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COVID-19 testing insulates life sciences companies facing slow recovery in Q3

High-performing healthcare equipment and life science companies have relied heavily on their COVID-19 diagnostics business during the third quarter, while those with limited portfolios are only starting to recover to pre-pandemic levels.

Waters Corp.'s third-quarter recovery was sluggish with low single-digit sales growth from revenues delayed by the COVID-19 related decline in the first half.

The company had a limited ability to keep up with emerging trends during the pandemic primarily because of the narrow focus of its portfolio, Waters President and CEO Udit Batra said during the third-quarter earnings call. "This is evident in our lack of exposure to tailwinds from COVID-19 as compared to some of our peers," he added.

"Medtech companies that have testing segments have seen revenues in that sector shoot up," James Spencer from Global Data said in a Nov. 2 analyst note.

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Danaher Corp., which saw its profits during the third quarter increase 62% annually, is one of the healthcare companies in a favorable position to take advantage of COVID-19 tailwinds. The company said its life sciences and diagnostics segments were the main drivers of revenue growth.

Danaher's diagnostics business benefited from the increase in COVID-19 testing volumes and President and CEO Rainer Blair believes that this will allow the company to deliver low double-digit revenue growth in the fourth quarter.

The Washington D.C.-based company saw over 18% revenue growth in its life sciences business due to strong demand from customers building out their genomics and automation capabilities and from the biopharmaceutical sector working on COVID-19 vaccines and therapeutics.

Healthcare supplier Quidel Corp., which is a smaller company than Danaher, saw third-quarter revenue grow 276% annually to $476.1 million due to an increase in demand for COVID-19 diagnostic products.

Quidel President and CEO Douglas Bryant said the company expects that fourth-quarter revenue will be at least $800 million with average manufacturing to reach about 2 million tests per week.

"Many companies have had orders far exceeding their manufacturing capacities and have had to reorganize their production in order to increase their output," Spencer said. "As COVID-19 is probably going to impact communities for years to come, we will need billions [of] more tests, and testing companies will need to be ready to provide."

Quidel is committed to pushing production capacity to 50 million QuickVue SARS tests per month in 2021 to keep up with an expected increase in demand, Bryant noted. The company is yet to launch QuickVue SARS but remains hopeful that the new test will have a meaningful revenue contribution in the last quarter.

North Chicago, Ill.-based Abbott Laboratories, which has sold over 100 million COVID-19 tests across its diagnostics platform, is no exception. The company simultaneously built two new manufacturing facilities in the U.S. to help meet the demand for testing.

"It will eventually ramp down to more of like a flu state kind of business, but the installed base that we've built during this period, the consumer behavior that's been created, the new channels that we've opened up with rapid testing — whether it's airports, retail stores, more physicians' offices — the app ecosystem that we're building, all that is going to remain," Abbott President and CEO Robert Ford said during the company's third-quarter earnings call.

Similarly, healthcare equipment manufacturer Danaher shipped 7 million tests during the third quarter and is increasing production to haul 8 million tests in the fourth quarter.

In July, Waltham, Mass.-based Thermo Fisher Scientific Inc. expected organic growth for the third quarter to be at about 15% betting on high demand for its coronavirus diagnostic test. The company generated about $2 billion of COVID-19-related revenue in this quarter that supported a 36% year-over-year growth overall.

Without the COVID-19 revenue, which was largely driven by testing-related products and contributed 31% to growth, the company's base business grew 3%, Thermo Fisher senior vice president and CFO Stephen Williamson noted in the third-quarter earnings call.

The COVID-19 related revenue growth has given a boost to companies with relevant diagnostic businesses, however, the outlook for recovery outside this segment is still bleak and remains at risk from a second wave of the outbreak.