An expected post-Covid bonanza in elective surgeries hasn't exactly materialized. Think of the endemic Covid recovery in elective surgeries as more of a slow burn rather than an explosion for health care stocks.
But that could still provide enough kindling to stoke such stocks as Intuitive Surgical, Stryker, Boston Scientific and others, experts say. The reason is that patients who delayed hysterectomies, knee replacements or pain procedures amid Covid waves likely still need those surgeries.
How quickly will that demand return? And how much will there be? That's anyone's guess. But there could be a lot of upside, says Needham analyst Mike Matson. Companies aren't banking on it — so a boom in demand would be a positive surprise for beleaguered health care stocks.
Intuitive Surgical Chief Executive Gary Guthart says Covid surges will continue to be "the main predictor of surgical volume" for some time. Preston Wells, Stryker's vice president of investor relations, says the recovery is well underway. But it's slow and in flux as the omicron variant chews its way across the globe. Wells estimates the company has a backlog of five to six quarters.
"We have seen some progressive return happening and we would expect the patients requiring these procedures haven't stopped needing them," Wells told Investor's Business Daily. "The reality is patients have just been waiting for procedures to happen or for the system to open up enough."
Health Care Stocks: A Return In Demand?
Investors in health care stocks who hoped for a backlog benefit in 2021 ended up sorely disappointed, Needham's Matson said. They hoped for a sudden boom in surgical demand following a collapse in the spring and summer of 2020 as the health care system was overrun by Covid patients.
Instead, demand has — and continues — to return in fits and starts.
An October 2021 survey from Epic Research provides a model for what endemic Covid might look like for the health care system. It found there were fewer elective surgeries performed in July 2021 than there were in January 2020, after the coronavirus was discovered but just before the Covid lockdown. Covid vaccines were launched in December 2020.
None of the surgeries studied had returned to pre-Covid levels. Epic looked at breast and prostate surgeries, hysterectomies, knee protheses and thyroid surgeries. Then, omicron reared and elective procedures took another back seat as already understaffed hospitals tackled Covid again.
Experts say the health care system is getting better at managing Covid waves. But that doesn't mean every patient is willing to return. Meanwhile, health care workers themselves are getting sick or even leaving the profession entirely. There's also supply-chain constraints.
All together, it creates a bottleneck in the system, Intuitive Surgical's Guthart says.
"This has sobering consequences, with patients getting diagnosed later in disease progression or forgoing important treatment," he said in an email. "The impact of deferrals in the diagnostic pipeline is hard to forecast — many patients will come back to care, some with more advanced disease."
A Potential — But Unexpected — Boon
Matson, the Needham analyst, says there would be a lot of upside for health care stocks if a pop in surgical demand materializes as Covid becomes endemic. But he's not hopeful, and companies offered mixed views.
Boston Scientific Chief Financial Officer Dan Brennan says the company isn't banking on a huge jump in demand as Covid enters its endemic phase. But that's because many of Boston Scientific's products treat deferrable, rather than elective procedures. Deferrable procedures can wait, though a patient's quality of life will suffer without eventual surgery. Elective procedures are entirely optional.
In the second quarter of 2020 — which all agree represents the worst Covid peak to date — Boston Scientific reported a nearly 24% sales decline. It followed that up with a roughly 2% dip the following quarter. In the December quarter of 2020, sales toppled about 7%, coinciding with a winter Covid wave.
Then vaccines launched and changed the paradigm in Covid.
In 2021, Boston Scientific's sales grew almost 11% on a strict as-reported basis vs. the last pre-Covid year, in 2019. Organically, sales rose 6% vs. 2019. CFO Brennan says patients who need pacemakers, defibrillators or cancer treatments generally go ahead with their procedures even during Covid surges.
"The businesses that we have on the more electable side are things like spinal cord stimulation for the treatment of chronic pain," Brennan said. "You do see higher cancellation rates and lower revenue during peak Covid times. The good news is there's a high recapture rate of those on the other side."
What's Actually Deferrable?
Health care stocks providing products for truly deferrable procedures could see a bigger increase, says Needham's Matson.
That list includes companies like Stryker, Zimmer Biomet, NuVasive and Globus Medical. Those companies sell products to replace hips and knees or perform back surgery.
In June 2020, Zimmer Biomet — a massive provider of products to replace hips and knees — reported a 62% dive in second-quarter sales. NuVasive, which makes spine products, had a 30% sales decline.
Since then, almost all of the companies say they've returned to pre-Covid levels of demand.
Boston Scientific is forecasting 6%-8% organic sales growth in 2022 as Covid cases decline. Stryker says the global outlook "remains volatile" as it monitors the Covid environment. But the company also said it expects 6%-8% organic sales growth this year.
Intuitive Surgical is calling for 11%-15% growth in the number of procedures using its robotic surgery system, da Vinci. Procedure growth is a key determining factor for Intuitive Surgical, which sells one-time tools and instruments to accompany its system. Last year, procedures grew 28% year over year, following the easy comparative year that was 2020. Midteens growth is more in line with historical trends.
The health care system tends to recover quickly following Covid surges, executives told IBD.
"With each wave, the impact has been less" on Boston Scientific, CFO Brennan said.
Nimble Health Care Stocks Benefit
Stryker's Wells says the recovery has been progressive since the second quarter of 2020.
For patients needing joint replacements, "these are disease states that don't get better," he said. "They have reached the end of that continuum of care."
As Covid becomes endemic, patients could start to schedule those surgeries and provide a boon for the health care stocks. Pandemic-related volatility continues to snag shares. IBD's industry group tracking medical products hit a low in March 2020. Then shares peaked in February and September 2021 on hopes for a boom in elective surgeries.
But the expected boom didn't happen and shares have fallen.
Now, companies have to remain flexible. That means continued use of digital and virtual tools, says Boston Scientific's Brennan. Stryker's Wells says patients also are embracing outpatient surgeries. In the future, that's where he expects most of the demand to exist for healthy people.
"As a patient, it's a simpler place to go and have a procedure done," Wells said.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
