The four major companies in the orthopedics space – Johnson & Johnson, Smith & Nephew PLC, Stryker Corp. and Zimmer Biomet Holdings Inc. – have all seen significant reductions in first-quarter revenues due to the delay of elective procedures as hospitals focused on treating COVID-19 patients.
With many US states taking steps to resume outpatient and inpatient elective surgeries under President Donald Trump’s three-part plan to reopen the country, companies are hoping to ramp up procedure volumes in the coming months. Analysts agree, however, that the negative financial impact of the delays will probably last for months, as customers are likely to reduce inventory and conserve cash. (Also see "Plan To ‘Reopen’ America Gradually Allows Return Of Elective Orthopedic, Colon, Eye Surgeries" - Medtech Insight, 21 Apr, 2020.)
After withdrawing its 2020 full-year guidance on 6 April, Zimmer Biomet was one of the last major medtechs to report first-quarter earnings.
For the first quarter, Zimmer Biomet reported a net loss of $509m compared with net earnings of $246m from the same period a year ago. Its global knee business fell 8.3% year-over-year, marking the second-largest decline among the big four players in this space, while its hip business saw the biggest decline among the big four, at 9.7%. First-quarter sports, extremity and trauma sales declined 5.8%.
Zimmer Biomet’s CEO Bryan Hanson told investors during the first-quarter earnings call on 11 May that the pandemic has had a significant impact on its business, given their dependence on elective surgeries.
“We have 80%-plus of our global revenue that comes from elective procedures,” Hanson said, adding he expects that patients will ultimately return to the health care system. (Also see "Knees Boost Zimmer Biomet; Turnaround Continues, But FDA Woes Linger" - Medtech Insight, 6 Feb, 2020.)
“We have 80%-plus of our global revenue that comes from elective procedures.” – Bryan Hanson
Suketu Upadhyay, Zimmer Biomet’s CFO, told investors that procedures were down 75-85% from early February to mid-March.
He expects a “sequential deepening” of procedure-deferral rates in the second quarter, followed by an upward trend starting in June as countries and states reopen, continuing into the third and fourth quarter. He cautioned that the “rising level of improvement remains fluid,” and added that he does not expect a significant recurrence of COVID-19 later this year.
Credit Suisse analyst Matt Miksic wrote in his 11 May report that Zimmer Biomet’s expected sequential monthly improvements are in line with his analysis, but he remained concerned about the company’s ability to effectively compete against Stryker’s MAKO robotic surgery platform.
Upadhyay told investors that Zimmer Biomet’s robotic ROSA platform contributed to sales early in the first quarter, but added that COVID-19 negatively impacted capital sales overall. Hanson reiterated the company’s commitment to the ROSA platform and said investments in ROSA and other robotics-related initiatives remained “key priorities.”
Miksic noted that sales of Zimmer Biomet’s knee devices in the Americas in the first-quarter fell 7%, including robot sales, which were $44m below Credit Suisse’s estimate.
The analyst lowered the company’s 2020 sales estimate by $34m and increased its 2020 earnings per share by 38 cents to $4.02.
Smith & Nephew
Smith & Nephew said on 6 May that its first-quarter revenues fell 7.6%, year-over-year, to $1.1bn, citing the impact of COVID-19, with orthopedic sales taking the biggest hit.
Orthopedic sales fell 8.3% in the first quarter. Hip sales dropped 8.6%, which is the second-largest decline among the big four orthopedic companies, and knee sales declined 10.6%, the largest drop among the four players.
Smith & Nephew’s trauma device sales fell by 7.1%, impacted by fewer traffic accidents due to the shelter-in-place and lockdown restrictions.
Roland Diggelmann, Smith & Nephew’s CEO, told investors during a 6 May earnings call he is optimistic that elective surgeries will soon restart in some of the largest markets.
“Some states started to announce selective case approvals from 22 April and more than 40 states had made announcements by 1 May,” Diggelmann said about the US market.
He noted that the company’s next-generation CORI computer-assisted surgery platform, which was cleared by the US Food and Drug Administration in February for use in unicondylar knee replacement surgery, is ready for launch as surgery ramps up in the US. In April, the company received the CE mark for the REGENETEN rotator cuff implant, allowing for EU marketing of this product in its sports medicine portfolio.
In response to an analyst’s question about the US recovery, Diggelmann said he is seeing gradual recovery, but said a lot depends on patients’ confidence to return to hospitals as well as hospitals being able to do elective surgeries again.
“Every hospital is in a different recovery status. They will develop protocols, always on the auspice of the broader guidelines. Infection control is a very, very important point and it will affect the entire delivery of care, of course, from accessing the hospital to the treatment and also to the rehab,” he said. “I think that [in the] short-term, it probably will impact the capacity, but I think it’s also going to become a new normal and we’re going to see efficiencies there as well.”
