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Medtech Climbs While JPMorgan Warns Fear May Slow Recovery

Medtech Climbs While JPMorgan Warns Fear May Slow Recovery

(Bloomberg) -- Expectations for a quick recovery in elective medical procedures may be misplaced as many patients may remain afraid to go to the doctor, JPMorgan analysts warned even as companies tied to those procedures rose on Monday.

It’s a given that 2020 will be painful for the medical technology sector, but estimates for next year are also too high, and JPMorgan analysts led by Robbie Marcus predict a slow recovery from Covid-19 “until at least a vaccine/cure is discovered.”

“The fear factor is real and will have an impact on patients’ willingness to undergo procedures,” the analysts said, with the elderly especially likely to continue avoiding doctor’s offices and health care even beyond this year. “If 2021+ forecasts continue to move lower and the pain appears to be more durable than immediate, we’d expect multiples to contract and stock prices to decline,” the bank said in a client note laying out the bear case for the sector.

Medtech Climbs While JPMorgan Warns Fear May Slow Recovery

“Even once hospitals return to normal, the hospital system simply doesn’t have the capacity in terms of beds or manpower to meaningfully increase its caseload, with a growing backlog likely coupled with increased waiting times.”

The health-care system will face lower demand and less ability to supply treatments as fewer, elective procedures, which are more profitable, lead to sector job cuts during the shutdown. Hospitals, already operating on razor-thin margins, may further cut their spending on new equipment and procedures over the next few years.

The companies that rely less on elective procedures or hospital budgets,such as Baxter International Inc., Abbott Laboratories and Becton Dickinson and Co., will fare best among large caps, while among smaller companies Penumbra Inc., IRhythm Technologies Inc. and diabetes device makers Insulet Corp. and Tandem Diabetes Care Inc. will also be more insulated, according to the bank’s analysis.

Abbott rose 4.1% to a record and was one of the top gainers as a benchmark of the sector rose to the highest since Feb. 25, before Covid-19 fears started to eat away at U.S. stock market confidence.

Investors may be more optimistic on a recovery after reports over the weekend that Texas became one of the first states to resume elective procedures. Earlier today, New York Governor Andrew Cuomo said the state would make an announcement regarding its policy on when those surgeries could restart.

Baxter International Inc. climbed as much as 2.3% to touch an intraday record. Wells Fargo raised the company’s price target, citing an increased need for Baxter’s kidney treatments from a Covid-19-linked increase in kidney failure.

Although JPMorgan says medical technology “will return to its former glory over time,” the bank also predicts that after the virus subsides, investors might see an increase in the “healthy cadence of value creating M&A” as acquirers snap up distressed companies on the cheap. “Investors with a longer-time horizon (3-5 years) are likely to find today’s valuations somewhat more attractive because of this longer-term outlook, but the next 12-24 months will likely be a bumpy road to get there.”

©2020 Bloomberg L.P.