- The diagnostic sector faces a “challenging set-up” in 2022 as economic slowdowns in the U.S. and Europe dampen hopes of a post-pandemic recovery in volumes, according to analysts at Goldman Sachs.
- As companies in the sector begin reporting second-quarter results, the analysts said there will be “limited visibility over the course of the year” and added that businesses may need to focus more on showing their paths to profitability in a more challenging macro environment.
- Shifts in investor sentiment, coupled to a possible recession, may make it harder for companies to raise capital, Goldman Sachs noted. The analysts pointed to Invitae as a company that has a “tighter cash picture.”
With the impact of COVID-19 receding, some industry observers expected the second half of 2022 to be a growth period for the core, non-pandemic parts of the diagnostic industry. Instead, the Goldman Sachs analysts said that “concerns over a growth slowdown have increased for Europe” and that the U.S. is “posing challenges.”
They added that “positive surprises” or confirmation of guidance is needed in the second quarter to restore confidence in the sector.
Faced with the concerns, investors have begun to focus on “companies with strong balance sheets, a high or improving gross margin profile and near term growth drivers,” the analysts wrote in the note to investors, adding that the shift in focus could affect strategies.
“The promise of large [total addressable markets] and accelerating growth rates is being questioned for the first time in a number of years and therefore companies with a clear or articulated path to profitability have outperformed year to date, a theme that we see resonating throughout the course of ’22,” the analysts wrote.
In the longer term, the trends may make it harder to raise money, they said. The analysts identified Qiagen, Exact Sciences, Guardant Health and Myriad Genetics as companies that can weather such a problem, with their cash “runways” extending into 2025 and 2026.
Natera, Veracyte, CareDx, NeoGenomics and Cue Health have shorter financing paths and likely will need to raise cash in 2024 or 2025, according to the analysts.
Separately, analysts at BTIG said in a note to investors that they expect Abbott Laboratories to have generated $1.15 billion in sales from COVID-19 tests in the second quarter, which should enable it to pull in about $4.9 billion in revenue from COVID-related diagnostic testing for the full year. They estimated that sales in that sector will slump to about $400 million in 2023.
“We think our estimates remain achievable, but we do not think investors will give [Abbott] much credit for a COVID testing-related beat. However, we believe the higher contribution margin from these products as well as the strong cash flow generated, should not be dismissed,” the analysts wrote.
In addition, Hologic’s COVID-19 testing sales are slowing as well, contributing to the analysts’ decision to lower their rating of the company’s stock to “neutral” from “buy.” The move reflects the loss of “an offset to softer womens' wellness visits and elective gynecological surgery,” they noted.