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Cautious medtech sees surgery rebound

Much delayed and needed elective surgeries are getting back on track as the latest wave of COVID-19 infections eases.

Much delayed and needed elective surgeries are getting back on track as the latest wave of COVID-19 infections eases. That’s good news not only for the patients who had been waiting for those procedures, but for the medical technology (medtech) companies that supply equipment and services to operating rooms.

Surgeries are resuming at a steady pace to tackle the backlog for procedures such as hip and knee replacements, cardiac implants, cataract removals, and more. People feel more comfortable undergoing the procedures and hospitals have adapted by moving some things to outpatient clinics. This trend was in place before the pandemic but has been accelerated by it.

So, after two lean years, this sector is hoping for a better 2022.

“What sort of year will it be for medtech companies? I would characterize it as one poised for solid performance,” says Peter Choi, senior research analyst with Vontobel Asset Management Inc. in New York.

“There’s a sense that each subsequent [COVID-19] wave has had less impact on hospital systems. They have become better at managing by screening or moving more procedures to locations such as outpatient departments.”

Tarik Aeta, vice-president and portfolio manager at TD Asset Management Inc. (TDAM) in Toronto, says medical device companies are more confident but remain cautious after a stop and start past year caused by the Delta and then Omicron variants.

“The companies have all been very conservative with their guidance,” says Mr. Aeta, who researches global health care equities at TDAM. “They’re keeping expectations low, so there is opportunity on the upside to perform well.”

But there are questions about burnout and hospital staff shortages, supply chain bottlenecks, and inflationary pressure on the sector. The impact of any new variant is also a wild card.

Geoff Martha, chief executive officer of Medtronic PLC (NYSE:MDT), the world’s largest medical device company, alluded to the challenges during a recent conference call.

“We felt the short-term impacts of Omicron in January, particularly in the U.S.,” Mr. Martha said. “The resurgence affected procedure volumes, but also created acute periods of worker absenteeism [including among] our customers, suppliers, and our own operations and field teams.”

Mr. Martha remains optimistic that as COVID-19 infections decline, reducing the squeeze on intensive care units, the problems will ease.

“While some of the impacts will linger, we do expect that our markets, our customers, and our industry are on the path to recovery,” he said.

Mike Mahoney, CEO of Boston Scientific Corp. (NYSE:BSX), a Medtronic rival, delivered a similar message in February. The company is a multinational leader in cardiac devices and expects a broad recovery, but he noted the same staffing concerns.

Mr. Choi of Vontobel Asset Management says he believes labour shortages and supply chain issues will ease, adding that their effects have been modest so far. He also expects absenteeism to decline once pandemic pressure on intensive care units falls.

Vontobel Asset Management’s equity funds have reduced their emphasis on Medtronic and increased it on Boston Scientific. Mr. Choi sees Boston Scientific as having leading positions in faster-growing areas than Medtronic and a strong record of product innovation.

Mr. Choi also likes Abbott Laboratories (NYSE:ABT) which sells a broad range of medical devices and has benefited from demand for COVID-19 testing. Another pick is Alcon AG, (NYSE:AL) the Novartis AG spinoff that sells contact lenses, lens implants, and equipment for cataract surgery. It’s benefiting from reopening and the growth of an older demographic as well as demand for basic eye care in emerging markets.

Mr. Aeta manages TD Global Healthcare Leaders Index ETF  (TSX: TDOC) which also holds Medtronic, Boston Scientific, Alcon and Abbott Labs.

He says if investors step back from the pandemic and look at the health care sector more broadly, they will see strong fundamentals, including aging populations in developed economies and rising demand in emerging ones.

Mr. Aeta points out that during the past 30 years, earnings for companies in the S&P 500 Health Care Index rose just less than 10 per cent a year while earnings for the S&P 500 grew a little under 7 per cent. In addition, companies in the S&P 500 Health Care Index trade at a lower average price-to-earnings ratio than those in the S&P 500.

“So, you have an industry that grows faster than the broader market, but trades at a discount,” he says.

This is an edited version of an that article appeared in the Globe Advisor section of the Globe and Mail’s Report on Business on March 9, 2022. For reprint information please view this page.

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