For Medtech Companies, Will 2020 Be a Lost Year?

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The coronavirus pandemic has shone a spotlight on the important role that medical devices play in patient care. But the short—and perhaps even mid-term ramifications are proving painful for the industry, especially as elective surgeries decline precipitously.

The scourge of the coronavirus has thrust the medical device industry, every bit as much as the biopharma industry, centerstage. While there’s been a lot of talk about the development of vaccines and therapies to prevent and treat the virus—at press time, hydrochloriquin appeared not to have promise, though remdesevir did (Gilead’s drug received FDA Emergency Use Authorization on May 1) the short term focus has been on medical devices and hospitals supplies, most notably PPEs like masks, ventilators, infection control products, and, particularly, diagnostic testing. Indeed, diagnostic technology and diagnostic companies were enjoying a much-warranted re-valuation as the critical role of testing in managing the disease has become a pressing concern. This is one story where medtech will have at least as high a profile as pharma, at least in the short run.

And indeed, in some quarters, the virus has opened opportunities for medtech companies, both for companies with products on the market and those with technologies under development. Still, for the industry in general, the virus has proven to be much more of a negative than a positive, particularly in the short term. Of most immediate concern: a near total shutdown in elective procedures that is crippling hospital systems financially, and causing medtech companies to feel the effects of a healthcare system simply devastated by the virus. While diagnostic companies and manufacturers of PPE and ventilators are seeing a surge in business, nearly every other manufacturer of medical devices is suffering because elective procedures simply aren’t being done. Just one example: in mid-April, Medtronic plc reported a 60% drop in weekly sales, as its businesses in a number of clinical areas, including spine and orthopedics, bariatric, general surgery, ENT, and a-fib, were feeling the impact of a steep reduction in elective procedures.

It’s hard to overstate the stress on the healthcare system that the pandemic has wrought.

Of course, as bad as the medtech industry is feeling the virus, its customers are feeling it much worse. It’s hard to overstate the stress on the healthcare system that the pandemic has wrought. By some estimates, in the immediate wake of the crisis, 75% of elective procedures were being postponed. Worse, some hospital executives worry about a longer-term ripple effect: surgeons and physicians who are losing money during the peak of the crisis may want to recoup lost revenue when the system is less stressed, picking up the procedures currently not being done. But some hospital executives were skeptical, arguing that some patients would be reluctant to come back into facilities still perceived as hot zones of infection and, in addition, that there might not be sufficient staff and other resources to mount a real recovery of elective procedures. For medtech companies that, as a group, rely so heavily on a recovery of elective procedures, some executives worry that 2020 could be a lost year for the industry.

But against such pessimism, there were signs of optimism: by the middle of April, New York State, the hottest of early hot spots, reported the beginning of a decline in new cases and an end to hospital bed shortages, and by mid-to-late April, the issue of lost elective procedures started to attract attention, nationwide. The Trump Administration released guidelines for the recovery of such procedures, and, as we noted in our April 22nd feed of Pathway Picks from Market Pathways, CMS and multiple medical groups have started to issue recommendations for phasing in elective surgeries that have been postponed by COVID-19, with an initial emphasis on geographical areas that are experiencing low or stable incidence of the virus. By the end of April, according to a report in Becker’s ASC Report, 21 states had either resumed elective surgery or were considering doing so.

And around the same time, the giant surgical device companies, Johnson & Johnson and Medtronic, were issuing guidance, albeit limited, about a recovery that posited elective procedures would start to rebound later in the year. (Some reports suggest a rebound had already begun in some places in China, though there were also reports of a second wave of the virus after that.) Predictions are always difficult, but some analyses predicted that the worst quarter will be the second and third quarters, with a decline in elective procedures of 65-85%, improving to a 20-60% drop in the third quarter and then a gradual rebound in the fourth quarter.

The rebound may not be evenly distributed, with some specialties experiencing a faster recovery than others. Some industry executives have speculated that some specialties—dermatology and some forms of plastic surgery—may be particularly hard hit by the new public attitudes. People with problems in those areas may re-think whether to have elective surgeries at all. That’s where the boost in telehealth comes in. Interestingly, at the peak, one issue was what seemed to be an expanded definition of elective procedures. Suddenly, in some quarters, spine and total joint replacement surgery, some cath lab procedures, and other cases once deemed essential were being thought of as “elective.” One hospital executive noted that there had even been a fall-off in heart attack and heart failure patients coming into hospitals in geographic hot spots. Indeed, in late April, one New Jersey hospital reported a 37% drop in heart attack and stroke patients over the year before.

For start-ups, particularly those pre-revenue, it’s all about preserving cash.

