By Jaimy Lee
Several of the world’s largest medical device makers warned investors that the COVID-19 outbreak has delayed and in some cases halted elective medical procedures — and that will likely cut into their earnings for the quarter.
Zimmer Biomet Holdings Inc. /zigman2/quotes/205473073/composite ZBH -0.83% CFO Suketu Upadhyay said March 2 at an investor conference that he expects the drop-off in elective procedures in China “at a minimum to continue through March” and that the company is also seeing a slowdown, albeit less dramatic, in South Korea. China makes up about 5% of global revenue, and low double-digit growth makes it a “very meaningful market for us,” he said.
During the week of Feb. 17, Boston Scientific Corp. /zigman2/quotes/203726728/composite BSX +4.84% , Medtronic PLC /zigman2/quotes/206816578/composite MDT +1.76% and Smith & Nephew /zigman2/quotes/203117274/composite SNN +4.85% separately said that delays in elective medical procedures in China will negatively impact their financial performance for the quarter. The warnings come at a time when the companies have each reported double-digit growth for their businesses in China.
“The business that we’re in is elective surgery for the most part,” Smith & Nephew CEO Roland Diggelmann told analysts on the company’s earnings call, according to a FactSet transcript. “Elective surgeries right now are not the focus of the Chinese authorities. They are very focused, and rightfully so, on containing the outbreak of the virus.”
More than 80,000 people in China have been diagnosed with the novel coronavirus, which was first identified in December in Wuhan, a city in central China. At least 2,945 people have died in China, making it the most severely impacted of the 26 countries to have reported a case of COVID-19. Regions like Hubei Province, home to Wuhan, remain largely locked down, with many shops and restaurants closed. More than 30,000 health care workers from all over China have been deployed to Hubei Province to care for the patients there, China’s National Health Commission said in February.
“Almost no” elective surgeries were performed in China in February, Diggelmann said. The device maker, which sells devices like hip and knee implants, generated 7% of its revenue from China last year. It is a rapidly growing market for Smith & Nephew, with revenue jumping 24% to $336 million in 2019, up from $270 million in 2018.
China also makes up 7% of Medtronic’s global business, generating about $2.14 billion for the company in fiscal 2019. It is home to Medtronic’s largest manufacturing and research facilities outside of the U.S. The manufacturer said it is not only seeing a slowdown in procedures, it is also facing a combination of closures and slowdowns in its factories there. The company expects to see a negative impact to its fourth-quarter financial results as a result of the outbreak. In the last quarter, the company’s China business grew 14%.
“A lot of physicians are being asked to actually go and help with the virus,” Medtronic CEO Omar Ishrak told investors on Feb. 18. “Even now, even in places like Beijing and others, procedures are only just beginning.”
Boston Scientific Inc. derived about 4.6% of its $10.7 billion revenue from China in 2019. That market was expected to grow 20% year-over-year, from $500 million in 2019 to $600 million in 2020, according to remarks made by Boston Scientific CFO Daniel Brennan during a Feb. 5 earnings call. The company said it expects to take a $10 million to $40 million hit in the first quarter due to delayed elective procedures in China in February and March.
“The China dynamic adds some noise in 1Q but given the volatility of late, we think it’s prudent for management to bake in conservatism and, effectively, reset the bar,” analysts at Raymond James wrote in a Feb. 5 note about Boston Scientific.
Executives from all three companies say that they expect pent-up demand for surgeries to even out the slowed performance once the outbreak subsides.
“If someone needs an artificial hip, that demand will still be there in a couple of months’ time,” Diggelmann said. “The question, of course, is how quickly will the situation recover and what is the capacity in the system to then actually make up for this pent-up demand.”
Over the past three months, Boston Scientific’s stock dropped 0.3%; Medtronic’s gained about 1.8%; and Smith & Nephew’s is up 19.5%. Zimmer’s is down about 5%. The Health Care Select Sector SPDR Fund /zigman2/quotes/205918244/composite XLV +0.55% , an exchange-traded fund, has gained about 6.4% over the past quarter.