Medtech earnings season got underway this week with results from Abbott Laboratories, Intuitive Surgical and Johnson & Johnson that confirmed the mixed financial impact of the delta wave and early signs of recovery in elective procedures in the U.S.
The broad outline of the third quarter was revealed before the first round of results, with companies that rely on elective procedures flagging up weak sales and COVID-19 testing businesses racing to up production in response to fast-rising demand. Abbott, Intuitive and J&J confirmed the broad outline in their results.
Surging demand for COVID-19 tests drove 22.4% growth in organic sales at Abbott, enabling it to beat the consensus estimate and immediately bounce back from a slump that led it to begin restructuring its diagnostics business, at a cost of $500 million, just weeks before the start of the third quarter.
The Abbott results suggest Quidel and other companies exposed to COVID-19 testing will grow in the third quarter. Quidel, which will report on Nov. 4, earlier this month announced preliminary results saying it expects total revenues to be between $505 million to $510 million, above Wall Street's $186 million.
After the whiplash change in testing demand, from sky high over the winter to rock bottom as the vaccine rollout advanced, and then back up again as delta took hold, the question now is what happens in the fourth quarter and beyond. The U.S. delta wave peaked in mid-September. Since then, the seven-day rolling average of new cases has fallen steadily to a level last seen in July.
Based on how testing demand collapsed after the winter wave, the decline in COVID-19 cases points to a fall in sales at companies such as Abbott and Quidel beyond the third quarter. However, testing is now a much bigger part of the U.S. strategy for containing the coronavirus, suggesting the fall off may be smaller this time around.
Abbott CEO Robert Ford is wary of making predictions, though, telling analysts the company will "have to update on a rolling quarterly basis" on how COVID-19's going to play out. Comments from companies that report later in October and into November may provide more insights into how testing demand is holding up in the fourth quarter.
The performance of medtech companies that sell products used in elective procedures has been somewhat inversely correlated to testing demand, with sales falling as COVID-19 cases rise. That pattern, which was seen earlier in the pandemic, was evident again in the third quarter, when Intuitive and J&J d escribed a very similar set of events. Each company saw procedures fall in August and early September, only to then stabilize.
Intuitive and J&J’s comments, which are in line with other sources, suggest all companies exposed to elective procedures will endure a tough third quarter. Upcoming results from companies such as Boston Scientific, Stryker and Zimmer Biomet will confirm if delta hit uniformly or if some medtechs managed to weather the storm better than others.
Boston Scientific reports Oct. 27, Stryker reports Oct. 28 and Zimmer reports on Nov. 4.
As analysts at J.P. Morgan noted in a recent look ahead to the final two quarters of the year, the fact that the results of all companies exposed to elective procedures are expected to be weak means the third quarter will be defined by discussion of the outlook for the rest of the year. J&J offered an early positive sign by reporting that U.S. hospital systems have begun ramping up and resuming elective procedures over the past few weeks.
As companies that report later in October and into November discuss their results, the industry should gain a better picture of the universality and persistence of the positive signs seen by J&J. Data collected by Jefferies, which so far chimes with the J&J comments, will also indicate how the recovery is going.
"This week marks the second consecutive week of positive movement in our index and the first time we have seen consecutive growth since before the Labor Day holiday. While staffing shortages and COVID variants could have been pressuring procedural volumes through the early fall; two consecutive weeks of modest increases in our index could be an early indicator of a recovery. Accordingly, another week (next week) of positive momentum in our index could prove as a confirmatory shift in procedural volumes," the Jefferies analysts wrote in a note to investors.
Jefferies analysts added that while their index has improved from the lows of the pandemic, the numbers remain well below 2019 levels which they contend suggests "there is still pent-up demand and now possibly a rising backlog on the heels of the renewed delta variant constraints."
Analysts at J.P. Morgan took a closer look at the staffing shortages referred to by their counterparts at Jefferies. The J.P. Morgan analysts found "staffing issues are real across healthcare facilities in the U.S. at both inpatient and outpatient facilities," leading them to conclude that medtech companies are less likely to benefit from a backlog of procedures in 2022.
According to the analysts, the ability of hospitals to significantly increase volumes to quickly chew through a backlog of procedures is limited by the lack of incentives for nursing and support staff to put in the extra hours. Many surgeons have "volume bonus escalators" that incentivize them to get through additional cases but without similar incentives for all the other healthcare professionals that are essential to procedures hospitals may struggle to increase throughput.