Procedure-dependent medical device companies are bracing for another bumpy quarter as the omicron variant drives a new surge in COVID-19 cases. While medtechs faced challenges related to hospital staffing in the third quarter of 2021, exacerbated by the delta variant, those problems continued in the fourth quarter with the new strain.
How much omicron affected companies' earnings in their most recent quarters remains to be seen. Just a handful of medtechs pre-announced results, and while for some the end of the year went better than expected, it's difficult to predict how the rest of the year will look given the pandemic's volatility.
One company that announced its financial results early is surgical robotics firm Intuitive, which shared an upbeat forecast during the J.P. Morgan healthcare conference and kicked off the medtech earnings season on Friday. While Intuitive acknowledged that procedures have slowed down as a result of the latest omicron-driven surge, it's still seeing better-than-expected placements of its da Vinci surgical robots in hospitals.
Intuitive's annual revenues of $5.7 billion were up 31% from 2020. It shipped a total of 1,347 surgical robots in 2021, a 44% increase from the previous year. The company set a more conservative forecast for 2022, with expectations that the pandemic will continue to have a dampening effect on procedures.
CFO Jamie Samath said Intuitive began to see the effects of omicron in mid-December, as rising cases affected hospital staffing. That has worsened going into January, and CEO Gary Guthart recently said it is "by far" the biggest issue from the last few years and won't resolve quickly.
Other surgical robot manufacturers, such as Stryker, Globus Medical, and Zimmer Biomet, are seeing a similar trend.
"We have heard surprisingly positive feedback from manufacturers of surgical robotics systems throughout the pandemic," said Matt Miksic, U.S. medical supplies and devices analyst for Credit Suisse. "The fact that many hospitals are writing $1 million to $2 million checks to purchase these systems would tell you they are expecting them to be used for surgeries, which is encouraging. That acceleration has been consistent for about 18 months now, despite the pandemic."
Orthopaedic robotics companies
Stryker, which is slated to report earnings on Thursday, expected to see hospital staffing challenges continue into the fourth quarter. But it still sold some of its Mako surgical robot assistants in the year. At an investor day in November, Stryker disclosed it had installed about 1,300 systems since acquiring Mako Surgical in 2013, up about 300 from last year.
It also remains to be seen how Stryker's $3 billion acquisition of Vocera Communications, announced earlier this month, will play out with some analysts favoring the deal and others questioning the price tag.
Zimmer Biomet gave a slightly more pessimistic forecast last quarter. The company reduced the midpoint of its full-year revenue guidance by 23%, expecting continued pressure through the fourth quarter and into 2022.
At the J.P. Morgan conference, CEO Bryan Hanson said that guidance played out as forecast in the fourth quarter, and the company would take a similar approach going forward. Zimmer is currently grappling with the effects of the omicron variant and expects pandemic pressures to continue well into 2022.
"Interestingly enough, a lot of times when we saw cancellations for procedures in the fourth quarter, it wasn't always because of capacity, but it was a patient that wanted to come in, the surgeon was ready to do the procedure, but the patient had COVID. Or a staffing issue because someone actually had COVID," Hanson said. "A lot of the disruption we had in the quarter was more around that than typical capacity concerns we've had in the past."
When it came to sales of Zimmer's Rosa robotic surgical assistant, the picture was a bit more positive. The company had placed nearly 600 units by the end of 2021, and Hanson said it has seen strong demand.
Healthcare giants Johnson & Johnson and GE will report earnings on Tuesday, as both companies are in the midst of restructurings to focus their respective business. J&J is splitting off its consumer health division into a separate, publicly-traded company, while its prescription drug and medical device businesses will stay with current leadership. Incoming CEO Joaquin Duato expects the move to boost the company's growth for these businesses and help it focus more on specific markets.
Meanwhile, GE is splitting into three parts, spinning out its healthcare division into a separate, publicly traded company in 2023. The company's third quarter revenues fell 6%, driven by supply chain challenges, which the company expected to continue through at least the first half of 2022.
