- All evidence indicates the medical technology sector hit its trough in April, as each month since has brought sequential improvement - from a springtime hole where elective medical procedures faced widespread suspensions.
- That meant growth slowed sharply in Q2 (-25.4% vs. Q1's -9.7%), and Needham expects declines to ease in Q3 before returning to growth in Q4 - so long as there isn't a double-dip (or "w-shaped" recovery) from COVID-19 rates that could worsen, or if "too many patients remain fearful of elective procedures."
- Digging in to Q2 particulars, ortho market growth slowed to -30.3% from -7.5%: Recon growth slowed to -41% from -7%, spine growth slowed to -25% from -13%, trauma growth slowed to -18% from -3%, and extremities growth slowed to -40% from -6%. It's expecting the overall ortho market in 2020 to fall 12.9% (vs. growth of 3.7% last year), with recon -16%, spine -13%, trauma -8%, and extremities -14%.
- In the cardio market, growth slowed in Q2 to -21.4% from -11.8%. Cardiac rhythm management improved to -18% from -22%; drug-eluting stent growth slowed to -19% from -18%; peripheral vascular growth slowed to -21% from -8%; TAVR growth slowed to -17% from 6%; electrophysiology growth slowed to -21% from -12%; and neuromodulation growth slowed to -35% from -17%.
- For the year, Needham expects overall cardio growth of -9.7% vs. gains of 5.7% last year, with CRM -12%, DES -15%, peripheral vascular -8%, TAVR flat, EP -9%, and neuromodulation -17%.
- For full 2020, Needham forecasts overall medtech market growth of -11.2%, up from its previous estimate of -17%, and vs. 4.7% in 2019.
- Looking at valuation, large-cap medtech multiples are near recent 10-year highs, while it's a different story in small and mid-caps, where multiples are mixed, the firm says. Large-caps look reasonable relative to the broad market, with a P/E multiple relative to the S&P 500 of 1.23x (a 1% premium to 10-year average).
- Overall, though, medtechs have traded in line with the market in 2020.
- The firm's top pick among large-caps is Zimmer Biomet Holdings (NYSE:ZBH), while its top pick among small/midcaps is CryoLife (NYSE:CRY).
- Meanwhile, moving up fast in its Buy-rated universe are GenMark Diagnostics (NASDAQ:GNMK), AtriCure (NASDAQ:ATRC), and Surmodics (NASDAQ:SRDX).