ARTICLE SUMMARY:
Highlights from our recent interview with BTIG Managing Director Ryan Zimmerman on the current state of medtech stocks.
After years of above average returns, medical device stocks are down collectively by roughly 20% over the past six months, slightly more than the decline of the S&P 500. Even as reality sets in that COVID-19 and hospital staffing shortages are likely to continue for some time, it’s not yet a bear market,says Ryan Zimmerman, managing director and senior medtech analyst for BTIG. (See “Tracking the Pullback in Medtech Stocks: A Conversation with BTIG’s Ryan Zimmerman,” MedTech Strategist, February 2, 2022.)
While many subsectors of the industry have been hurt by slowdowns and halts of elective procedures, the expectation is that patients will eventually return to the healthcare system for treatment. But while experts once modeled for a post-COVID-19 short-term bolus of unusually high volumes that would make up for the lost procedures, they now foresee a slower, more evenly distributed return that is likely to continue for some time, due to staffing challenges, patient hesitation, and the uncertainty of COVID-19 surges. The staffing shortage in the healthcare sector is particularly ingrained and unlikely to be resolved in the short term, leading to a slower than expected return to normal, Zimmerman notes. (See “JPM 2022: COVID-19 Means Tougher Outlook for Medtech, Stronger, Larger Integrated Healthcare Systems,” MedTech Strategist, January 19, 2022.)
Zimmerman covers primarily orthopedics and surgical companies. He is board certified in hospital management and is a fellow in the American College of Healthcare Executives. His BS in anthropology and zoology is from the University of Michigan, and he has a Masters in Healthcare Administration from the University of Illinois-Chicago School of Public Health.
During our conversation, Zimmerman pointed out that medtech subsectors have different recovery expectations, depending in part on the site of the procedure and urgency of the condition. Market share dynamics will be important in the mature and highly concentrated orthopedics sector, particularly in the large total joint reconstruction segment. On the other hand, pain management via electrical stimulation and ophthalmology are likely to grow faster. Pain stimulation is a newer technology, with opportunities for expansion into segments such as peripheral diabetic neuropathy. Ophthalmology remained strong in 2021, although most procedures are elective, partly because its end-markets are focused on outpatient procedures that are not subject to the same staffing shortages or patient fears as other subsectors, Zimmerman says. Alcon and RxSight are examples of ophthalmology companies benefiting from the launch of new technologies in the outpatient setting and the willingness of stay-at-home consumers to spend more on cosmetic eye surgeries. While market share gains are important growth drivers for the larger ophthalmology players, emerging companies with innovative products are also gaining ground and helping to expand the total size of the market opportunity, he continues.
Overall, he notes that larger-cap companies sitting on cash, with strong balance sheets, are looking for growth and are interested in M&A, while willing to pay a premium for innovation, especially as competition for high-quality assets grows. “Companies are stepping in earlier in the lifecycle and willing to pay a premium to do so and take on a little more risk,” he says.
As for financing start-ups and medtech IPOs, Zimmerman notes, “right now, with interest rates rising and a pullback in the general markets, it is more challenging, although there will always be an appetite for innovative companies to raise capital.”
Excerpted from Tracking the Pullback in Medtech Stocks: A Conversation with BTIG’s Ryan Zimmerman, MedTech Strategist, February 2, 2022.
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