Big medtech convalesces after Covid-19

What goes down must come up.

Corporate strategy

What a difference a year makes. The second quarter of 2020 took a tremendous toll on many device makers, principally those whose technologies are used in elective procedures, as non-urgent care was deprioritised to allow hospitals to focus on treating Covid-19 patients.

Companies whose sales were hit hardest are now riding high, with orthopaedics and cardiovascular players leading the revenue renaissance among the 10 biggest groups. But a comparison with the second quarter of 2019, as a means of benchmarking companies’ 2021 performance against a more normal year, suggests that the real winners from the pandemic era are the diagnostics companies. 

Medtronic reported a return to growth today, unveiling a 23% increase in quarterly sales from the same period in 2020; this time last year, the pandemic caused the company's sales to shrink 13% on 2019's level. The group cited "strong recovery" in elective operations, adding that most of its businesses are now at or above pre-Covid levels.

Still, that 23% makes Medtronic’s performance pretty average, compared to other big medtechs. In a neat reversal of the situation in 2020, the orthopaedics players Johnson & Johnson and Stryker and the cardiovascular specialist Boston Scientific now lead the charge – these three, in the same order, posted the worst revenue losses of the second quarter last year (Orthopaedics companies’ nightmare quarter, August 25, 2020).

The first of the big groups to report, J&J set the tone for a buoyant quarter, its medtech sales up 63% as Ashley McEvoy, chairman of J&J's medical devices unit, hailed “the light at the end of the Covid-19 tunnel”. The group’s orthopaedic sales grew 54%, driven by a near-doubling of revenues from its knee business. 

Stryker followed suit a week later, its 55% uptick in second-quarter sales fuelled by the rebound in elective surgery. The group was able to flip its bottom line from a loss of $83m a year ago to a $592m profit. 

How the top 10 medtechs have fared in the pandemic era
Date of earnings Company Q2 2021 sales ($bn) Change from Q2 2019-20 Change from Q2 2020-21 Change from Q2 2019-21
Jul 21, 2021 Johnson & Johnson* 7.0  (34%) 63% 8%
Jul 27, 2021 Stryker 4.3  (24%) 55% 18%
Jul 27, 2021 Boston Scientific 3.1  (24%) 54% 17%
Jul 30, 2021 Siemens Healthineers** 5.9  (7%) 51% 39%
Jul 22, 2021 Roche* 5.1  (5%) 47% 39%
Jul 22, 2021 Abbott Laboratories 10.2  (8%) 40% 28%
Aug 5, 2021 Becton Dickinson** 4.9  (11%) 27% 12%
Aug 24, 2021 Medtronic 8.0  (13%) 23% 7%
Jul 27, 2021 GE Healthcare* 4.5  (2%) 14%  (10%)
Jul 26, 2021 Philips 5.0  (6%) 6%  (10%)
*Medtech-only sales. **Fiscal Q3 2021. Fiscal Q1 2022. Source: company communications.

At the bottom end of the scale, the Dutch giant Philips only managed a meagre 6% second-quarter sales boost. The company had been doing reasonably well until mid-June, when it was forced to recall millions of DreamStation ventilators and sleep apnoea machines owing to health risks posed by the polyester-based polyurethane foam used to muffle the sound of these devices. 

Degradation of this foam produces particles that might enter the devices’ air intake and be ingested or inhaled by the user, potentially causing inflammation, headaches, nausea and even carcinogenic effects, the FDA said when designating the recall as class 1, the most serious kind. The foam could also release chemicals that can lead to toxic reactions, difficulty breathing and lack of oxygen in the blood. 

The recall prompted a double-digit decline in Philips’s sleep and respiratory care segment in the second quarter. The situation has only got worse since, with two more recalls of different ventilators designated class 1 in August.

Two years

The pattern is not perfect, but the table above shows a clear trend: those groups that did worst in the second quarter of 2020 owing to the strictures of the pandemic did best this past quarter as these pressures eased – and vice versa. 

Arguably a better benchmark of underlying performance is given by making a two-year comparison, to before the new coronavirus changed the way the world works. And here the secret to success is clear: Covid-19 diagnostics. 

Roche, Abbott and Siemens Healthineers spent huge sums on developing dozens of Covid-19 tests, including highly accurate PCR assays, fast, cheap antigen tests and innovative products including those that can not only detect antibodies to Covid-19 but measure their levels, and tests that can track the transmission of new variants of the virus. 

The investment has been worth it. Healthineers, the fourth-largest in vitro diagnostics company by sales of these products, had a scorching second quarter, its Covid-19 test revenues markedly higher than expected at a time when most of its rivals were reporting declining sales of coronavirus assays. 

Abbott, for example, when reporting its second-quarter results, cut its full-year guidance by 24% versus what it had forecast in April, blaming falling demand for its suite of Covid-19 tests. But its cardiovascular business, hit hard during the height of the pandemic in early 2020, has already largely recovered. 

The group’s sales have increased by 28% since the second quarter of 2019. It seems that diagnostics saw Abbott though the hard times, and now its cardiology, diabetes and neurology units are picking back up. 

Inorganic growth and shrinkage have also played their parts in companies’ performance. GE’s sales are down 10% since 2019 largely because it sold its biopharma business to Danaher in 2019. And Healthineers’ top line will have been boosted by its acquisition of Varian, which closed in April. 

M&A activity notwithstanding, the correlation between the pandemic taking away in mid-2020 and giving back a year later is stark. If vaccination drives continue, and no frightening new variants of the virus emerge, the second quarter of 2022 might see a return to normality.

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