First-quarter earnings announcements start in earnest today when DePuy Synthes’ parent company Johnson & Johnson reports. We expect much of the commentary this earnings season to focus on COVID-19. As a reminder, 15 public orthopedic companies withdrew their 2020 guidance due to the unpredictability of the extent and duration of COVID-19. Still, we think a clearer picture of the entire orthopedic market may emerge in the next month. DePuy Synthes, Stryker, Zimmer Biomet and Smith+Nephew—the four largest orthopedic companies—will report by May 11 and most of the U.S. and Europe could be on the downslide of their COVID-19 curves by early May, according to the Institute of Health Metrics and Evaluation.
To formulate a better forecast for orthopedics, we’re listening for comments around these points in the earnings calls.
1. What are the second-quarter expectations?
Elective procedures were halted in most of the U.S. the last two weeks of March and uncertainty remains around when they’ll resume. There’s no doubt that the second quarter is going to be extremely difficult for device companies. Analysts at Needham & Company and Piper Sandler have noted potential revenue decreases in the -40% to -60% range for the second quarter. We’ll be looking for commentary to back these models, knowing that some companies will fall outside of this range based on their exposure to elective procedures.
2. What will they say about full-year guidance?
Public companies that withdrew their guidance noted that they would provide an update once the effects of COVID-19 are known. We can expect companies to provide a wider range than usual for full-year guidance or even hold their full-year projections until after they report 1Q results. As we move later into the earnings season and more is known about the pandemic’s peak, companies may be able to talk about 2020 with more confidence.
3. How are companies preparing for the return of procedures?
While orthopedics is expected to experience a procedural drought in the second quarter, it’s believed that the vast majority of the procedures will be rescheduled. Wells Fargo analysts surveyed joint replacement and spine surgeons who noted that 89% and 90%, respectively, said that their postponed procedures would eventually take place. How are companies thinking about inventory levels in the second half? How are they positioning their manufacturing capabilities and supply chain partners to prepare for the eventual uptick? We expect that procedures will begin again in a patchwork manner similar to the way that COVID-19 spread across the U.S. and Europe. The disruption will likely make manufacturing forecasts difficult for the remainder of the year.
4. How have ex-U.S. markets rebounded?
We use the word “rebounded” lightly. China reported its first case of COVID-19 December 30, 2019 and hit the peak of its curve in mid-February with 15,000+ cases reported in one day, according to Johns Hopkins University & Medicine Coronavirus Resource Center. By early March, China was tracking at a few hundred cases per day.
The period of significant orthopedic disruption in China was six to eight weeks, Stephen Sunderland, Partner in L.E.K. Consulting’s Shanghai Office, told us back in mid-March. And while elective procedures have started again in China, they “remain considerably below pre-outbreak levels,” Smith+Nephew noted in a statement March 30.
While there are too many variables to precisely apply China’s situation to other countries, we wonder what can be learned about supply chain disruptions and procedure returns.