Medical technology companies have been the stars of the healthcare sector for the past decade, but they met their match in 2020 when the pandemic arrived.
Spring lockdowns cancelled elective surgeries and slowed the pace of necessary surgeries. Patients were afraid to visit hospitals for checkups and for less urgent needs. While many of the public medtech companies are global, their diversity didn’t help as the pandemic affected all of their markets.
That meant slim returns for investors. But with hopes that vaccinations will normalize conditions this year, is 2021 the year medtech bounces back?
The consensus seems to be yes, but where exactly the opportunities lie are a matter of opinion. The sector includes multi-million dollar surgical robots, simple blood tests and everything in between. For Canadian investors, domestic choices are limited, so the U.S. is often where they turn.
“I see it as the year of low hanging fruit,” says Hans Albrecht, vice president, portfolio manager and options strategist at Horizons ETF Management (Canada) Inc. in Toronto. Mr. Albrecht thinks managing costs will be uppermost this year for healthcare systems.
“That means growth in efficiencies,” he says, including such areas as virtual care and behind the scenes improvements like healthcare records, booking and billing.
“These are plug and play solutions with an easy training and learning curve. That’s very different from robotic surgical solutions which are fantastic, but not cheap.”
Peter Choi, senior research analyst based in New York with Vontobel Asset Management Inc., believes that once surgical backlogs are cleared, hospitals will resume their normal purchasing patterns. This includes higher end products which cost more, but offer features that are constantly improving. In many cases, this means less invasive and less painful surgeries, which means shorter hospital stays with fewer post-surgical complications. Hospitals can therefore do more surgeries which increase revenues and patients are happier with the outcomes.
“It’s a win-win on both ends. Less traumatic surgery and fewer complications,” he says.
Vontobel is an asset management group based in Zurich with a multi-boutique approach and a global business, including institutional investors in Canada.
Mr Choi says pre-pandemic, global medtech players such as Boston Scientific Corp. (NYSE: BSC) and Medtronic Inc. (NYSE:MDT) were attractive. They remain so, enjoying high barriers to entry in many product lines and strong relationships with customers. Vontobel holds both in one of its equity funds.
Boston Scientific with annual revenues of US $10.1 billion is a leader in heart-related implants and products. Medtronic is the world’s largest medical device company with annual revenues of US. $27.8 billion. Both saw share price declines in 2020 with Boston Scientific off 20 per cent and Medtronic 1.3 per cent.
Mr. Choi says incremental product improvements create a flow of new business, citing pacemakers as an example. While a relatively old technology, it has continuously evolved. Medtronic introduced the world’s smallest pacemaker in 2016 which is the size of a large pill. It is inserted under the skin and monitored through a wireless connection. It eliminates the need for invasive surgery and complications caused by electrodes used in older models.
The telehealth opportunities Mr. Albrecht sees are areas of growth for Telus Inc. (TSX:T) and Loblaw Cos. Ltd. (TSX:L) Telus has used its telecom expertise to generate $800 million annually from patient management software and a patient app linking medical staff with patients. Loblaws is using its Shoppers Drug Mart subsidiary to connect customers with doctors and pharmacists.
“I think you’re going to see growth in efficiencies of these sorts of systems,” Mr. Albrecht says. “Healthcare records are very old school. It’s a world that hasn’t really caught up in many ways.”
He agrees that improvements of higher end systems mean more features and lower costs. This attracts more business in a virtuous circle in much the same way that “the cost of your TV and computer has come way down in price from 20 years ago and is 1000s of times better.”
So what are the areas to watch?
Mr Albrecht sees advances in early cancer detection using genomics, a process that uses DNA to treat disease.
Simple robots are another area. China is a leader here, he says. The machines clean rooms with UV light, deliver supplies and take temperatures as children go to a school. Their advantage is performing repetitive tasks which free staff for more important things at a more modest price point.
Both Mr. Albrecht and Mr. Choi sees opportunity in surgical video imaging systems which are rapidly improving. They allow surgeons to watch their operations and make adjustments as they go.
“Imaging is getting to the point where you are actually getting suggestions from the robots,” Mr. Choi says.
He agrees that early cancer detection is one to watch. New products from Intuitive Surgical Inc., (NYSE: ISRG) the leader in surgical robots and Johnson and Johnson Inc. (NYSE: JNJ) are enabling non-invasive lung biopsies for earlier cancer detection, he says.
“[Medical technology companies] are attractive businesses with the steady growth, incremental innovation and the ability to open new markets,” Mr. Choi said. “COVID-19 hit them square on, but as things normalize they will benefit.”
This is an edited version of an that article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Feb. 8, 2020.
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