According to the British Economist, the COVID-19 has caused economic depression, and medical equipment manufacturing industry is the first to bear the brunt. The epidemic is raging, and the medical procurement process that requires precision medical equipment has collapsed, causing a huge blow to sales. At the same time, this epidemic crisis has also created business opportunities for manufacturers of ventilators and testing equipment.
To illustrate the changing process of this trend, we can take Medtronic as an example. On August 25th, American giant Medtronic, with a market value of $138 billion, announced its quarterly financial results as of July. From the financial report, the performance was extremely poor: revenue was only $6.5 billion, a year-on-year decrease of 17%, and net profit fell by nearly half. The company refused to predict future revenue on the grounds of the epidemic.
However, investors and analysts cheered for it, partly because their previous expectations were even worse: Medtronic's revenue and profits easily exceeded expectations. Another reason is that the sales of ventilators have increased fivefold, providing a foundation for overall revenue. Medtronic CEO Jeff Martha expects the company to return to "normal growth" in the coming quarters.
The recovery of Medtronic may indicate a larger recovery for medical device companies. Matt Michisich of Credit Suisse, an investment bank, pointed out that these companies were in crisis "against the wind". The strong growth of global income has become the driving force for their recovery. In 2020, consulting firm KPMG predicted that global sales would increase from $371 billion in 2015 to $795 billion in 2030. Tim Van Bison of Bain Consulting pointed out that before the outbreak of the epidemic, the sales of high-margin equipment used in orthopedics, neurosurgery, and cardiovascular surgery surged. As a result, in the past five years, its stock price has surpassed the Big Pharma and S&P 500 index (see chart).
Screenshot of a report by The Economist in the UK
The sustainability of the above expected performance depends largely on the trend of the COVID-19 epidemic. In order to promote profitable devices and related services, medical device manufacturers rely on a well-trained team of sales representatives to attract and train doctors. A survey by Bain found that before the emergence of COVID-19, 9 out of every 10 medical staff wanted to communicate with the device sales staff in person. Van Bison stated that when performing complex surgeries, many surgeons value the advice given by top representatives because they understand the cutting-edge technology of their own businesses better than doctors. Some doctors even rely on these representatives to rank their preferred tools before surgery. Now Bain has found that over 60% of surgeons expect this face-to-face communication to be limited.
Long term restrictions on communication may affect the medical device industry in unexpected ways. Bison believes that large enterprises may lose their outpatient business. These outpatient clinics are usually not as large as hospitals, and are more cost conscious, and are less focused on high priced brands and sales representatives. Mikhisic believes that in professional fields such as spinal surgery, high-level on-site services are common, and non-contact communication may provide protection for current practitioners but hinder new entrants. This week, Medtronic announced that its largest business is gradually gaining market share. If, as Martha put it, the company is "seeking to develop new equipment," then these achievements should be attributed to the sales of old equipment.