What happened
Shares of medical device makers Becton Dickinson (BDX 2.50%), Boston Scientific (BSX 4.67%), and Medtronic (MDT 2.48%) fell by double-digit percentages in the first six months of 2020, according to data provided by S&P Global Market Intelligence.
BD's shares slid 12%, Medtronic's were down 19.2%, and Boston Scientific's tumbled 22.4% during the six-month period, trailing the S&P 500, which was only down a modest 4%. Despite the recent losses, shares of all three companies have increased by double-digit percentages over the past five years.
Image source: Getty Images.
So what
All three companies are diversified manufacturers of hundreds of different pieces of medical equipment and devices, both high- and low-tech. BD, for example, is a well-known manufacturer of disposable syringes but also makes infusion therapy devices. Boston Scientific is known for making stents and catheters but also produces high-tech medical scopes and pacemakers. Medtronic makes a wide variety of devices, including insulin pumps for diabetics and ventilators.
Medical device makers of all sizes were hit hard as the coronavirus pandemic spread. That might sound counterintuitive, but as hospitals began focusing on treating COVID-19 patients, they began canceling elective surgeries. "Elective surgeries" refers to surgeries that are scheduled in advance (as opposed to emergency surgeries, which must be performed immediately) and make up the vast majority of procedures. Because many medical devices are used exclusively in surgeries, this decimated the companies' sales. Medtronic, for example, reported that its U.S. revenue plunged 60% starting the week of March 16. Meanwhile, Boston Scientific said its April revenue was down 45% to 50% year over year. (BD's revenue did rise for the quarter ended March 31, but only by 1.4% from the prior year, and those dates only include the beginning of the pandemic.
Stay-at-home orders and general concerns among the public about heading to a medical facility during a pandemic also affected the companies, particularly their sales of newer products. For example, in its earnings report for its Q4 fiscal year 2020 -- which ended March 31 -- Medtronic revealed that its sales of diabetes supplies were up, but it sold fewer new insulin pumps as patients put off in-person visits to their endocrinologists, where such devices would usually be prescribed.
Each company has a product or product line that saw increased demand due to COVID-19. The widely reported global shortfall of ventilators in March led ventilator manufacturer Medtronic to ramp up production, while Boston Scientific quickly developed a low-cost ventilator alternative that was approved by the U.S. Food and Drug Administration (FDA) for emergency use. However, one in-demand product can't do much to offset slumping sales of just about everything else.
That said, if you're one of the only companies making a brand-new product that's expected to be in extremely high demand -- more so even than ventilators -- the market may reward you anyway. One big reason BD's shares outperformed Medtronic's and Boston Scientific's in the first half of 2020 was the boost its share price got from the early-April announcement that BD had developed a 15-minute COVID-19 antibody test, which was quickly given emergency approval for distribution by the FDA.
Now what
BD has recently received FDA emergency use authorization for a second rapid COVID-19 test, which can be performed on the company's Veritor Plus portable diagnostic system, already in use in more than 25,000 U.S. healthcare facilities. BD says it expects to produce 2 million coronavirus tests per week by Sept. 30. Its share price has responded and is now down less than 5% year to date. BD is a long-term outperformer that's positioning itself at the forefront of COVID-19 testing, and it pays a 1.2% dividend to boot. Now could be a good opportunity to pick up shares.
As for the beaten-down Medtronic and Boston Scientific, they're unlikely to outperform until the COVID-19 pandemic is in the rearview mirror and patients feel comfortable scheduling nonemergency doctor visits and surgeries. It's unclear how long that will take, but Boston Scientific's price-to-earnings ratio is at a 15-year low, while Medtronic's is on the low end of its historical range. Value investors who can tolerate some risk may be interested in picking up shares, particularly in the 2.4%-yielding Dividend Aristocrat Medtronic.
