3 Q4 takeaways: COVID-19 testing strong (for now), electives hit, and M&A

As Yogi Berra famously said: “It’s déjà vu all over again.” With the fourth-quarter earnings season in full swing, medical device and diagnostics companies are feeling lingering effects, both positive and negative, from the COVID-19 pandemic. 

What’s clear is: the virus is a moving target and predictions are precarious.

While MedTech Dive continues its coverage of companies’ fourth quarter and full-year financial disclosures, here are the trends that have emerged over the past few weeks and the market dynamics that might be expected from the industry for the rest of the year.

Demand for COVID-19 testing continues (for now)   

The surge in coronavirus infections at the end of November and into December led to high demand for COVID-19 testing for diagnostics companies and laboratory networks in the fourth quarter. 

Hologic’s molecular diagnostics revenue increased more than 450%, while Qiagen’s fourth quarter sales related to COVID-19 jumped almost 400%. Abbott reported a 110% increase in diagnostics sales compared to the prior year, driven by strong demand for its rapid antigen and PCR-based coronavirus tests.

Lab giants Quest Diagnostics and LabCorp also benefited from strong demand for COVID-19 testing. LabCorp on Thursday reported 52% year-over-year revenue growth for the fourth quarter, and last week Quest reported a revenue increase of nearly 56% compared to the prior year.    

Many analysts and companies are expecting demand for COVID-19 testing to remain strong throughout the first half of 2021, and possibly longer, despite the rollout of vaccines and a nationwide drop in daily U.S. coronavirus cases.   

However, others see too much uncertainty to make 2021 forecasts and a possible decline in testing as early as the second quarter.  

“We are only one quarter into the year, COVID is still an uncertainty, and the trajectory of COVID testing is still debatable,” J.P. Morgan analysts wrote in a note last week.  

Becton Dickinson CEO Tom Polen said during last week’s earnings call the company continues to project “very strong demand” for antigen testing in the first half of the year but the second half is less certain. Siemens Healthineers sees demand for COVID-19 antigen tests remaining elevated until the back half of its fiscal year.  

While Thermo Fisher Scientific expects continued strong demand for coronavirus tests in 2021, CFO Stephen Williamson told investors earlier this month that testing-related revenue of $7.1 billion is “assumed to be very front end-loaded” this year with first quarter levels similar to the fourth quarter of 2020, adding that test demand “may begin to moderate” in the second quarter and further later in 2021. 

J.P. Morgan analyst Tycho Peterson noted that Thermo Fisher’s expected testing drop-off this year is “steeper than what we’ve heard from others such as Hologic and Abbott.”

In a dire warning on Thursday, LabCorp told investors that COVID-19 testing revenues could fall by as much as 50% this year as the mass-vaccination campaigns now underway start to drive down cases.   

All this comes amid the Biden administration’s efforts to scale up U.S. testing capacity and expand the availability of test supplies as part of a national strategy to reduce the spread of COVID-19.   

Last week, the administration awarded $231.8 million to Australia’s Ellume to boost domestic production of a rapid at-home test, including the purchase of 8.5 million of the over-the-counter antigen tests. The White House also announced it intends to award contracts to six other diagnostics companies to expand production of 61 million rapid point-of-care or at-home tests by the end of the summer. 

Electives hit to spill into Q1

The decline in elective procedures, once again, hit the medtech world in the fourth quarter. After rebounding in the second and third quarters from the sudden drop in March, April and May, rising global cases of COVD-19 halted hospital operations at the end of last year.

The impact was particularly seen by medtechs with large hip and knee portfolios, such as Johnson & Johnson, Stryker and Zimmer Biomet. 

Stryker’s hips and knees business declined by 8.3% and 10.2%, respectively, and Zimmer reported declines of 1.3% for hips and 3.1% for knees. Meanwhile, Johnson & Johnson missed expectations for orthopaedics by $92 million, with a miss of $12 million for hips and $38 million for knees.