In the short term, large to mid-sized medtechs have already begun to furlough workers, as uncertainty about duration hangs over the industry. For start-ups, particularly those pre-revenue, it’s all about preserving cash. Indeed, even for devices not on the market, there’s likely to be a ripple effect: VCs are worried about delayed timelines, particularly because of clinical trials that had to be put off. And as a result, some VCs are talking about keeping more money in reserve to support existing portfolio companies before investing in new ones. Whether the COVID-19 crisis results in any sustained pull back or retrenchment in new investments remains to be seen. But anecdotally, some deals were still getting done. Two examples: French robotics company Robocath announced a€40 million closing at the end of April and RefleXion, developers of a potentially disruptive technology to treat cancer, announced in mid-April that it had closed on a $100 million round to fund commercialization, having just a couple of days earlier announced the placement of its first unit at Stanford.(See “RefleXion: Using Biology to Guide Radiation Therapy,” MedTech Strategist, November 16, 2016.)

To be sure, just as with more established medtech companies, there are opportunities for some start-ups; witness all of the companies that were racing to develop ventilators that they can get to market quickly. Ventilators and PPE aside (obvious areas) new opportunities will come in remote patient monitoring, POC diagnostics and biomarkers, infection control, new technologies that help doctors and hospitals to measure and predict severity of infection to enable hospitals to triage patients more efficiently, getting infected patients into the hospital sooner while keeping out of the hospital patients who don’t really need to be there using valuable resources better spent on other patients.

Further out, as clinicians and researchers get a better handle on the long-term impact on lung and kidney function of the virus, companies working on technologies in areas like COPD may find an unanticipated opportunity for treating patients suffering from the after effects of the virus. At the end of April, MedTech Innovator held a pitch and feedback session, in coordination with BARDA (the Biomedical Advanced Research and Development Authority, a unit of the US Department of Health and Human Services), showcasing start-ups with COVID-related technologies. Among the companies featured in the session were several POC diagnostic test companies, including Abreos Biosciences and GNA Biosolutions, remote patients monitoring companies Spry Health and Bardy Diagnostics, Prenosis, developers of clinical decision support tools to help triage patients, and Thorasys, developers of a COPD device that can treat the long-term after effects of coronavirus infection, among others. (For a complete list of the 16 companies in the MTI showcase and a video of their one-minute pitches, click here.)

Still, the critical issue for the medtech industry right now isn’t the opportunities for new and existing technologies, it’s the duration of the crisis (though that is related to the ability to get more diagnostic tests quickly; faster and accurate diagnostic testing is also critical to any rebound in elective procedures). Most experts have dismissed the notion this will be a “V-shaped” recovery, with a quick fall and then a rapid spike back to normal. Some are predicting a “U-shaped” recovery, with a recession/depression of longer duration before any recovery comes; others a “W-shaped” recovery, characterized by a series of spikes and crashes.

It’s important to keep in mind that COVID-19 is, first and foremost, a health crisis and most of the challenges for the medtech industry come as a result of a healthcare system, particularly in hard hit areas like New York and New Jersey, that is overwhelmed treating virus patients and has time for no one else.

Because of the drop in elective procedures, some large healthcare systems are, in the short term, losing hundreds of millions of dollars a month. 

That said, there is obviously a significant financial aspect to the crisis that is almost as crippling as the virus itself. And there are two things to keep in mind. First, the conventional wisdom that healthcare, of all sectors of the economy, is recession-proof obviously doesn’t hold here. In fact, in the past, when recessions loomed, the healthcare system sometimes got a boost, as people rushed to have procedures done before their health insurance lapsed. In this healthcare crisis, the healthcare system is feeling as much of the brunt of the financial crisis as any other sector, in part because the dramatic spread of the virus has stretched hospital resources to the breaking point. In addition, because of the same drop in elective procedures that is hurting medtech companies, some large healthcare systems are, in the short term, losing hundreds of millions of dollars a month. For one large system, the impact was reportedly likely to be measured in billions of dollars over the course of this year.

And, as noted, some hospital executives worry that, longer-term, the recovery will be slow because some patients simply won’t feel comfortable going to hospitals that were once centers of coronavirus infection. Thus, the second consideration concerns the possibility that such retrenchment might not go away once we’re out of what seems to be the first wave of the crisis. Here there seems to be some debate. One school of thought is that the experience of the virus has been so shattering, people are going to think differently about where and how to get care in the future. The chorus that is making the case for a revolution in telehealth basically makes the case that many people will now turn to remotely-delivered care rather than go back to a hospital-based care (See “COVID-19: A Pivotal Moment for Telemedicine and Remote Care Technologies,” MedTech Strategist, March 31, 2020).

Most analysts point to a long-term and a short-term impact of COVID-19, but there’s a mid-term impact as well, and that entails getting hospitals back to treating non-COVID patients, and in particular starting to do elective surgeries again. The folks hit the hardest are the proceduralists, not primary care physicians who will make an easier transition to telehealth. For surgeons and interventionalists, talk of a shift to telehealth seems less relevant.

