Covid-19 Resurgence to Take a New Swipe at Surgery Recovery

(Bloomberg) -- Americans cautiously returned to the doctor’s office for non-essential medical procedures like knee replacements in the third quarter but Wall Street expectations into the end of the year may be too high.

While device makers are largely expected to top revenue projections in upcoming earnings, the pace of recovery in the fourth quarter is under scrutiny as a second wave of Covid-19 cases threatens to stymie a comeback in procedures. Cowen analyst Joshua Jennings predicts an “underwhelming timeline” on the return to growth, given the potential impact from a seasonal surge in coronavirus cases.

Wall Street is modeling a return to growth in the fourth quarter, but hospital administrators surveyed by Cowen see unchanged year-over-year procedure volume. “The return to elective procedure growth is crucial for the MedTech sector,” Jennings wrote in a note. Most administrators, however, expect such growth to resume in the second quarter of 2021 or beyond, he said.

Still, the industry remains undaunted. The IShares U.S Medical Devices ETF has surged more than 60% from its March trough and is on track to close at a record Monday. For the year, it’s up almost 20%.

Cowen wasn’t the only bank to sound the alarm. SVB Leerink analyst Danielle Antalffy cautioned that the fourth quarter and 2021 numbers may be too high. Leerink was more bullish after its own survey of administrators, particularly on growth in cardiology and urology.

Companies like Abbott Laboratories or Abiomed Inc. with more essential devices or procedures like heart monitors or valve replacements “are best-positioned to deliver meaningful outperformance and more positively toned commentary around the go-forward outlook,” she told clients in a research note.

Some bright spots have buoyed stocks, like a preliminary look at the nation’s largest publicly traded hospital operator, HCA Healthcare Inc., which revealed earnings that were ahead of expectations after a pick up in surgeries. Patients insured by their employer “may have vacation and sick days accumulated since the pandemic began or are squeezing in procedures as their future employment status may be uncertain,” Bloomberg Intelligence analyst Glen Losev said after HCA’s results.

Tuesday’s earnings from Johnson & Johnson, the pharmaceutical giant which generates about a third of sales from medical devices, should give another early glimpse inside the industry. Investors will be paying particular attention to the bellwether’s forecast for the rest of the year and when the company expects a recovery for the sector.

©2020 Bloomberg L.P.