As economic concerns shift from the U.S. to China, medical device manufacturers such as Medtronic and Intuitive are monitoring how procedure volumes and new policies affect their businesses.
In a new note, William Blair analyst Brandon Vazquez details the exposure of those companies and four more on Medical Design & Outsourcing‘s Medtech Big 100 ranking of the world’s largest device makers.
“The bottom line for our coverage universe is that exposure seems manageable with all companies at 10% or less of revenues/procedures coming from China, though we admit materially worsening macro conditions, if materialized, have the potential to move the needle on results — something we have already heard from some intra-quarter updates this month,” Vazquez wrote.
Beyond general economic strength and procedure volumes, major issues for device developers to keep an eye on include China’s volume-based procurement (VBP) policy and anticorruption efforts.
No. 1 on the Medtech Big 100
Revenue from China: Approximately 7%
“A strong recovery in procedure volumes in China last quarter has raised management’s level of optimism and was a contributor to the raise in organic sales guidance,” Vazquez wrote.
More than 80% of Medtronic’s product portfolio has been repriced since last year under VBP, and Medtronic expects at least another 15% to be repriced by the end of this year. As recently as this month, Medtronic leadership said it has not been affected by anticorruption issues.
“Based on stronger-than-expected procedure volumes trending higher last quarter, management expects procedure growth will move toward the high-single-/double-digit range,” Vazquez wrote.
“We’re investing in China,” Medtronic CEO Geoff Martha said earlier this year while offering an update on China and a variety of other topics. “It’s a big market, and it’s growing.”
No. 22 on theMedtech Big 100
Procedure volume from China: 6%
Intuitive’s leadership appears to be planning for several scenarios in China, which is the DaVinci system’s largest procedure market after only the U.S.
“Management noted the strong win rates (86%) under China’s new quota in 2023 have largely been a result of its broad indications that are outweighing the cost benefits of local systems, but, as previously communicated, recent price caps and anticorruption campaigns could be a risk to results in this segment,” Vazquez wrote.
Meanwhile, procedure volume continues to grow in China with the lapse of COVID-19 lockdowns.
“China makes up about 6% of Intuitive Surgical’s total procedures and we estimate makes up a similar midsingle-digit percentage mix of system installations and year-to-date system placements, so we think any potential slowdown in the country is manageable,” Vazquez wrote.
No. 13 on Medtech Big 100
Revenue from China: Less than 1.5%
Of Henry Schein’s $12.6 billion in annual revenue, less than $200 million comes from China, and those sales are primarily consumable products.
“Management has said it remains committed to China longer term and sees future growth opportunities. Our sense is that it will continue to try to expand its endodontics and implant business in the region over time,” Vazquez wrote.
No. 29 on the Medtech Big 100
Revenue from China: Approximately 3%
Growing sales of Dentsply Sirona implant products more than offset the effect of VBP, and company leaders say they expect continued strength. But Vazquez said Dentsply Sirona said CAD/CAM/imaging has yet to recover to a notable degree in China.
“That said, with China making up only about 3% of revenues and a relatively lackluster start to the year that likely reined in growth expectations to start the year, we think China-related risks are relatively manageable,” Vazquez wrote.
No. 32 on the Medtech Big 100
Revenue from China: Less than 10%
Considering data from Align Technology and one of its Chinese competitors, Angelalign, Vazquez sees a “largely stable market, though admittedly not overly bullish.”
“Our sense is that while this is a meaningful long-term opportunity for the company, management is being somewhat cautious about contributions to guidance, especially since China started 2023 on a relatively weak COVID impacted baseline,” he wrote. “Between cautious expectations and what we expect are easy comps, we believe headwinds in China should be a relatively low risk for Align’s guidance in the second half of the year.”
No. 43 on the Medtech Big 100
Revenue from China: Approximately 10%
Envista’s dental implant sales offset the pricing impact of VBP in the second quarter, and the company said last month that it expected the same story over the rest of the year.
Management acknowledged the realities of the China economy remain fluid but believed specialty (a small segment of the broader market) can remain resilient,” Vazquez wrote. … “We think management is taking a somewhat cautious approach to China given a weak start to the year and still moving pieces around the macro situation despite the fact that the country is doing better than it originally thought heading into 2023.”
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