Joseph Coletti
Welcome back to Pathfinders, a podcast series from RBC Capital Markets, where we uncover key trends and catalysts, shaping the fast moving world of biopharma and healthcare. I'm your host, Joe Coletti. This week we'll be talking to medical technology analyst Shagun Singh about the world of medtech, a sector that's been doing particularly well so far this year. We'll discuss the catalysts that are propelling the sector forward, and also glean some insights into how key opinion leaders are thinking about the space across subspecialties as Shagun and recaps her takeaways from RBCs 2024 medical device Doctor Days events. Shagun, thanks for joining us. I want to start by telling the audience a little bit more about Doctor Days and what they are, who you talk to what you heard, and why these kinds of events are so impactful for our corporate and investor clients.
Shagun Singh
So we host the RBC Capital Markets, Doctor Days each year across various cities covering broad topics across med tech and markets. This is our discussion with key opinion leaders or KOLs, to better understand key trends and product updates in various specialties. This year in 2024, we covered 10 different topics with 27 different doctors in four different cities across the United States. And that gave us a really good cross sectional views from more experienced to younger doctors as well as views across geographies. Some of the key topics that were discussed were around robotics, electrophysiology, interventional cardiology, orthopedics, diabetes, urology, vascular interventional pain, and ophthalmology. As you can imagine, there were a lot of data points across the space. It is especially impactful for our investor clients who can assess what these data points mean for their investments. So areas to avoid and where to position themselves for future growth.
Joseph Coletti
Going a little bit bigger picture on the sector for a moment. We've just come out of Q1, we've seen a lot of positive trends in the medtech space in particular. What do you see as the primary drivers of performance for the sector?
Shagun Singh
Yeah, the sector fundamentals are the strongest that they have been in decades. We are seeing real strength in procedure volumes, which is the number one driver of revenue growth for our sector. And it's been driven by the ageing demographics that are spending exponentially more on health care as they age. Let me share some statistics here. Healthcare spending goes from 10% of total budget for those below the age of 65 to 60 to 70% if you're over the age of 75. The United States and several other developed markets across the world are ageing. And as they do, they're consuming more healthcare. Additionally, there is a shift to more efficient sites of care such as ambulatory surgery centers or ASCs. So it's easy to get in and out post procedure. Innovation is another driver and an important one. As technology advances, more complex procedures can be performed, which wasn't the case a few decades ago. So this is allowing people to be treated who weren’t back in the day, surgery is also getting safer and minimally invasive, that has faster recovery time, so patients are more likely to come in and get their conditions treated. I would say that a vast majority of metric and markets are still highly under penetrated. For example, diabetes market is just two and a half percent penetrated in the US. This is why companies such as Abbott and Dexcom participate, surgical robotics and other market is single digits penetrated globally, where Intuitive Surgical is the market leader. And there are multiple such specialties such as electrophysiology, left atrial appendage closure, that are under penetrated. And we have companies like Abbott, Boston Scientific, Johnson and Johnson, and Medtronic participating. Importantly, these are not catalysts just for 2024. But for a multiyear period ahead.
Joseph Coletti
So you've hit on the fundamentals. What do you think is going to drive the durability of stock performance beyond Q1 earnings?
Shagun Singh
Yeah, interestingly, Q1 performance has not been uniform across the board despite the strong fundamentals due to high expectations coming into the quarter. And because companies tend to be conservative and raising guidance this early in the year. In my view, fundamentals are strong, and dislocations create opportunity and specific quality stocks. We see multiple catalysts ahead, including new product approvals, clinical data point releases, as well as opportunity for M&A and margin expansion. And we think these catalysts will drive stock performance beyond Q1.
Joseph Coletti
Let's turn to some of the individual areas within medtech that are experiencing significant breakthroughs. Let's start with interventional cardiology, and the innovation within that space in particular what advancements are driving excitement in this field?
Shagun Singh
Pulsed field ablation or PFA to treat atrial fibrillation or electrical imbalance in the heart that may cause it to beat erratically, is likely the most significant catalyst in medtech in a decade. This is where Abbott, Boston Scientific, Johnson and Johnson, and Medtronic operate. So far we have been using radiofrequency as well as cryoablation. But PFA is faster and safer as it uses electrical signals and not heating or cooling to break the electrical pathways in the heart.
Shagun Singh
The technology was just introduced in the market in Q1 of ‘24. Ahead of earnings, during our doctor days, were able to share the strong enthusiasm for this technology based on which we were able to project that 70 to 80%, if not 90% of the market will move to PFA over the next few years. And EP ablation market will essentially double in the next three years or so, because of higher average selling price. And because our KOLs are willing to pay for it due to the safety features. So there are multiple catalysts ahead with the product ramp for Boston Scientific, as well as Medtronic that are launching currently, Johnson & Johnson's entry into the market likely by year end, and Abbott launching a next generation system likely in 2026. So a lot of exciting innovation here. Separately in interventional cardiology transcatheter valve technologies are remain exciting, where Edwards and Medtronic lead the market. TAVR diagnosis or transcatheter aortic valve replacement is gradually expanding and there is indication expansion to asymptomatic patients. We will see the data in October at the TCT medical meeting for that. And on the mitral and tricuspid side. It is a new leg of growth with new product introductions by Edwards and Abbott. Collectively, we see the market expanding from 7 billion in 2023 to 15 billion over time.
Joseph Coletti
So much innovation accelerating so quickly and so much market opportunity there. Let's pivot to surgical robotics. How is new technology transforming surgery for surgeons and patients right now?
