Experts say the medical device industry is poised to weather an economic downturn
Medical device makers are poised to weather an economic slowdown even as they continue to face hurdles related to the pandemic, such as ongoing supply chain issues and staff shortages, analysts say.
While device makers aren’t completely immune to potential recessionary pressures, the industry says it should be fairly resilient to a deepening downturn Shagun Singh, an analyst at RBC Capital Markets.
“I think there are a lot of corporate puts and takes to consider,” Singh said. “But there’s definitely a lot of opportunity, given that there’s a defensive element in healthcare and medtech.”
As economists and politicians debate whether the US has slipped into a recession, indicators are pointing to the economy cooling off afterwards two consecutive quarters of falling GDP. Meanwhile, rising inflation and interest rates are also contributing to a slowdown as consumer spending eases.
Those economic factors could dampen consumer spending on devices and lead to a decline in non-emergency 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 — as more people have coverage under the Affordable Care Act (ACA) and stronger safety-net programs such as the expansion of Medicaid.
“I wouldn’t expect things to get that bad, let’s hope this time. In terms of the volume of cases, in terms of people losing their jobs, in terms of investments – I think it was all worse [during the Great Recession]said Needham analyst Mike Matson. “I think we could see similar things happening. It might not be as bad as it was then.”
Any impact will depend on the market and company, RBC’s Singh said. Companies tied to more emerging procedures like heart surgery could be more resilient in a recessionary environment, while companies with consumer-related products and procedures considered deferrable, like orthopedics, will be more vulnerable.
View procedural volumes
Singh flagged Edwards Lifesciences, which specializes in heart surgery, as a company that could be more resilient to the effects of a recession as its processes are seen as more necessary.
While the company experienced a slowdown during the pandemic, the declines were mostly linked to hospitals restricting procedures at their facilities to stop the spread of the virus and, more recently, healthcare staffing shortages.
Edwards lowered its 2022 sales guidance in July due to staff shortages and FX pressures.
Companies more vulnerable to economic decline include Stryker and Zimmer Biomet, Singh added, as hip and knee replacement procedures are viewed as more deferrable, although eventually necessary. The analyst added that hospital spending could also dry up during a recession, making pricier products like robotic systems more vulnerable.
In the most recent round of results, Intuitive Surgical found tighter hospital budgets limiting the placement of its soft-tissue robotic system, while Stryker and Zimmer did not report a similar slowdown for their orthopedic systems.
Vijay Kumar, an analyst at Evercore ISI, said that while the proceedings could take a hit if unemployment rates rise, there would generally not be a big impact on volumes. A cut in hospital spending could pose a greater risk for device makers.
Margaret Kaczor, an analyst for William Blair, wrote in an emailed statement that even as the orthopedic field faces a near-term slowdown in procedures: “These are usually not bad, and then they just queue more cases for later.”
A factor for more stable intervention volumes could be the effects of the ACA. According to the Department of Health and Human Services a recording of more than 35 million people were insured under the ACA in early 2022 and 28.7 million people were uninsured in the fourth quarter of 2021 compared to 48.2 million in 2010.
In addition, the expansion of Medicaid opening eligibility for the program is in 39 states including Washington, DCwhich provides a broader safety net for individuals and families who may lose employer-sponsored insurance coverage.
“I think people are going back to ’08/’09 because that’s the latest data point we have and that serves as a kind of bottom, right, in terms of how bad things can get,” Kumar said by Evercore. “In general, I think there will be some impact this time, but it should be a little better than 2009.”
Along with more insurance coverage, RBC’s Singh said various mixes of sales and mergers and acquisitions have transformed the market. The COVID-19 slump and the Great Recession can be used as a reference, but there are eight or nine different points to consider, the analyst added.
“We need to put the mosaic together,” she said, adding that Boston Scientific is an example of a company that has been hurt by process abandonments during the pandemic, but “in an economic recession, they don’t anticipate major volatility in medical device usage.”
Kaczor made a similar point, writing: “the financial crisis was a beast unto itself,” and companies have better evidence of the benefits of using their devices.
“As the burden on vendors has increased as a result of the pandemic and likely in a possible recession, medical device companies are increasingly stepping in with resources to offset some of this impact on these vendors,” Kaczor said. “This is part of the expansion of the ecosystem [medtech] undergoes.”
pressure on consumer spending
A slowdown in consumer spending in the midst of a recession is a concern for the medtech industry, and Singh specifically cited the area of diabetes technology. While devices like continuous glucose monitors and insulin pumps are necessary for patients to control their diabetes, there is no need to rush to buy the latest model or switch to the devices for the first time.
Tandem Diabetes Care, a maker of insulin pumps, was the first in the industry to directly attribute a drop in sales to recession fears. CEO John Sheridan said on a conference call Aug. 3 that data suggests the threat of recession and inflation are affecting new customers’ decisions to buy its pumps from the second quarter.
The company then lowered its 2022 revenue guidance by $15 million to $20 million last month.
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 competitor, elevated its sales growth forecasts and increased the launch of its latest pump.
ResMed CEO Mick Farrell is optimistic about the potential impact 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 are seeing is yes, a huge slowdown in consumer-driven spending. But the slowdown in medicine — there might be one, but it’s a lot more modest,” Farrell said. “We grew through it [Global Financial Crisis.] I have no question that through this slowdown/recession we will grow in every country we operate in.”
While medical device companies still face macroeconomic pressures, RBC analysts wrote in an Aug. 7 note that they now have more confidence in the stability of case volume than second Quarterly calls began.
Medtech executives are optimistic their companies can weather an economic downturn as broader health coverage has made their businesses more resilient than during the previous recession and a prolonged slowdown is not expected, the RBC report said.
Singh said companies are unlikely to radically change their strategies, such as: B. Increased diversification to expand revenue streams when a recession hits.
“I think end markets are what they are. The fundamentals haven’t changed,” Singh said. “I don’t see any change in the long-term strategy.”