The COVID-19 delta and omicron variants are extending the timeline for a return to normal surgical procedure patterns, forcing some medical device companies to get ready for yet another year of uncertainty.

Wall Street analysts agree that virus variants are, once again, clouding projections for the medical device industry in 2022, particularly when it comes to procedure volumes. Adding to the confusion of variants are other pressures on the market, such as hospital labor shortages, supply chain disruptions and the shift from in-person care to telehealth.

"Trying to predict when, how, or if the impact of COVID on medtech markets will end has proven futile," analysts at BTIG wrote in a note last week to clients. "Suggesting that COVID will subside midway through 2022 feels like a fool's errand especially in the face of a new [omicron] variant."

While healthcare analysts at William Blair suggest the virus will move into an endemic phase in 2022, the impact on patient demand is difficult to gauge.

The challenges were already being felt in the third quarter as the delta variant spread rapidly and hospital beds began to fill once more with COVID-19 patients in communities across the U.S. The result was lower overall patient volumes, restricted sales rep access and clinical trial delays, all issues that had subsided in the summer but re-emerged with the variant, the William Blair analysts told clients in its 2022 outlook report.

"We believe this return of significant headwinds caught investors off guard and contributed to a particularly ugly third-quarter earnings season," the analysts wrote. 

The rise of the more transmissible omicron variant and mixed news about vaccine protection has the potential to bring a new spike in COVID-19 cases, causing more alarm across the sector. Investors responded to the new worries by sending medtech stocks tumbling in late November. Companies exposed to surgical procedures have largely underperformed the broader market throughout the year.

Medtronic, which reported financial results in late November, said the COVID-19 resurgence negatively affected the company's revenue in the latest quarter. CEO Geoff Martha said on Medtronic's call that hospital staffing shortages were part of the reason for lighter than expected procedure volumes in some markets. Martha specified more deferrable procedures including spine surgery and those requiring ICU capacity, such as heart valve replacements, as being the hardest hit.

As if the coronavirus pandemic isn't enough, Baird analysts in a Wednesday note said that influenza rates continue to trend above last year, warning of a potential "twindemic" of COVID-19 and flu season that could put further strain on hospitals currently seeing a rise in national inpatient and ICU utilization.

"After a ~two month period of declining utilization metrics per our data ... utilization metrics are increasing again and at or approaching delta-surge highs," Baird analyst Mike Polark wrote, noting that the uncertainty makes any visibility for procedure volumes complicated, once again. 

Against this difficult backdrop, William Blair analysts have identified three medtech sub-sectors likely to prove the most resilient as the healthcare system comes under renewed pressure.

Diagnostic testing 

Test manufacturers are still seeing very strong demand for tests and assay components as the virus lingers on. William Blair analysts said the evolution of COVID-19 from pandemic to endemic points to a durable market for testing despite investor skepticism, supporting companies including Abbott Laboratories, Becton Dickinson, Quidel, Qiagen and Meridian.

FDA authorization of several over-the-counter COVID-19 tests, both antigen and molecular, could increase demand as availability expands in the retail setting.

"We believe this is noteworthy and sets the stage for broader testing to move into this channel in coming years," the William Blair analysts wrote.

Diabetes

The diabetes space is among the medtech categories poised to benefit from digital offerings that could improve both patient outcomes and efficiency, offering an advantage amid ongoing staffing shortages, William Blair said.

Dexcom and Insulet are two companies introducing advanced algorithms for insulin management. Diabetes device makers are among the medtechs making meaningful progress in treating patients earlier in their disease progression.

The space is awaiting key product launches for both insulin pumps and CGMs. Insulet's Omnipod 5 pump was highly anticipated by analysts for 2021. However, after a series of delays by the FDA, the product is not expected to be cleared and launched until 2022. The pump is still poised to lead the pump space and could even drive overall pump adoption.

Dexcom's newest CGM system, the G7, has also been anticipated for this year but no regulatory approval has yet come. The company has maintained a CE mark approval is still likely in 2021. Even if a CE mark is handed down this year, any meaningful launch will come next year.

Medtronic is also expecting a new insulin pump launch for the U.S., but a recent FDA warning letter for the company's diabetes group may upend any previous timeline.

Aesthetics

Consumer-driven medical technology companies such as Abbvie's Allergan unit and makers of clear aligners in the dental space were among the top performers in the sector in 2021 as demand and volumes remained high for the second year in a row. In dental care, a recovery in demand after temporary closures in 2020 has been much faster than expected, according to William Blair.

"We expect dental will largely return to normal spending patterns in 2022 assuming offices remain open, but pent-up restorative demand has already been satisfied. We expect clear aligners, dental implants, and analog-to-digital conversion to be the best candidates for investment outperformance longer term," the analysts said.

Companies to Watch

At BTIG, analysts named Alcon, Boston Scientific, Inari Medical, Establishment Labs and RxSight as among the firm's top picks for 2022. For these companies, healthy product pipelines are expected to provide catalysts for market-beating growth even as COVID-19 continues to cast gloom over the sector. Additional top pick Hologic should benefit from a number of tuck-in acquisitions, the analysts said.

BTIG overall said they are optimistic that the impact of COVID-19 will lessen through the early part of 2022 with "pockets of strength across the MedTech universe, areas more immune from staffing shortages."  

Looking further ahead, William Blair analysts offered a cautious assessment of the medical device landscape, predicting the virus could remain a risk for several years as variants emerge and global vaccination rates remain low. Medtech companies with the greatest exposure to elective procedures could take a longer time to recover from COVID-driven pressures, they said, noting procedure delays negatively affected companies in the cardiology, ophthalmology and orthopaedic sub-sectors in 2021.

"In our view, these spikes in cases and emerging variants of concern, coupled with staffing shortages, are prolonging the recovery for some companies, in some cases as far out as into the second half of 2022," the analysts wrote.