As the year comes to an end and companies look to move on from the volatile economic environment created by the coronavirus pandemic, analysts are warning the challenges for the medtech industry for much of 2020 will not be easily escaped.
For the first half of 2021, the medtech industry will have to manage another likely decline in elective care and lower general hospital admissions due to the ongoing rise of COVID-19 cases, with the risk of another surge after the holidays, J.P. Morgan analysts wrote in a report.
The recent climb in cases will not just impact the first half of 2021, companies will likely miss Street estimates for the fourth quarter of 2020 as well.
However, the second half of next year could provide some relief. The rollout of coronavirus vaccines, easy comps to 2020 performances, and a snapback in procedure volumes from pent up demand could all contribute to somewhat of a return to form for the medtech industry.
Medtech should see organic revenue growth of 10.1% and earnings growth of about 24.8% next year, compared to declines of minus .5% and minus 12.7% expected in 2020, respectively, according to the report.
"While we won't get back all the revenues lost in 2020 ... we remain bullish on this reacceleration as underlying market fundamentals remain healthy and focused innovation into high-growth markets has continued through the pandemic," the analysts wrote.
A delayed recovery for procedures
One of the lessons learned from 2020 is how exposed the medtech industry is to the pandemic, particularly its reliance on elective procedures and emergency care, analysts noted. While some return to normalized volumes is expected throughout the first half of 2021, the analysts "don't expect a meaningful bolus of catch-up volumes."
The industry will also be hit by a decline in emergency care that cannot be easily recovered and hesitancy from patients to return to hospitals.
Some procedures, however, are expected to return more quickly than others, such as orthopaedics, spine and neuromodulation, according to J.P. Morgan.
SVB Leerink analysts outlined a similar near-term environment for the industry — vaccine availability will likely help elective volumes, but procedure comebacks are not expected until the second half of 2021 and even 2022.
Even with recovery delayed to the back half of next year, the SVB Leerink analysts believe that medtech's fundamentals are "relatively stable" and 2021 sales for large-cap companies should beat 2019 levels. The analysts added that while 2020 brought a lot of pressure for the industry, new trends like the boom in telehealth could benefit "all medtech subsectors."
William Blair analysts also pointed to telehealth as a positive for the industry going forward while the traditional procedure decline continues.
"We believe this could shift industry focus beyond just medical devices, but also to those with digital offerings that can improve both outcomes and efficiency (think artificial-intelligence-driven decisions)," the analysts wrote. "This dynamic could extend competitive advantages for medical device companies that have already invested meaningfully in these solutions."
The William Blair analysts added that telehealth and remote monitoring could open new revenue streams and markets for companies, such as further at-home patient monitoring and hospital inpatient monitoring.
Companies to watch
The pandemic has not been negative across the board for medtech and the overall healthcare industry. The rise of virtual care and telehealth has benefited companies like Teladoc and remote monitoring companies like Dexcom and iRhythm, while Abbott has been boosted by its diagnostics business and seen continued success for products like the MitraClip mitral valve repair device and FreeStyle Libre continuous glucose monitors.
J.P. Morgan forecasts Abbott's 2020 success could continue into next year with growth for its base businesses, new product launches and further demand for the company's COVID-19 offerings. The analysts added that even as coronavirus vaccine administration expands next year, J.P. Morgan does not "expect to see the drastic cut to revenues that others currently forecast" for Abbott's COVID-19 diagnostics business.
Despite a projected strong 2021 for Abbott, the analysts chose Medtronic and Dexcom as the top two large-cap companies to watch.
Medtronic's recent restructuring and new CEO Geoff Martha are the biggest reasons J.P. Morgan chose the company. The restructuring — estimated to generate annualized cost savings between $450 million to $475 million by 2023 — coupled with a strong product pipeline and a comeback for its diabetes business, should help the company continue its turnaround next year, the analysts wrote.
The analysts expect the Dexcom's patient base to grow from about 900,000 to 1.2 million by the end of 2021 and continue a shift to delivering its CGM products through the pharmacy rather than durable medical equipment channels, which lowers prices but makes up losses through increased volumes.
At a recent investor day, Dexcom executives projected that the company will double revenue from approximately $1.9 billion in 2020 to between $4 billion and $4.5 billion by 2025.
Both J.P. Morgan and SVB Leerink expect Edwards Lifesciences to perform well next year as transcatheter aortic valve replacement procedures tick back up, and the emergent nature of the procedure should keep volumes more insulated from the effects of the pandemic.
Edwards business is primarily made up of the company's TAVR program, which did take a hit throughout the year and has not yet returned to pre-pandemic levels. Still, Edwards projected mid-teens growth for 2021 sales overall and TAVR global sales growth of 15% to 20%, bringing in a range of $3.2 billion and $3.6 billion.
"In the near-term, we see significant upside potential to both top- and bottom-line estimates in 2021, which is likely underappreciated by the Street," SVB Leerink analysts wrote. "We think expectations broadly have gotten more depressed with COVID, and [Edwards] is well-positioned as ever to drive consistent and meaningful sales and EPS upside going forward."
The company should also benefit from the recent shift in the TAVR market when Boston Scientific recalled its Lotus Edge transcatheter program, according to SVB Leerink. However, multiple analysts have previously said any gains would be minimal due to Lotus' small market presence.
Both J.P. Morgan and SVB Leerink also said that the cardiac device company AtriCure should have a successful 2021 with an expected FDA panel review and approval for its Converge IDE minimally-invasive heart procedure following successful trial results.
The device will help AtriCure "to more aggressively address the multi-billion dollar longstanding persistent [atrial fibrillation] market that is currently poorly managed via either catheter ablation or medically," according to the SVB Leerink report.
Short seller Kerrisdale Captial recently said that AtriCure's core cardiac ablation business is "structurally unprofitable" and cast doubt on the move into noninvasive procedures, causing the company's stock price to temporarily tumble. However, the stock recovered and SVB Leerink disputed Kerrisdale's criticisms.