Medical device industry poised to weather economic downturn, experts say

Medical device companies are poised for an economic downturn even as they continue to face pandemic-related hurdles such as ongoing supply chain issues and staffing shortages, according to the analysts.

While device makers aren’t completely immune to potential recessionary pressures, the industry should be quite resilient to a worsening downturn, according to Shagun Singh, an analyst at RBC Capital Markets.

“I think there are a lot of put options per company to consider,” Singh said. “But there’s definitely a lot of opportunity given that there’s a defensive element to healthcare and medtech.”

As economists and politicians wonder if the United States has fallen into recession, indicators suggest the economy is cooling after two consecutive quarters of decline in GDP. Meanwhile, soaring inflation and interest rates are also contributing to a slowdown as consumer spending declines.

These economic factors may dampen consumer spending on devices and lead to a drop in elective care, similar to what happened in 2020 amid the COVID-19 pandemic, analysts say.

At the same time, the healthcare environment is seen as more isolated – particularly since 2008 and 2009 – with more people receiving insurance coverage under the Affordable Care Act (ACA) and stronger safety net programs like Medicaid expansion.

“I wouldn’t expect things to be this bad, hopefully this time around. In terms of the volumes of proceedings, in terms of people losing their jobs, in terms of capital expenditure – I think everything was worse [during the Great Recession]”, said Needham analyst Mike Matson. “I think we could see these similar things happening. It may not be as bad as it was then.

Any impact will depend on the market and the company, RBC’s Singh said. Companies related to more emerging procedures such as heart surgeries may be more resilient in a recessionary environment, while companies with consumer-related products and procedures considered reportable such as orthopedics will be more vulnerable.

Monitoring of procedure volumes

Singh called Edwards Lifesciences, which specializes in heart surgeries, as a company that may be more resilient to the effects of a recession as its procedures are seen as more necessary.

Although the business experienced a downturn during the pandemic, the declines were mostly related to hospitals limiting procedures at their facilities to stop the spread of the virus and, more recently, healthcare staff shortages.

Edwards lowered its 2022 sales forecast in July due to staffing shortages and currency pressures.

The companies most vulnerable to an economic decline are Stryker and Zimmer Biomet, Singh added, as hip and knee replacement procedures are seen as more postponeable, though needed at some point. The analyst added that hospital spending could also dry up during a recession, leaving more expensive products like robotic systems more vulnerable.

In the latest round of earnings calls, tighter hospital budgets were noted by Intuitive Surgical, limiting placements for its robotic soft tissue system, while Stryker and Zimmer did not report a similar slowdown for their systems. orthopedics.

Vijay Kumar, an analyst at Evercore ISI, said that while procedures could be affected if the unemployment rate increased, there usually wouldn’t be much of an impact on volumes. Cutting hospital spending could be riskier for device makers.

Margaret Kaczor, an analyst at William Blair, wrote in an emailed statement that while the orthopedic space faces a short-term slowdown in procedures, “those usually aren’t bad, and then it just queues up more cases for later.

A factor for more stable procedure volumes could be the effects of ACA. According to the Department of Health and Social Services, a registration more than 35 million people had insurance under the ACA at the start of 2022, and 28.7 million people were uninsured in the fourth quarter of 2021, compared to 48.2 million in 2010.

Additionally, Medicaid expansion, which opens eligibility for the program, is underway. 39 states, including Washington, D.C.providing a broader safety net for individuals and families at risk of losing employer-sponsored coverage.

“I think people keep coming back to ’08/’09 because that’s the most recent data point we have, and it sort of serves as a watermark down, right, in terms of how serious things are,” said Evercore’s Kumar. “In general, I think this time around there will be some impact, but it should be slightly better than 2009.”

In addition to greater insurance coverage, different combinations of sales and mergers and acquisitions have changed the market, according to RBC’s Singh. The COVID-19 drop and the Great Recession can be used for reference, but there are eight or nine different points that need to be considered, the analyst added.

“We have to put the mosaic together,” she said, adding that Boston Scientific is an example of a company that has been hit by stays of proceedings throughout the pandemic, but “in times of economic recession, they do not expect major fluctuations in medical device use.”

Kaczor made a similar point, writing that “the financial crisis was a beast unto itself” and companies have a better body of evidence of the benefits of using their devices.

“As stress on suppliers has increased as a result of the pandemic and likely in a potential recession, medical device companies are increasingly stepping in with resources to offset some of these impacts on these suppliers,” Kaczor said. . “It’s part of the expansion of the ecosystem that [medtech] is in progress. »

Pressure on consumer spending

A slowdown in consumer spending amid a recession is a concern for the medtech industry, and Singh specifically called the diabetes tech space. Although devices such as continuous glucose monitors and insulin pumps are necessary for patients to manage their diabetes, they may not be rushing to buy the newest model or to switch to devices for the first time.

Tandem Diabetes Care, a maker of insulin pumps, was the first in the space to directly attribute a slowdown in sales to recession fears. CEO John Sheridan said on an Aug. 3 earnings call that data suggests the threat of recession and inflation was impacting new customers’ decision to buy his pumps from the second trimester.

As a result, the company lowered its 2022 sales forecast last month by a range of $15 million to $20 million.

Still, the insulin pump space is an example of the variance in company forecasts for the second half of the year. Insulet, Tandem’s main rival, increase its revenue growth forecast and stepped up the launch of its latest pump.

Mick Farrell, CEO of ResMed, has an optimistic view of the potential effects of a recession. Farrell said in an interview that while consumers can limit spending on products like Teslas or iPhones, medical devices are more necessary for patients.

“What we’re seeing is yes, huge downturns in consumer spending. But the downturn in medicine — there may be one, but it’s much more modest,” Farrell said. We have grown thanks to [Global Financial Crisis.] I have no doubt that we will grow through this slowdown/recession in all the countries where we are.

Although medical device companies are still facing macroeconomic pressures, RBC analysts wrote in a note on August 7 that they are now more confident in the stability of the volume of procedures than in the second shift calls began.

Medtech executives are optimistic about their companies’ ability to weather an economic downturn as their business is more resilient than in the previous recession due to broader health coverage and a prolonged slowdown is not not expected, according to the RBC report.

Singh said companies are unlikely to drastically change their strategies, such as increasing diversification to expand revenue streams, in the event of a recession.

“I think the end markets are what they are. The fundamentals haven’t changed,” Singh said. “I don’t see any change in the long-term strategy.”

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