Dive Brief:

• Bank of America analysts in a note Tuesday said they are "broadly bullish" on the medical device industry into the end of 2020, touting Medtronic and Baxter as particularly poised to exceed expectations, while lowering their rating for robotic surgery market leader Intuitive Surgical.
• The analysts' main takeaway is that procedure volumes continued to recover in August compared to July and that medtechs are "gaining confidence in the quality and durability" of demand for devices. They cited the attitude of Medtronic management during an Aug. 25 earnings call and recent meetings with execs at Stryker, the company they believe stands out as the most bullish on procedure recovery and outlook for the capital portion of their business.
• That confidence tracks with hospital traffic data through Aug. 30 that Jefferies analysts shared in a note to clients Friday. They reported the fourth consecutive week with a positive change in traffic. "While not a perfect gauge of procedure volumes, an increase in visits broadly would suggest that activity in hospitals is returning to normal levels," analysts said.   

Dive Insight:

U.S. procedures were down between 40% and 80% mid-March through April, but are on the path to pre-pandemic levels, according to Jefferies analysts, whose hospital traffic index tracks 3,300 hospitals as a proxy for the recovery. They reported Friday that the previous four weeks have showed positive week-over-week changes after five straight weeks of declines. Additionally, seven states that the firm tracks individually have grown from prior week levels.

"Notably, Illinois and Arizona, two states that have lagged the recovery posted the largest gains this week, 24% and 17%, respectively. Of the states we track, Texas has recovered the most, up 72.3% from lows seen in early April (65.5% last week) but still below late June levels," Jefferies analysts reported, adding that the trajectory of recovery is far from settled. 

Nonetheless, medtechs during the recent earnings season reported that elective procedures resumed faster than anticipated. While these companies are likely to continue to voice "cautious" optimism, BofA analysts said they do not expect any of them to to walk back previous comments on the fourth quarter and, going forward, expect more public optimism and less caution.

Recent conversations with Medtronic, Stryker, Edwards Lifesciences, Boston Scientific and several small companies have given BofA analysts "incremental confidence that this will be the tone of the message from most at September investment meetings."

Medtronic CEO Geoff Martha said during the recent earnings call the company is in "a way better position" than anticipated three months ago, citing sequential improvement across business lines following the April trough in procedure volumes experienced across the medtech sector. The company beat analysts' top and bottom line expectations during its fiscal first quarter.

Overall, BofA analysts said they see view medtech valuations remaining reasonable and are encouraged by the fact that the industry has no drug pricing risk, has innovation pipelines that are full and has outperformed in the past three recessions.

The analysts highlighted positive recent conversations with Boston Scientific and Edwards Lifesciences, but also noted Stryker has "exposure" should a deep and lasting recession occur, and opted to lower its rating for Intuitive Surgical based on its current high valuation.