Dive Brief:

• Rising demand for COVID-19 tests and reagents at companies including Abbott and Thermo Fisher Scientific has led Moody's Investors Service to improve its outlook for the U.S. medicinal products and devices industry.

• Moody's raised its outlook from stable to positive in response to evidence that the industry is recovering faster than expected from the deferral of procedures and that COVID-19 testing will enable some companies to grow despite headwinds in other parts of their businesses.

• However, the investor service also warned the pace of innovation in the COVID-19 test sector may render some products obsolete.

Dive Insight:

Earlier in the pandemic, Moody's warned that industry-wide earnings would fall as much as 30% this year. That forecast reflected the then commonly held assumption that demand for medical devices would rebound slowly throughout 2020 from the lows in March and April, when hospitals around the world deferred elective procedures.

A series of medtech companies have since reported that procedure volumes bounced back faster than expected. Boston Scientific, Edwards Lifesciences, Johnson & Johnson and others all reported recoveries in the second quarter, months ahead of schedule. Subsequent updates from analysts and medical device companies suggest the recovery continued in the third quarter. 

The situation at firms exposed to COVID-19 testing is brighter still. Thermo Fisher expects COVID-19 to add $1.6 billion to revenues in the third quarter. Abbott and Hologic are also benefiting from their role in the effort to bring the virus under control. 

Against that backdrop, Moody's has raised its outlook for the industry for the next 12 to 18 months. Moody's now expects earnings to fall 10% to 20% this year, compared to the 20% to 30% prediction it made earlier in the pandemic. The investor service expects the situation to improve beyond that, predicting earnings will "grow substantially" over the next 12 to 18 months.

The prediction is underpinned by assumptions that patients will return and COVID-19 diagnostics will continue to generate revenues. Moody's expects testing to accelerate in the second half of 2020 as people return to work and school and the influenza season gets underway. However, Moody's said the opportunity is temporary and products may quickly rise and fall in the churn of a fast-changing market. 

"While demand will remain high for several quarters, rapid technological advancements will create winners and losers and volatility in demand for different tests," the Moody's analysts wrote. "Also, once widely effective vaccines are available, we would expect testing needs to decline."

It is unclear when vaccines will be available in sufficient numbers to significantly reduce the need for testing. When that happens, the COVID-19 diagnostic revenue streams will dry up but other sources of income could grow as hospitals and patients gain the confidence to return to pre-pandemic levels of healthcare activity.

Moody's sees the industry benefiting from favorable long-term dynamics as people decide they cannot delay procedures any longer, and beyond that as the pandemic abates. The investor service predicted demand for transcatheter aortic valves sold by Edwards and Medtronic will return to double-digit growth in the near term. Demand for continuous glucose monitors is also expected to remain strong; Moody's noted Abbott's FreeStyle Libre that posted 40% quarterly growth amid the pandemic.

On the flip side, the analysts expect companies that benefited from a tailwind of providing hospital beds and ventilators early in the pandemic, such as Stryker and Hillrom, will see that demand reverse in the coming quarters.