Medtech Has Hope For A Solid Recovery Later In 2021

Delivering innovation is still the driving force for medtechs intent on growing in the market, regardless of COVID-19, the disruptive effects of which have intensified with the appearance of new variants, says Jefferies Healthcare equity analyst Raj Denhoy.

The ability for businesses to keep communication channels open during the COVID-19 lockdowns of 2020 lessened the damaging effects of the pandemic that swept global markets all year.

The virtual way of working rapidly became second nature at Jefferies Healthcare, which used remote methods effectively during its June and November health care conferences. Video and audio company presentations, interactive panels and pre-arranged 1-2-1 conference calls were the channels it made available for these traditionally well-attended forums for medtech and pharma companies, and investors.

While the availability of screen-based discussions has been a major blessing, Jefferies’ medtech equity analyst Raj Denhoy bemoans the inability to get back to former methods of client interaction. Some in industry are starting to weary a little of Zoom-type channels of communication. In-person site visits and face to face interaction remain off limits, but the opportunities for virtual interaction are huge – and potentially overwhelming even.

Denhoy thinks the current means of doing business will persist through the summer, until the COVID-19 vaccines are widely disseminated and people feel comfortable about going out again. But there is a very real question about how business gets back to normal, he says. Much as people might be experiencing virtual communication fatigue, Denhoy wonders how quickly and to what extent the business world will get back to air travel. The majority of what people do might continue to be done virtually, he suggested.

Jefferies has reported on hospital footfall at over 3,000 hospitals during the pandemic. At the start of the second wave, it seemed that hospitals were coping better with the dual challenge of COVID-19 plus other patient traffic. But then cracks started to appear in that recovery, in the US (over 291,000 new infections reported on 3 January 2021) and elsewhere. Ahead of its Q4, Edwards Lifesciences Corp. noted that patient flow was picking up, but conditions were still not normal, making forecasts all but impossible. People were staying away from hospitals and the pandemic’s impact was deeper than had been imagined, said Denhoy.

“My sense is that most people have come to terms with the fact that the next three to six months will be pretty unpredictable,” said Denhoy. COVID-19 will ebb and flow until the vaccines come fully into play, whereafter people will get more comfortable with the situation. But the waters will remain very choppy for a period of time.

In areas like orthopedic interventions, where procedures are regarded as more readily deferrable, companies will feel the effects of the pandemic acutely. “Most people know there will be a trade around that for the next six months, and they should be looking beyond the immediate period and to the back half of next year [2021] or 2022 before things will get back to normal,” he said. But he added a word of optimism: “The reasons that made medical devices attractive before the pandemic are still very valid now.”

Medtronic plc, now under the leadership of new president and CEO Geoff Martha, chose to cope during the 2020 pandemic by adopting an expansive approach. It opted to spend its way out of the problem. It was one of the first companies to aggressively show it was not pulling back in this period, Denhoy observed. Instead, the group viewed the disruption caused by COVID as a chance to push forward, just when others might be deciding to do the opposite.

But then other companies came around to Medtronic’s way of thinking, to the extent that, by [mid-December 2020] that window of opportunity was not quite so open as it may have been just a short time before. Looking back at the March-April-May period, there was maximum uncertainty about prospects for medtechs, leading some companies to adopt very conservative approaches.

More companies have by now “loosened the reins a bit,” and relinquished some of their erstwhile conservatism. Medtech investors, too, are now looking at what the back half of this year looks like, said Denhoy.

Medtechs Will Get Stability Under the New US Administration

Over time, the major issue of US health care reform has tended to become less of a concern, but the medtech industry waits keenly to see what the new US administration under incoming President Joe Biden will bring. Denhoy’s current view is that people are not expecting to see wholesale changes in health care policy relating to medtech uptake in the US.

“General wholesale changes to the health care provider or payment landscape are not really contemplated at this point.” – Raj Denhoy.

The Obama administration that ended in 2016 encouraged value based purchasing programs, and supported the shift from volume to value-based reimbursement. Such initiatives are likely to be sustained as US health care moves forward. “Most companies are adjusting to the new paradigm of how medtech solutions will be reimbursed. General wholesale changes to the health care provider or payment landscape are not really contemplated at this point.”

Another major theme for the larger companies is how  ̶  or whether – to go further into the provider payer partnership, and transform their business in that way.