All of this is, obviously, a snapshot in time. Perceptions and projects had changed, in both obvious and less obvious ways, between late March and mid-April and will likely have changed as well between when this article was written and when you’re reading it.

Even assuming that there is some rebound and recovery in elective surgeries, a month and a half into the pandemic, few people were predicting a return to “normalcy” or “status quo ante bellum.” If anything, the conventional wisdom, widely held was that in many spheres of society, not limited to healthcare, life as we know it had changed forever. For medtech executives, that meant, in particular, a new mindset on the part of customers, though in many cases, the new “new” seemed to embrace things that have been talked about for the last decade or so, mostly under the umbrella of value-based care.

Manufacturers who come up with new messaging will win.

Beyond concerns about elective surgery, as hospitals struggle with the larger pressures that come from financial stress, some industry executives point to trends that have been predicted or anticipated for years: no more me-too products and more aggressive procurement strategies by hospitals, such as standardization and utilization reduction as hospitals look everywhere to recover financially. Technologies that focus not on improved outcomes but lowering system costs and enabling new, less intense delivery models. A reduction in sales forces, some mandated or driven by hospitals and some by manufacturer furloughs, as well as a move to virtual/digitally-enabled selling models. And as part of that, new marketing messages, strong on the science and clinical benefit, and devoid of bells and whistles. Said one hospital executive, “Manufacturers who come up with new messaging will win.”

As hospitals seek to strengthen their finances through reduced costs, there’s likely to be increased leverage on manufacturers, as group purchasing efforts and strategies gain a new importance. At the same time, and part of the same dynamic, hospitals that were already in shaky financial condition before the current crisis may find it difficult to survive. As a result, hospital consolidation may also pick up again, as a kind of Darwinian dynamic drives the provider sector, further giving customers a volume-driven leverage over their suppliers. And as hospitals, centers of high acuity care delivery struggle, many hospital executives believe that more care will shift to less expensive, lower-intensity settings such as ambulatory surgery and care centers.

Finally, for most hospitals, the supply chain will now move to the top of every hospital CEO’s priority list. New supply chain models will likely emerge. Whether financially-stressed hospitals can, in any meaningful sense, afford to take on their own huge stockpiles of supplies in anticipation of the possibility of future pandemics remains to be seen. But there are alternatives: already some major health systems are paying manufacturers to, in effect, consign supplies of some products, not taking them on site, but paying manufacturers to hold emergency stocks for them as a backstop strategy and insurance policy against future crises.

Sidebar: Medtech Schemes?

While the specific needs of hospital workers treating COVID patient raised the profile of the medtech industry, there were, to be sure, a few dark clouds behind the silver lining of medtech’s boost in prominence if not popularity. In mid-April, The New York Times, which often takes a negative view of the medical device industry, published an article, followed by an op-ed piece a couple of days later, that recounted the story of Newport Technologies, a small manufacturer of low-cost ventilators that a decade or so ago, received a government contract. The company was acquired early by Covidien who soon after shut down the ventilator project, with the Times implying that Covidien only acquired the company to take a rival’s lower-cost device off the market. The Times seemed to suggest that it was outrageous of Covidien to have purchased a company only to take it off the market, though in this case, it’s hard to assign outrage for a decision made almost a decade before anyone had heard of COVID-19. The op-ed that followed, written by Tim Wu, a Columbia University law professor and Times contributor, doubled down on the criticism of Covidien. (To be accurate, Wu’s point was that medical device and pharma companies that make products critical to health shouldn’t be allowed to game the system for corporate benefit, and he was more critical of companies, mostly pharma, that have attracted a lot of attention recently by buying up old, under-used drugs and marking up the prices dramatically, as was the case with Pharma Bro Martin Shkreli and Mylan, makers of the Epi-pens.)

               Consistent with concerns over potential bad behavior by some medtech companies: on a mid-April conference call to report first quarter earnings, Roche CEO Severin Schwan called the state of antibody testing at the time “a disaster,” due to opportunistic companies rushing onto market with inaccurate tests to satisfy the new urgent demand. High rates of both false-positive and false-negative results meant that a lot of tests “aren’t worth anything or have little use,” said Schwan. He called the behavior of some companies “ethically questionable” as they rushed to get tests on the market quickly, adding that “amateurs could produce an antibody test,” working “overnight in their garage.” At press time, the FDA had approved just over 60 new tests. And a report in the Times in late April noted that studies done by independent researchers found that 11 of 14 antibody tests rushed on the market proved unreliable because of a high number of false positives. (See “Is the Medtech Industry Evil?” MedTech Strategist, January 16, 2019.)


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