In a recent GuruFocus article, I noted that health insurers seem to be benefitting from fewer elective procedures as resources are diverted to Covid-19 care.
The same trend is having an opposite impact on medical device companies and their share prices. The pain could worsen depending on long it takes for elective surgeries to resume, even on a limited basis.
The effect of the surgery drought was driven home when industry-giant Medtronic (MDT) reported on April 20 that weekly revenue from the United States had dropped by 60% year-over-year since mid-March.
The problem has been further exacerbated as Medtronic customers cut back on large orders to save cash they may need if the economic impact of the virus worsens, according to an article in the Minneapolis St. Paul Business Journal. Medtronic is selling ventilators, but at a lower price and margin than before the pandemic.
All in all, considering the situation it finds itself in, the company’s shares are holding up reasonably well, down only 15% to just under $99 year-to-date. That’s $20 higher than what the stock was trading for at the end of March, when the shares of many of the big industry players plummeted. At that time, the iShares U.S. Medical Devices ETF (IHI) had dropped to the year-to-date low of about $185; since then it’s recovered to about $255.
Medtronic expects Covid-19 to especially hurt results in its fiscal fourth quarter, which ends on April 24, 2020. That’s because the company’s three-month performance will reflect an additional month of impact compared with companies that operate on a calendar-based year.
Medtronic has yet to revise its guidance for the fiscal year, but Boston Scientific Corp. (BSX) and Conformis Inc. (CFMS) have.
Last month, medtech market analyst Raj Denjoy of Jefferies said in a DeviceTalks weekly podcast that those companies who focus on providing devices for elective procedures could fare worse than others in the industry. In that group, he included Zimmer Biomet Holdings (ZBH) and Stryker Corp. (SYK). Hologic Inc. (HOLX) is unlikely to suffer as much, in my view, because its business is diversified. Mike Matson, senior research analyst for medical technologies at Needham & Company, believes that these three firms are likely to be hardest hit, according to an article in MASSDEVICES.
Matson added that he sees Hologic, Masimo Corp. (MASI) and Stryker experiencing the smallest impact on earnings, while the biggest effect on EPS will be felt by Invacare Corp. (IVC), Inogen Inc., (INGN) and Hill-Rom Holdings Inc. (HRC).
Looking further down the line, Covid-19 is also likely to delay the time it takes for new medtech products to reach the market, as is the case with pharmaceuticals. That’s because most data from clinical trials of devices is gathered in hospitals.
Disclosure: The author holds no positions in any of the companies mentioned in this article
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