“Certainly, many device companies would want to insert themselves more deeply into the delivery equation, and become more of a partner to providers.” Historically, device companies have been looked at more as providers of technologies or services, as opposed being a “true partner” in health care. And many hospitals are probably hesitant about letting device companies “too far in,” Denhoy speculated. For devices companies, the drive to mesh better with delivery networks will remain a preoccupation, although just how far they can stretch their models in reality remains to be seen.

This is proof, however, that health care is continuing to evolve. There is a noticeable move away from the notion of reimbursement for every individual item or service provided, and towards more value based provider models, “While we’re probably years from that still, we are slowly moving in that direction,” said Denhoy. While the talk is all of risk payment models and paying for solutions, how these things will happen in practice is still uncertain. But it is where things are headed, he underlined.

Regulatory Change In The EU In 2021

The EU Medical Device Regulation will call on medtech companies to deal with new compliance rules. It was perceived for a time that some smaller companies, those that were lower down the pecking order in terms of getting their devices appraised under the MDR, might have been trapped in an air pocket, unable to deliver their products to the European market. The MDR was seen as a risk for them. “But I think that’s passed, and companies have built it into their expectations around spending to the point that I don’t think it’s too surprising for anyone at this point.”

Investor Hotspots – Are They Changing In Medtech?

Medtech remains an innovation-driven sector, Denhoy stressed. Companies that develop solutions that improve clinical outcomes or lower the cost of treatment are those that tend to succeed. Companies at the more commoditized end of the product spectrum will continue to find it more of a struggle.

As such, innovators will remain the dominant players in medtech. While COVID has been the main preoccupation for the past nine months or more, “innovation” has continued to evolve, with the use of data, digital solutions and remote monitoring of patients now the major themes in medtech. Companies like DexCom, Inc. (diabetes management devices) and iRhythm Technologies, Inc. (wearable biosensing technology plus cloud-based data analytics and machine learning to clinically diagnose cardiac arrhythmias) are exploiting this direction of travel.

Looking more longer term, medtech stocks recovered fairly quickly as the course of the pandemic evolved during 2020. Many large cap medtechs recovered to within 10% of their all-time highs in the late fall of 2020. The remaining 10% shortfall was due to levels of uncertainty around when the economy and normal health care routines recover fully.

“Nobody is claiming that this industry won’t come through the other side [of COVID] and that it won’t remain as meaningful as it has always been,” said Denhoy. The rationale is simple: nobody is getting any heathier, so medical technology is only going to continue to be needed, he maintained.

Things To Watch For In 2021

This year will be pivotal for many of the large caps. Stryker Corporation finally completed on its acquisition of Wright Medical Group N.V. in fall 2020, and much of the focus in 2021 will be on what Wright Medical looks like within Stryker. Will the acquirer still endorse the same synergies it was talking about in 2020, and how will Wright’s business develop as it is bedded into Stryker? people will be keen to discover.

Fellow orthopedic group Zimmer Biomet Holdings, Inc. is being monitored for different reasons. In fall 2020, it espoused caution about the near term, but expressed greater ambition about the longer term. The group’s senior management, having evolved over the past two years, has expressed an aim to increase the group’s growth profile in the future. While the visibility of that has yet to kick in, the strategy includes a renewed focus on surgical robotics, new implant technologies and the capacity to do acquisitions.

Boston Scientific Corporation’s management, too, has pushed the group’s growth in recent years, but in the past six to eight months it has withdrawn the TAVR device Lotus Edge from the US market and seen new competition arrive for its stroke prevention device Watchman in the shape of Abbott Laboratories Ltd’ Amplatzer Amulet left atrial appendage occluder.

Hopes Of A Solid Recovery In 1H 2021

The medtech industry is in somewhat of a holding pattern as 2020 turns to 2021, said Denhoy, who reiterated that companies and investors should be focused on the end of 2021. Industry people might have baked in a recovery for 2021 in general, but the first half of the year might still be impacted, he warned.

People are looking at 2020 as something of a lost year. Looking to 2021, they will likely be keen to see how their numbers compare with those of 2019. “My view is that 2021 should look similar to 2019, as we’re still going to be impacted in the first part of the year,” said Denhoy. He added that it is unlikely that the industry will see a lot of growth in Q1 or Q2, and that fundamental growth in demand will not return until the back half of the year.