companies to embrace new execution models, such as direct-to-consumer models, while tailoring commercial strategies by region. 

Such multi-pronged approaches significantly enhanced investor confidence, underpinned growth and ultimately contributed to strong TSR performance. While it is clear how growth and margins contribute to strong TSR performance, what truly supercharges TSR has been a massive improvement in investor risk perception.