Dive Brief:

• Moody's Investors Service on Tuesday lowered its outlook for the medical device sector to stable from positive, citing a global economic slowdown and shift in healthcare resources toward fighting the novel coronavirus.
• Hospitals will dedicate capacity to treating infected patients and postpone elective procedures such as hip and knee replacements. The disruption is expected to dent medtech sales in the near term, Moody's said in a report.
• M&A activity will drop, particularly larger transactions, as companies proceed with caution until the duration of the pandemic becomes clearer, the credit ratings agency predicted.

Dive Insight:

The fast-spreading pandemic is causing a credit shock across sectors, regions and markets. With the healthcare industry focused on addressing the virus, Moody's is forecasting a pullback in device use in the first half of 2020 and a moderate recovery in the second half. That prediction hinges on successful efforts to halt the virus' spread.

The recession of 2008-2009 offers a blueprint for what a coronavirus-driven medtech slowdown could look like. Sales of critical products such as cardiology devices were less affected during that period, while orthopaedic procedure volumes were flat in 2009 before rebounding to a 3% to 4% growth rate soon after, Moody's said. 

The ratings agency reduced its medtech sector EBITDA forecast to a 2% to 4% annual growth rate over the next 12 to 18 months, down from a previous outlook of 5% to 6% growth. Revenues, excluding the impact of currency fluctuations, are predicted to grow at a similar pace.

The Centers for Disease Control and Prevention is advising healthcare facilities and clinicians to reschedule inpatient and outpatient elective surgical and procedural cases, to free up hospital capacity for the outbreak. Urgent and emergency visits and procedures should be prioritized in the coming weeks, CDC said. Routine dental and eyecare visits should also be postponed.

In New York, one of the hardest-hit states, Mayor Bill de Blasio on Monday signed an emergency executive order requiring hospitals and ambulatory service centers to cancel the surgeries they deem elective.

Moody's said lower sales for device companies from deferred orthopaedic surgeries and other procedures will be only partially offset by higher demand for products such as respirators, pumps and saline. Deferred procedures will resume over time but will initially encounter operating room bottlenecks. "Over time, patients will have these procedures and the majority of near-term deferred surgeries will be recovered," Moody's said.

The agency also expects large deals in the sector to dry up for the time being. While Stryker hopes its $5.4 billion purchase of Wright Medical will close this year, Moody's said Stryker and other medtechs, including Boston Scientific, Danaher and Becton Dickinson, will be focused on debt repayment over the next 12 months. "That said, lower equity valuations could help fuel more M&A, though greater visibility into the global economic outlook will likely be necessary before companies commit to significant transactions," Moody's said.