While the coronavirus pandemic continues to put pressure on health systems across the globe as cases continue to climb, Wall Street analysts see a recovery in sight for the medtech industry and believe that the sector can still outperform 2021 expectations.

Though elective care is once again at risk of being canceled or delayed due to hospitals filling up, UBS analysts predicts a pent-up in demand leading to elevated levels of utilization in the second half of 2021 and continuing into 2022.

As a result, procedure-dependent companies like Abbott, Boston Scientific, Medtronic and Zimmer Biomet could benefit.

"Despite a choppy near-term path, we think pent-up demand from delayed care could lead to elevated levels of utilization in [the second half of 2021] and into [2022]," UBS analysts wrote. "This makes us positive on the sector broadly speaking in [2022] and drives some preference for procedurally driven stocks with good portfolios, especially ones that have lagged."

Analysts from BofA Securities had a similar outlook, writing that large-cap companies — Boston Scientific, Medtronic and Zimmer Biomet — will benefit from a second-half recovery for the industry.

"Patience may be required near term due to COVID, but on a 12 month view, we think exposure to the procedure based medtech names that underperformed the broader market in 2020 ... makes strong sense given positive vaccine news," the analysts wrote.

Reliance on elective care

Companies across medtech and the broader healthcare industry were hard-hit by the pandemic in 2020, particularly during the early months in the U.S. as elective care was largely shut down and lockdown measures took hold. 

However, summer and fall surges did not produce the same negative impact on companies due to more regional procedure shut-down strategies and hospitals gaining lessons learned from the spring experience.

Even as COVID-19 cases rose in the last quarter of 2020, UBS analysts said that procedure volumes remained relatively stable, giving hope that a similar environment should be seen for any 2021 surges.

"Despite the need to defer cases again, we viewed the recovery in utilization to 'normal' levels in October and much of November as a positive sign," the analysts wrote. "In our view, if patients were willing to come into facilities and get procedures done at a time when cases were rising dramatically and there were still high levels of fear and uncertainty around [COVID-19] in the community, we think this bodes well for future periods when patient confidence will be higher."

Still, companies are still not seeing procedures fully return.

For example, Edwards Lifesciences — whose business is largely made up of transcatheter aortic valve replacement procedures, which are not seen as a largely deferrable procedure — said in December 2020 that procedures volumes were taking a hit in the fourth quarter due to rising COVID-19 cases.

Despite the criticality of the procedure for patients that can be in life-threatening positions, the company still has not seen TAVR volumes return to pre-pandemic levels and expects 2020 slowdowns to continue into 2021.

Similarly, Zimmer Biomet CEO Bryan Hanson said during a November 2020 earnings call that while procedure volumes improved from the second quarter to the third quarter, hard-hit regions of the U.S. were still seeing procedure volumes at between 70% to 90% of 2019 levels.

Factors such as a decline in the availability of elective care and patient fear to return to hospitals were contributing to these declines, according to Hanson.

UBS forecasts that the drop off in care, however, is what will lead to an eventual rebound this year.

"We expect lack of care given throughout 2020 and into [2021] to lead to elevated levels of demand when conditions normalize and patients feel more comfortable seeking care," the analysts wrote. "In our view, this could lead to a watershed event for medtech utilization in [the second half of 2021] and we think it will take several quarters for delayed care to work its way through the system, supporting strong growth in [2022] as well."

However, a comeback for medtech will not be dependent on a return to procedures alone. UBS and BofA Securities analysts said that further vaccine rollouts will play a large role in recovery. Factors such as patients' willingness to return to hospitals and insurance coverage changes from the larger economic hit and employment losses will also play a factor, according to UBS.

While UBS analysts said that procedures could return to normal as early as the first quarter of 2020, J.P. Morgan analysts said in a December 2020 note that any meaningful return is not likely until the second half of 2021 or even until 2022.

The J.P. Morgan analysts wrote that one lesson learned during the pandemic is just how reliant medtech is on elective care.

Declining demand for testing

One bright spot for medtech during the pandemic has been in the diagnostics space as companies like Quest Diagnostics and Quidel have seen COVID-19 business boom and largely offset any losses seen in their core business. Device companies like Abbott that developed COVID-19 tests have seen a similar effect.

However, these new business lines may now face declines in 2021.

Due to the distribution of vaccines and an expected decline in cases, testing demand could drop by as much as 50% of current levels by the second quarter of 2021, according to UBS. The analysts added that "investors have not been capitalizing much in the way of testing dollars for [Abbott] and [Becton Dickinson] beyond [2021]."

The industry has pushed back on any declines in testing as vaccines become more widely available.

Quidel CEO Doug Bryant said in November 2020 that mass testing will still be necessary to manage the spread of the virus even after vaccine distribution. The CEO also said that testing need will remain to identify any virus mutations, which has already occurred in several countries, including the U.K., U.S. and South Africa.

Julie Khani, president of the American Clinical Laboratory Association, echoed a similar sentiment in a statement near the end of last year.

UBS acknowledged a remaining short term demand but said that this boost will drop off by the end of 2021.

"Expectations have ramped up for near-term results, and while the short-term outlook remains favorable, we model a large deceleration for PCR players in [the second half of 2021] continuing thereafter due to the impact from vaccines and share shifts to rapid testing," the analysts wrote.

Outside of the hospital and other healthcare settings, secondary markets like travel, leisure and home testing could provide some opportunities for companies, according to UBS.