Hip, knee replacements back on track, boosting device makers

[June 16, 2023]  By Manas Mishra and Leroy Leo

(Reuters) - Older adults are catching up on missed hip and knee replacements and other non-urgent surgeries, a shift that will benefit medical device makers this year, Wall Street analysts said after insurer UnitedHealth warned of higher costs due to a spike in some procedures.

While heart-related surgeries have returned to pre-pandemic numbers after delays due to lockdowns and hospital staffing shortages, orthopedic surgeries had initially lagged as older Americans chose to postpone them.

Medical device makers had already pointed out in the first quarter that orthopedic surgery volumes were picking up, but some investors thought the trend would be shorter lived.

BTIG analyst Ryan Zimmerman expects the pent-up demand to continue boosting medical device makers over this year and the first half of the next, leading to more forecast raises throughout 2023.

This is especially true for orthopedic equipment makers, he said.

"Clearly, orthopedics is having its moment. As a sub-sector relative to cardiology or other areas of medtech, we're in a very good market right now in the ortho space."

UnitedHealth's comments late on Tuesday wiped nearly $60 billion from the market value of health insurers the next day and added over $20 billion to the market capitalization for medical device makers and hospital operators, with UnitedHealth falling about 6%.

That represented a historic intraday shift in funds within the sector, UBS analysts said in a research note.

The corporate logo of the UnitedHealth Group appears on the side of one of their office buildings in Santa Ana, California, U.S., April 13, 2020. REUTERS/Mike Blake/File Photo

UnitedHealth said medical care at outpatient centers rose more than expected in April, May and early parts of June as older adults, one of the most vulnerable populations during the pandemic, became more comfortable getting long-delayed health services like elective procedures.

The comments "will certainly help feed the view that backlog and elective volume lift will serve as an extended tailwind for device companies," said Truist analyst Richard Newitter, who covers medical device and supplies makers.

When medical device makers reported first-quarter results and benefited from higher surgeries, their results were at variance with comments from health insurers, who said non-urgent surgeries were in line with expectations.

As a result, shares of orthopedic-focused device makers Zimmer Biomet and Stryker Corp have fallen 8% each last month over fears that a jump in demand could be transient. Both stocks closed around 4% higher on Wednesday.

Humana, CVS and Elevance Health did not respond to Reuters requests for comment.

(Reporting by Manas Mishra and Leroy Leo in Bengaluru; Editing by Pooja Desai)

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