“Every hospital is in a different recovery status. They will develop protocols, always on the auspice of the broader guidelines. Infection control is a very, very important point and it will affect the entire delivery of care, of course, from accessing the hospital to the treatment and also to the rehab." – Roland Diggelmann
Diggelmann also expects downward pricing pressures to increase, acknowledging that hospitals have “put capital expenditures on the backburner.” But he expects this to be temporary, saying that the trend to create efficiencies will continue.
“We have an opportunity with our NAVIO [and] with our CORI platform on robotics, because it is a modular system, because it is a small footprint and because it is also less expensive than others on the market,” Diggelmann said.
Stryker CEO Kevin Lobo also painted a bleak picture on the impact COVID-19 had on the company’s orthopedic business. The company posted net earnings of $493m for the first quarter on sales of $3.5bn, an increase of 2%. Orthopedic net sales of $1.3bn increased 2.8% in the quarter.
Ryan Zimmerman, an analyst with BTIG, wrote in his 30 April report that the company’s first-quarter revenues beat BTIG’s estimate of $3.4bn on organic growth of 2.4%, driven by the resiliency in knees, instruments and medical, and spine business.
“Investors worried that Stryker’s elective procedure exposure would hamper results, the diversity of the portfolio helped to offset procedure declines in late March,” Zimmerman wrote.
“Investors worried that Stryker’s elective procedure exposure would hamper results, the diversity of the portfolio helped to offset procedure declines in late March.” – Ryan Zimmerman
During the company’s first-quarter earnings calls on 30 April, Lobo told investors that the last week in March, the company’s sales declined 30% versus the same period in the prior year. The most declines were seen in hips, knees, spines and endoscopy, but were offset by other businesses. During April, Stryker’s orthopedic and spine sales were down about 65% while its medical-surgical and neurotechnology businesses fell 25%.
“Clearly we are seeing a deferral in elective procedures, particularly with our orthopedic and spine business,” Lobo told investors. He expects those numbers to rise within the coming months, but said the timing is too fluid to make predictions, which is also the reason why Stryker didn’t give a Q2 or full-year guidance.
Stryker’s hip business saw the third-largest decline among the top four players at 6% during the first quarter while its knee business still performed much better compared to its peers, declining 1.6%.
Stryker withdrew its prior 2020 financial guidance, predicting organic sales growth between 6.5-7.5%.
Johnson & Johnson
Johnson & Johnson’s global first-quarter sales were $20.7bn, a 3.3% rise from the first quarter in 2019. However, the impact of the pandemic didn’t escape J&J’s medical device business, which declined 4.8%. (Also see "J&J Remains Optimistic Despite 5% Decline In First-Quarter Device Sales" - Medtech Insight, 15 Apr, 2020.)
The company’s orthopedics division declined 6.5% in the first quarter. The COVID-19 pandemic impacted growth in this franchise by about 750 basis points.
Knee sales fell 6.1% in the first quarter, the third-largest decline among the big four players, while its hip sales saw the lowest decline at 5.6% among the four companies.
Trauma declined by 3.5% with spine sales taking the biggest hit with a 10.6% decline.
The company pointed to continued pricing pressures in orthopedics with spine, hips and knees declining by 5%, 2% and 1% respectively, versus the fourth quarter of 2019.
J&J CEO Alex Gorsky told investors during the 14 April earnings call that the company’s medical devices business is experiencing a “near-term negative impact and expects this to continue while elective procedures are deferred and hospital resources are deployed to address patients impacted by the pandemic.”
Joseph Wolk, J&J’s CFO, told investors that medical devices remain the most uncertain, noting some companies have withdrawn their guidance. He said that J&J assumes that the most significant negative impact occurs in the second quarter with signs of stabilization in the third quarter and some recovery in the fourth quarter, which is based on external and internal data.
He also foresees that hospitals will have the capacity to make up deferred procedures from earlier in the year, but suspects that patients may be hesitant to get elective procedures done, also acknowledging the financial and personnel constraints hospitals are facing.
Advanced surgery fell by 1.4%, resulting from a significant impact of COVID-19, which the company estimated was almost an 800 basis point impact.
Wells Fargo analyst Larry Biegelsen wrote in his 15 April note that the company remains committed to its digital/robotics strategy with the Monarch and Verb platforms, which “validates their respective markets and bodes well for the market’s long-term growth.”
As the US is re-opening its hospitals and ambulatory care centers to provide “Non-COVID-19 essential care” as outlined by the Centers for Medicare and Medicaid Services (CMS) in April, the American Academy of Orthopedic Surgeons offered its five clinical recommendations. (Also see "CMS Chief Advises Separate Non-COVID-19 Wards At Hospitals To Allow Device-Related Elective Surgeries To Resume" - Medtech Insight, 22 Apr, 2020.)
Among the guiding principles are: ensuring patient safety and the safety of health personnel and staff as the highest priority; adherence to the Centers for Disease Control and Prevention and relevant federal, state and local public health guidance and recommendations; and decision making at the local level and following legal restriction.