Medical device companies, especially smaller businesses, likely will curb spending in the second half of the year as they prepare for a potential recession amid rising inflation and as supply chain and staffing woes continue, according to analysts at RBC Capital Markets and William Blair.

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

Macro 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 casts more uncertainty over the industry. 

Cash burn

Declining share prices limit companies’ ability to raise capital through equity offerings.The iShares U.S. Medical Devices ETF index has fallen 21% this year, and the share prices of the first two companies on the list of the smaller firms covered by William Blair — Aspira Women’s Health and Accelerate Diagnostics — have dropped 72% and 88%, respectively, in 2022. 

Aspira ended 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, the William Blair analysts said companies are reconsidering their spending plans. 

“Companies are listening to the market and understanding investor concerns on cash burn to the point where it is impacting management teams’ spending initiatives (many are pausing on certain more ambitious projects), and companies are laying out paths to profitability for investors,” the analysts wrote. “This was more explicit in presentations and breakouts than in any year we have seen. This is not terribly surprising but is it still good to see that awareness of the situation.”

Supply chain and inflation

Supply chain disruption and inflation remain an industry challenge, although the situation may have stabilized, RBC analysts said. They added that the factors “don't appear to have worsened into Q2” and are already factored into guidance.

The team at William Blair outlined how companies have been managing the situation. 

“It seems most companies have managed through disruptions as no management team called out any new concerns or worsening of situations previously mentioned (i.e., obtaining semiconductor chips). Most companies noted their ability to at least partly pass along price increases to customers, though the impact of these increases has yet to be fully seen in results,” the analysts wrote.

The RBC analysts warned that the supply chain and inflation issues that have affected medical device companies in the first half of 2022 likely will persist through the rest of the year. Still, while those headwinds are poised to linger, their impact may be mitigated, they said, adding that they expect the industry to manage the pressures “via second sourcing and inventory build-out.”

The analysts said there is scope for the situation to worsen and noted that higher oil prices could drive up the cost of logistics and resins into the winter “due to limited global spare capacity.”

Recovery trends, staffing and capital

Analysts at William Blair said they exited their talks with medical device leaders expecting the second quarter to “reflect an environment still not fully back in gear.” The conversations suggested the environment still is similar to that discussed in the first quarter with no signs that “a slowdown had occurred in the ongoing COVID-19 wave or that volumes, access, funding, etc. had really improved much either.”

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

“[The] capital environment is likely to see more scrutiny in the near-term and the full year outlook will depend on economic conditions as they evolve even though the tone/commentary remains positive in our checks,” the RBC analysts wrote. “If growth concerns persist and odds of a recession increase, we believe companies with exposure to higher acuity, Medicare/Medicaid, domestic sales will be better positioned.”