Other notable splits include Becton Dickinson spinning off its diabetes business, and Zimmer separating its spine and dental units into a new entity. Analysts with J.P. Morgan wrote in a research note that other companies might consider spinoffs in 2022, especially for businesses that are lower growth, have less strategic overlap with the rest of the portfolio, and could benefit from more focused attention from management.
Recalls leave opening for competitors
Several other medtechs also noted the supply chain challenges late last year. Companies, including Medtronic and Philips, and lobby AdvaMed warned of an "unsustainable" disruption in the supply of semiconductors in a comment to the Department of Commerce in November.
Those difficulties have continued as the omicron variant has further stretched logistics worldwide. Philips, which reported earnings early on Monday, had warned ahead of time that its revenue would come in below guidance, in part due to supply chain challenges and an expanded recall of its sleep apnea and ventilator machines. That leaves an opening for Resmed to win over more market share, but it, too, has been bogged down by supply chain challenges.
Meanwhile, Medtronic is grappling with its own recall. Recently, the FDA sent a warning letter to the manufacturer, citing several safety concerns related to its diabetes business. An ongoing recall of its Minimed 600 series insulin pumps was expanded to more than 460,000 devices. The warning letter could potentially delay the company's efforts to bring a new version of the MiniMed pump to market.
It's one of several strikes against Medtronic in recent months, as the manufacturer also faces a delayed rollout of its Hugo robotic surgery system, missed its chance for early FDA approval of its renal denervation system, and was recently slapped with a recall for its HawkOne Directional Atherectomy System. Since the start of 2021, the FDA has posted 13 Class I recall notices regarding Medtronic, including three already this year.
"Some of these recalls have been in effect for almost two years … So these are legacy issues that they're working to resolve," Credit Suisse's Miksic said. "We would say the three issues over the past several months are all significant issues [robot guidance, renal denervation and diabetes warning letter], but they're not of the magnitude to prevent the company from meeting their to five-plus percent organic growth on the top line. And that's what they will have to prove with this next quarterly report."
Competitors Insulet and Tandem Diabetes Care also see an opportunity to scoop up more customers, with Tandem CEO John Sheridan recently telling MedTech Dive the San Diego-based company has seen "substantial uptake" as a result.
Testing remains a roller coaster
If there's one industry that has seen a lot of ups and downs in the last two years, it's the diagnostics industry. After seeing sluggish sales for COVID-19 tests during the summer, demand skyrocketed as the delta and omicron variants caused new surges in cases.
After closing a manufacturing facility over the summer, and laying off workers due to a lack of demand for tests, Abbott Laboratories reopened it in November. CEO Robert Ford recently said at J.P. Morgan that the company had "plenty of capacity."
Quidel earlier this month reported preliminary fourth-quarter revenue, beating analyst expectations on the back of rising demand for coronavirus tests that brought revenues up to around $635 million. While COVID-19 sales are down compared to the $678.7 million Quidel generated in the fourth quarter of 2020, the company hailed the past three months as its best ever from a volume perspective.
Abbott is scheduled to report its fourth-quarter 2021 financial results on Wednesday.
All of the diagnostics companies face a challenge in forecasting future demand once cases start to go down from the latest peak.
"Describing the ups and downs of COVID testing for Abbott during the pandemic as a 'roller coaster' does not fully capture the experience," Miksic said.
Despite the uncertainty, companies are seeing a windfall from COVID-19 tests, and are putting that cash to use. For instance, Abbott is funneling it into more training and R&D resources for its diabetes and medical device businesses, and the launch of a new, consumer-oriented wearable device.
Going into 2022, J.P Morgan analysts wrote that "it can be tempting to look at 2022 as a repeat of 2021, with the combination of lingering delta challenges and omicron taking the place of last year's holiday surge."
While they expect to see "some softness" going into 2022, the analysts contend medtech companies overall will be in a better position, with hospitals better prepared to deal with future variants, improving vaccination rates and new treatments for COVID-19.