Shagun Singh
Absolutely. This was another area of very strong KOL feedback during our Doctor Days. The surgical robotic market is like I mentioned low single digit penetrated globally. But our KOLs believe that eventually a significant majority of cases will be done robotically. In fact, it's interesting that some KOLs indicated that open surgery may be lost as an art and they're holding sessions to treat younger surgeons how to perform those. We have new innovation paving the way. Intuitive Surgical received FDA approval for its fifth generation DaVinci 5 system in March. Medtronic is in us clinical trials for its Hugo system. And Johnson & Johnson is looking to do first in human studies in the back half of 2024.
Robotics is essentially transforming surgery for surgeons, due to its ease of use and standardization across surgeon capabilities. So essentially, you can be an excellent doctor or somebody who's just learning and essentially perform the same type of surgery and for patients due to better outcomes, faster recovery and other benefits of minimally invasive surgery. A good example is the latest DaVinci 5 that offers for sensing capability that can limit tissue trauma by 43%. And I would say that we are just getting started, innovation is likely to open new procedure categories down the road, including with single port robotic surgery, where companies are looking to expand for example, to areas such as breast oncology.
Joseph Coletti
This is so fascinating. This is such an interesting part of the space; it seems so transformational. Where do you think this capability is headed, particularly in the next five to 10 years?
Shagun Singh
Surgical robotics is one of the most significant and exciting metric and markets. I would agree with that. RK wells predict that again, the vast majority of cases will be done robotically in probably the next 10 to 15 years, robotics will allow more complex procedures to be performed in existing indications and likely significantly expand into new surgical categories over time. That said, we haven't even begun to see the power of AI and data analytics where robotics will eventually provide intra operative feedback to the surgeons based on millions and millions of data points studied for that specific procedure. robotic automation of certain surgical tasks and remote surgery are absolutely the Holy Grail. But we are likely several years out for those capabilities to be realized what all this means is higher robotic procedure volumes driving that makes benefit for our companies, and safer and better surgery for patients.
Joseph Coletti
Let's shift and talk about the impact GLP ones are having in orthopedics and also diabetes management. If you're reading the headlines, they're both headwinds and tailwinds. Can you talk us through what's happening here
Shagun Singh
GLP ones are an important class of drugs that we're still learning a whole lot about, and it does have implications for several procedure categories within our sector. So based on our Doctor Day conversations with KOLs, we think continuous glucose monitors or CGM in diabetes, where Abbott and XCOM operate as well as recon procedures, which is hips and knees where companies like Stryker and Zimmer operate our areas of tailwind, bringing more people into the funnel to be treated. In terms of headwinds, we see it in bariatric procedures, which honestly collectively is not a big exposure for our sector, as well as an insulin pump adoption beyond type one patients, but again, in markets are highly underpenetrated. So there is room for adoption, even if GLP-1 lowers the TAM somewhat. It is important to note that obesity is one risk factor for most disease states, but not the primary risk factor. For example, arthritis is a degenerative disease, and it will worsen over time. And GLP-1s for example, don't reverse beta cell declines. Supply cost reimbursement, you know, dropout rates at two years, are hurdles for continued GLP-1 usage, but definitely an area to watch and not a major headwind for our sector at this point.
Joseph Coletti
I want to zoom out and talk about the sector again. As we move into the second half of the year, what specific challenges or obstacles do you think companies and investors should be paying attention to?
Shagun Singh
We see strong sector fundamentals continue into the back half of the year and beyond. We walked through those catalysts. Backlog in certain categories will continue to wane. For example, in recon, which is hips and knees. The stock performance will be predicated on how companies perform relative to expectations. And valuation is also something investors continue to monitor. Interestingly, we've seen wide valuation gaps probably at historic levels between the haves and the have nots in our sector. Due to which coming into the year we had recommended quality with catalysts. And we think coming off of Q1 dislocations or create opportunities.
Joseph Coletti
What about M&A? Which is something that has become increasingly important in the medtech space? What trends are you observing, both in the types of deals that you're seeing out in the market, but also in the size?
Shagun Singh
The appetite for M&A is robust, it is the lifeblood for our companies. Let me explain it a bit for large cap companies in our coverage. They remain flush with cash and several have a category leadership strategy that lends itself to tuck in acquisitions. And companies essentially look to increase their weighted average market growth or WAMGR. And look to deliver growth above that, with the help of those stuck in acquisitions. For small cap companies. They remain innovative in our field, making them attractive takeout candidates. In terms of active companies and deal size. I would say that we have seen all types of late Johnson & Johnson $17 billion acquisition of Abiomed their proposed $13 billion acquisition of Shockwave, global medicals $3 billion acquisition NuVasive; or Boston Scientific’s $3.7B $3.7 billion dollar acquisition of Axonics. It is worth noting that our companies already have strong growth and margin profiles and M&A helps further boost that to drive incremental shareholder return over time. I would say that beyond M&A, we have seen and expect to continue to see companies streamline their portfolios with the spinoff of GE Healthcare Solventum from 3M and J&J’s own consumer business separation last year. So we expect medical technology companies to really do remain active around portfolio decisions.
Joseph Coletti
I think we'll end it there. Shagun, this has been a really fascinating discussion. And I think the takeaways from Doctor Days are so in depth and so helpful. I hope our listeners hope it was valuable to our listeners. And I really thank you for being on the podcast today. And we'll have you back again soon.
Shagun Singh
Thank you for having me.
Joseph Coletti
Well, that's all for our conversation today. Thanks for listening to another episode of Pathfinders and biopharma brought to you by RBC Capital Markets. Please remember to subscribe to get more great content and be alerted about future episodes. This episode was recorded on May 10, 2024. If you'd like to learn more or continue the conversation, please visit rbccm.com/biopharma. See you next time.