Medtech sounds alarm on semiconductor shortages, asks feds to prioritize chips for medical use

Dive Brief:

The medtech industry is again sounding the alarm over "unsustainable" disruption to the supply of semiconductors, highlighting the current impact and warning of further issues in feedback to the U.S. government.
AdvaMed and a clutch of companies, including Becton Dickinson, Medtronic and Philips, in response to a Department of Commerce request for comments on the risks in the semiconductor supply chain set out how constraints are affecting the industry, warning of long lead times, rising costs and the threat of counterfeits.
The lobby group welcomed plans to expand U.S. semiconductor manufacturing capacity but said "it is critical that policy makers and chips supply chain partners work together" to prevent the disruption of healthcare in the near term. In particular, AdvaMed wants to "explore ways that chips for medical uses are prioritized over non-essential uses."

Dive Insight:

Evidence of the impact of semiconductor shortages on medtech has mounted in recent months, with AdvaMed commissioning a report that found all respondents had experienced delays and companies citing the situation as a constraint on their ability to increase output.

Deloitte, which AdvaMed commissioned to do the survey, does expect the situation to start improving later this year. The forecast is based on evidence that companies in various industries, including medtech, are over-ordering to build up buffer stocks. Once companies amass enough chips to feel comfortable, demand should fall and begin to normalize lead times.

The call for feedback by the Biden administration gave the industry the chance to lay out its concerns to policymakers.

The submissions provide a detailed look at how the situation is affecting medtech. Philips told the government that shortages of wafers, raw materials and packaging, as well as other problems, are affecting its U.S. operations.

In 2019, lead times for various semiconductor products were 56 to 84 days. Now, lead times have ballooned to more than 365 days. Over the same period, Philips says it has gone from having 30 to 60 days of semiconductor inventory to having no inventory.

BD painted a similar picture, revealing that lead times have gone from 24 to 36 weeks before the supply crisis to 12 to 18 months today, "with questionable commitments made by suppliers." BD is now placing orders out 18 to 24 months to ensure it has parts to service health system customers. The situation is driving up costs and, in BD's view, poses particular problems for medtech.

"We are spending tens of millions of dollars to purchase materials on the open market just to maintain continuity of operations. We are also making significant investments to validate potential alternatives. However, we are a highly regulated industry and even if alternatives are available, the time it takes for new validation and regulatory approvals does not pose any short-term solutions," BD wrote.

BD has kept the cost impact to around 10% but "can document scenarios where the markup is 36-100X what we paid for the same products the year before." The company is increasingly worried about counterfeits entering the supply chain, leading it to invest in "extensive testing and validation measures."

The situation is constraining output at some companies. Fujifilm SonoSite has suffered "decommits, cancelations, quantity reductions, allocations and lead-time extensions with no notice" that have led it to limit ultrasound production for lack of semiconductors. "Production of ultrasound machines is behind customer demand and this delay in order fulfillment is growing," the company wrote.

Medtronic has "supply constraints in a few product categories that rely on electronic components," despite building up "inventory for essential products when elective procedures slowed during the COVID-19 pandemic."

The medtech respondents to the Department of Commerce suggested a range of solutions to the problem, including "priority attention to industries supporting pandemic preparedness" and government support for "increases in [semiconductor fabrication plant] capacity, both in the United States and with our allied overseas trading partners."