Covid-19 cases overwhelmed hospitals this January, leading to a drop in elective procedures, Medtronic says.
Ariana Lindquist/BloombergFor Medtronic, the Covid-19 pandemic has slashed sales as the virus forced hospitals to cancel elective procedures that use the medical device giant’s products.
Some of those sales from elective procedures have come back since the virus shut down parts of the economy last spring. But Medtronic’s (ticker: MDT) CEO tells Barron’s that the impact of rising cases on hospital capacity this January led to a pullback for the company not seen since the initial wave of virus infections in the U.S.
“January was worse than the earlier stages” of the surge in cases during the fall, says Geoff Martha, who took over as CEO this past April. Martha said that Medtronic didn’t feel the impact of the earlier phases of Covid-19 infections, as they rose from October through the end of 2020.
“It was late December, and then into January, and even into the first part of February, and even up to now, we’re seeing a pullback from what we would have expected,” Martha says.
Though cases rose across the U.S. in November and December, Martha says that it took time for the increase to overwhelm hospitals. “It takes a while for that patient flow to get to the severity to fill up the I.C.U.’s,” Martha says.
Medtronic’s experience could be a warning sign for investors. The third quarter of the company’s fiscal year ended on Jan. 29, later than other companies that have disclosed results in recent weeks. The company reported earnings on Tuesday morning, giving investors a preview of how the first weeks of 2021 looked in hospitals across the U.S.
Medtronic reported quarterly revenues of $7.78 billion, down 1% on an organic basis from the same quarter last year. U.S. revenues were $3.9 billion, down 2% on an organic basis year over year. Non-GAAP diluted earnings for the quarter were $1.29 per share, down 10% from the same quarter last year, but beating the S&P Capital IQ Consensus estimate of $1.15.
Revenues from the company’s cardiac and vascular group were $2.7 billion, down 5.9% year over year on an organic basis, a decrease the company attributed to the pandemic’s impact on procedure volumes in late December and January.
The impact pales in comparison to the initial wave of the pandemic, when Medtronic sales were down 17% on an organic basis in the quarter ending July 31, 2020.
But it suggests that, for Medtronic and the other medical device makers and suppliers that depend on elective procedures, the Covid-19 story is far from over.
Still, Martha says that there are signs the trends are reversing, and that, at least inside hospital operating rooms, things may be headed back toward normal.
“We’re seeing it in many hospitals, depends where you are, we’re seeing a snapback,” he says. “More and more are getting to that point of lower hospitalizations.”
He also says that Medtronic sales of capital equipment tied to elective procedures, like imaging equipment for surgery, navigation equipment for surgery, and surgical robots, were at record levels in the quarter that just ended. He called it a “really strong leading indicator that hospitals are ramping up in the U.S. for a rapid recovery.”
Shares of Medtronic are down 1.2% so far this year, and up 6.7% over the past 12 months. The stock trades at 20.8 times earnings expected over the next 12 months, according to FactSet, above its 5-year average of 17.9 times earnings. Of the 25 analysts who cover the stock tracked by FactSet, 20 rate it a Buy or Overweight, while five rate it a Hold.
The stock fell sharply in the first half of 2020, down 19.2% while the S&P 500 dropped 4% as revenues took a substantial hit from the Covid-19 pandemic. Sales in the quarter that ended in July 2020 were $6.5 billion, 17% lower than in the same quarter the previous year on an organic basis.
On Tuesday morning, after the company posted its earnings results, shares were up 0.6% in premarket trading.
The company has not issued formal guidance, citing the “uncertainty on near-term financial results caused by the Covid-19 pandemic.” But Martha said that the company sees a return to how things were before the pandemic in the near term.
“The worst is behind us,” Martha says. “We’re feeling optimistic. We’re indicating that things will get back to pre-Covid levels here, it could be as soon as the end of our next fiscal quarter.”
Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com
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