Medical device companies to cut spending as threat of recession dims long-term outlook: analysts

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According to analysts at RBC Capital Markets and William Blair, medical device companies, especially smaller ones, are likely to cut spending in the second half of the year as they brace for a potential recession amid rising inflation and as supply chain and personnel issues continue.

That’s when a clearer picture emerged of the impact of macro trends for medical device companies from the second quarter and beyond, analysts from both companies said in notes to investors.

Macroeconomic trends such as supply chain constraints, inflation and hospital staffing shortages have shaped the performance of medical device companies since the second half of last year.

These factors have slowed the post-pandemic recovery, and now a potential recession combined with these challenges is casting more uncertainty on the industry.

Cash consumption

Falling share prices limit companies’ ability to raise capital through share issues. iShares US Medical Devices Index ETF fell 21% this year, and the stock prices of the top two companies on William Blair’s list of small businesses – Aspira Women’s Health and Accelerate Diagnostics – have fallen 72% and 88%respectively, in 2022.

aspire end of March with $27.1 million in total cash, while Accelerate Diagnostics had $50.4 million in cash and investments. Faced with a tougher fundraising environment, analysts at William Blair said companies are reconsidering their spending plans.

“Companies are listening to the market and understanding investors’ concerns about cash burn to the point where it’s impacting management teams’ spending initiatives (many are pausing on some bigger projects), and companies are charting pathways to profitability for investors,” the analysts wrote. “It’s been more explicit in presentations and breakouts than in any year we’ve seen. It’s not very surprising but is it still good to see this awareness of the situation.

Supply chain and inflation

Supply chain disruption and inflation remain a challenge for the industry, although the situation may have stabilized, RBC analysts said. They added that the factors “do not appear to have worsened in the second quarter” and are already factored into the forecast.

William Blair’s team explained how the companies handled the situation.

“It seems that most companies have gone through disruption as no management team has raised new concerns or escalated the previously mentioned situations (i.e. getting semiconductor chips). Most companies noted their ability to at least partially pass on price increases to customers, although the impact of such increases has yet to be fully seen in earnings,” the analysts wrote.

RBC analysts have warned that the supply chain and inflation issues that plagued medical device companies in the first half of 2022 are likely to persist throughout the year. Still, while these headwinds are poised to persist, their impact could be muted, they said, adding that they expect the industry to manage pressures “via second sourcing and building up inventory”.

Analysts said the situation could worsen and noted that rising oil prices could drive up the cost of logistics and resins over the winter “due to limited global spare capacity. “.

Recovery trends, staffing and capital

Analysts at William Blair said they ended discussions with medical device leaders, expecting the second quarter “to reflect an environment that is still not fully back on track.” Conversations suggested that the environment is still similar to that discussed in the first quarter with no signs that “a downturn has occurred in the ongoing COVID-19 wave or that volumes, access, funding, etc. .have really improved a lot either”.

Staffing remains an issue, although the RBC team expects “hospitals are managing effectively” the situation. With other factors stable, investors are starting to pay more attention to the impact of a possible recession and the reduction in capital purchases by hospitals.

“[The] The capital environment is likely to come under closer scrutiny in the near term and the full year outlook will depend on economic conditions as they evolve, although the tone/comments remain positive in our reviews wrote the RBC analysts. “If growth issues persist and the odds of a recession increase, we believe companies exposed to higher acuity, Medicare/Medicaid, domestic sales will be better positioned.”

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