Executives for all three companies painted a similar picture for the quarter — volumes dropped largely in December when global cases spiked, varying geographically as countries’ different strategies were implemented to stop the spread of the virus.

For example, Stryker and J&J had larger declines in Europe but both had double-digit year-over-year sales growth in China. And Zimmer’s decline in the quarter was driven by a 13.2% sales loss in Europe, the Middle East and Africa, compared to a less than 1% decline in the U.S.

Beyond orthopaedics portfolios, Edwards Lifesciences saw a decline in transcatheter aortic valve replacement procedures in the quarter, with CEO Michael Mussallem saying that the drop in business was worse than the company expected.

Edwards still expects 15-20% 2021 sales growth for TAVR, which makes up the majority of the company’s business, despite the pandemic limiting volumes.

Meanwhile, Boston Scientific reported losses across the company due to procedure declines.

While many executives for large medtechs said the electives slowdown is expected to continue in the first months of 2021, Zimmer CEO Bryan Hanson was more candid.

“There’s just no doubt that COVID, unfortunately, remains a challenge. Coming out of Q4, we’re seeing the pandemic pressure and the surges continue and, frankly, worsen across pretty much all of our regions and markets,” Hanson said. “We expect that increase in pressure will continue throughout Q1, at least, and will impact all three of our regions.”

While other procedure-dependent competitors released 2021 guidance — J&J, Stryker and Boston Scientific — albeit cautious guidance, Zimmer did not.

A second-half rebound is expected as vaccines are more widely administered and global cases come back, which Wall Street analysts have been projecting for months.

J.P. Morgan analysts wrote in a Thursday note that recovery could begin as early as April due to vaccine rollouts, seasonality impact and procedures coming back.

M&A to remain largely tuck-in

After 2021 was kicked off with a run of M&A, executives remained largely cautious on any future dealmaking and reiterated a focus on smaller, tuck-in acquisitions.

Some believe that 2021 could be a banner year for medtech deals. EY consults projected that due to a record-high $500 billion in firepower, medtechs will start spending that capital, both on tuck-ins and a handful of deals over $1 billion.

Deals already announced have ranged from Hologic’s two pickups in women’s health — one for $64 million and one for $230 million — to Boston Scientific’s $925 million purchase of cardiac monitoring company Preventice Solutions and Steris’ $4.6 billion Cantel Medical buy.

Philips CEO Frans van Houten said during a fourth-quarter earnings call that the company will be active on the M&A front following its $2.8 billion acquisition of BioTelemetry in December.  But the CEO added that the company “will be selective on M&A, only when it strengthens our core business and it has a good return path, will we consider it.”

Philips also announced a $635 million deal for Capsule Technologies in January.

Stryker executives also said that after the company’s recent acquisition of OrthoSensor and the drawn-out purchase of Wright Medical, there will only be a focus on smaller deals for the next several years.

Tuck-in comments were echoed by Stryker, BD and Boston Scientific as well.

While not being a direct sale or acquisition, Zimmer announced it will spin off its spine and dental businesses into an independent company. The move will allow Zimmer to focus on what it called higher growth markets like hips and knees. The spinoff is expected to close in mid-2022.

One rumored but unlikely deal came to light this week. Bloomberg reported that point-of-care diagnostics company Quidel is in preliminary discussions to combine with molecular test maker Qiagen, citing sources familiar with the matter who asked not to be identified.

However, Wall Street analysts quickly poured cold water on the news, arguing that the potential deal makes no sense from several angles. 

While Quidel said it would not comment on rumors, CEO Doug Bryant issued a statement that the company “will not enter into an agreement that isn’t an obvious strategic fit.” Qiagen CEO Thierry Bernard told an investor call on Wednesday that it will not engage in M&A that dilutes its activities and that the company is focused on bolt-on acquisitions that support and strengthen operations in five target areas.

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