Moody's Investors Service lowered its earnings forecast for the medical device industry for the next 12 to 18 months in response to the global COVID-19 pandemic, in a research note on Thursday.
Analysts predicted earnings growth will be flat in the near term, reflecting their belief that an anticipated recovery in 2021 will fail to fully offset the deferrals of elective procedures this year.
That industry-wide picture masks considerable company-to-company variation among medtechs. The analysts expect Johnson & Johnson, Zimmer Biomet and other large companies that rely on elective procedures to suffer the most, while companies in more stable segments such as Abbott will fare better.
The rapid, global cessation of elective procedures to focus healthcare resources on the pandemic is set to hit many medtech companies hard in the second quarter. As the Moody’s analysts note, large medtechs have high fixed costs tied to infrastructure such as manufacturing plants. Those fixed costs will make it difficult for companies to reduce spending as fast as revenues are falling.
Moody’s expects the sales of the large, mostly investment grade medtechs it covers to fall by around 10% this year. Given the fixed costs such companies have, the analysts predict earnings will fall faster still, dropping as much as 30%.
However, the slump is expected to be temporary. Treatment of chronic diseases addressed by medical devices cannot be deferred indefinitely. With key markets such as the U.S. taking steps to resume elective procedures, Moody’s expects revenue and earnings trends to return to 2019 levels next year. Even so, Moody’s predicts earnings for the next 12 to 18 months will be flat, down from 2% to 4% growth under its previous prediction.
The prediction is subject to “many significant uncertainties” that could render the forecast inaccurate. On balance, the analysts think the nature of these uncertainties means their prediction is more likely to be too optimistic than too pessimistic.
"A 'second wave' could negatively pressure revenue and EBITDA beyond our current expectations, while uncertainty around the pandemic could keep patients from returning to their healthcare providers and undergoing procedures," the analysts wrote. "A slower than expected recovery could lead to business destruction and structurally high unemployment, which could affect the ability of consumers and payers to fund healthcare expenditures."
Some medtechs are better equipped to cope with prolonged disruption than others. As became evident in the most recent set of financial results, companies that provide medical devices used in procedures that can easily be deferred, such as orthopaedics, are suffering more than their peers that service acute care settings.
The Moody’s analysts predict J&J’s device unit, Zimmer and Hologic will suffer sales slumps of 15% or more in 2020. In contrast, the analysts tip companies such as Abbott and Becton Dickinson to only experience contractions of 5%, at most, reflecting segments less likely to be negatively affected by the pandemic. Some medtechs, such as those that make ventilators, may experience sales growth, but the analysts think they will face prolonged post-pandemic declines.
Aside from that lasting headwind, the analysts remain positive for the long-term prospects for the medtech industry, arguing favorable demographic trends and product innovation could enable the industry to quickly bounce back toward their earlier forecast of mid-single-digit earnings growth.
Correction: A previous version of this story incorrectly characterized the most recent outlook for the medical devices sector from Moody's. Rather, the firm lowered its earnings forecast for the sector.