Medtechs adapt to new sales reality amid halt on elective surgeries, hospitals’ financial stress

By | April 14, 2020

One by one, medtech companies have warned investors that a temporary pause on elective procedures — the bread and butter for many device maker and hospital balance sheets alike — render best-laid 2020 forecasts obsolete.

Earnings reports kick off next week — J&J, Abbott and Intuitive are all on deck — and based on pre-announced results, analysts at Needham & Co. estimated Thursday that medtechs saw an average sales decline of 40% to 50% late last month, potentially indicative of the steep drops likely to persist during the second quarter.

The American College of Surgeons, Surgeon General and CMS are among the authorities that in mid-March implored hospitals to postpone a range of high-margin surgeries. The impetus was to keep uninfected people out of high-risk centers and allow diversion of critical supplies and staff to an anticipated surge in COVID-19 patients.

Intuitive Surgical was earlier than many to report impact to its business from initial hotspot regions like China and Italy, and acknowledge a trend about to balloon in its key U.S. and European markets.​ Boston Scientific, Smith & Nephew and Stryker followed suit and formally rescinded previous financial guidance for the year.

While social distancing policies only came into play during the latter part of the first quarter, some particularly elective surgery-dependent companies report already sizable hits from the shock to the healthcare system. Orthopaedics-focused Zimmer Biomet preliminarily said this week its revenue during the quarter was down roughly 10%.

Some potential good news for these device makers: Many analysts project that revenues lost during the down period, however long it may last, will be waiting on the other side.

“The word ‘elective’ is a bit of a misnomer. It somehow implies that somebody with aortic stenosis doesn’t need to get the valve replaced. And that’s not really the case,” said Brian Chapman, who leads the medtech practice at consultancy ZS Associates. “That’s important, of course, because the need for the procedure doesn’t go away just because we postponed it.”

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Still, across medtech specialties, companies must prepare to meet bottlenecked demand against a backdrop of beleaguered hospital budgets once recommendations against the procedures are lifted.

Adapting in the near term

The face-to-face, sales rep-to-doctor nature of the medtech business is upended ​as long as hospitals bar most visitors and device makers themselves implement remote work policies.

While the acute U.S. coronavirus response is still just several weeks old, the head start in Europe may offer early insight into how medtech sales teams can adapt outside of the operating room, according to Chapman, who’s based in Zurich.

“The most progressive companies, they’re doing things that they may have been unwilling to do because their field teams were so critical to keeping the lights on, they didn’t want to take them out of the field,” he said. But the current environment is pushing medtechs to make better use of online trainings and, like so many other industries, connect with customers virtually.

“Now’s the time to really get a team, that’s realistically perhaps been a little bit behind the curve, to feel more comfortable with digital tools,” Chapman said.

Additionally, the stop on elective procedures could in some cases mean specialized clinicians have less packed schedules, potentially giving companies more opportunity for interaction. “Unless things are absolutely on fire in a hospital system, in which case it may be all hands on deck, many cardiac surgeons and so on might actually find themselves with more time on their hands,” Chapman said.

Ultimately, COVID-19 could change the “one-dimensional” nature of medtech sales, he said.  

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That reorientation could be especially important, given that the pandemic may prompt hospitals to rethink infection prevention protocols and potential restrictions to sales rep access beyond the current moment, said Tim van Biesen, who heads Bain & Company’s global healthcare practice.​

“If there’s no going back to normal, then what’s the what’s the new normal?” van Biesen said that question “raises the opportunity for manufacturers to now get ahead of that from a technological standpoint.”

That might look like remote OR consultations using cameras already in place. “Those will have to be closed, highly compliant networks. But technologically it’s doable.”

How medtechs negotiate with ailing hospitals in the near term will vary, van Biesen said.

“There’s two kinds of pricing modifications you see in the market in any attempt to gain ground,” he said. Smaller medtechs less equipped to ride out a downturn “find themselves scrambling for any form of revenue and discounts to stay in the market,” whereas larger ones might view it as an opportunity “to shore up customer relationships and to build a level of customer loyalty and affinity.”

For capital equipment manufacturers, on the other hand, “there’s some very delayable purchases in that space,” Chapman said.

The road back to “normal” may be longer as hospitals reel financially. Aftershocks from COVID-19 may further spur popularity of Intuitive Surgical’s leasing model for its expensive da Vinci robots, for example, and other alternative, utilization-based payment models.

“Other industries have solved this by changing the pricing paradigm,” van Biesen said. For instance, a company may consider placing a robot at little or no cost, recovering a fee on a use by use basis, with some revenue coming from the implant as well.

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Thinking ahead to a restart

While no one knows exactly where, when and how elective surgeries will begin to resume, the process won’t be uniform.

Prior to the pandemic, medtech companies might approach hospital systems in New York and California very similarly, but the regional nature of America’s COVID-19 epidemics puts those customers in clearly different positions, said Colm Foley, senior partner at Boston Consulting Group for the medical technology sector.

In being part of that restart process, “Medtech companies need to really be adjusting how they approach customers, based upon the specific situation that the customers are in, and ‘de-average’ what you’re doing in the marketplace,” Foley said. “There’s an opportunity to prove that you’re a good supplier​.”

Another reality medtechs could face: Hospitals may seek flexibility in making payments. The situation may cause disproportionate strain to companies with shallower cash reserves.​

“In moments of desperation — and there’s a lot of them, no way around it — they frankly just stop paying the bills. And what we’ll see is an accumulation of receivables in the industry, and very, very long payment timelines. So then the cash flow issue [affects] the smaller players who are less able to absorb that,” van Biesen said.

But Foley said companies for whom it’s financially viable to entertain extensions on those receivables will be rewarded in the long term. “The more medtech companies can customize how they approach their customers and really [put themselves] in their shoes — I think the companies that do that better are going to come out of this stronger.​”

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