As forecasted by Johnson & Johnson and Intuitive Surgical in the first week of earnings, medical device companies saw procedures bounce back after January’s surge in COVID-19 cases. Still, several companies also reported not being able to meet all of the demand for products because of shortages of critical supplies or hospital staffing.
One of them was ResMed, which has been grappling with shortages of semiconductor chips for the last year as its competitor, Philips, undergoes a months-long recall of its Respironics ventilators and sleep-apnea devices.
Philips estimated another 300,000 devices will need to be added to the recall, which already encompasses more than 5 million. It also expects the process of replacing devices to continue into 2023. The recall has been continuing since June of last year.
In an April 25 investor call, CEO Frans van Houten said the company took an additional 65 million euros provision, which was equal to about $70 million at the time of the announcement, related to the repair and replacement of the recalled devices, and another over $100 million to offset higher costs of executing the program, such as inflationary pressures. The company’s stock dropped more than 15% on the news and amid a disclosure that the U.S. Department of Justice had subpoenaed Philips and its subsidiaries related to the recall.
So far, Philips has only produced about 2.2 million repair kits or replacement devices, up from 1.5 million last year, analysts with KeyBanc Capital Markets wrote in a research note. However, the company said it had increased its pace of production despite supply chain challenges.
ResMed, which was expected to post a $300 million to $350 million benefit from its competitor’s recall, also hemmed in analysts’ expectations, citing shortages of critical components.
Specifically, ResMed CEO Mick Farrell said a semiconductor supplier “had a very significant, double-digit de-commit.”
Now, the company only expects to see a $200 million to $250 million benefit from the recall in the current fiscal year, which ends in June.
ResMed has cited supply chain challenges throughout the year as shortages of chips in particular have been a concern since 2020. Competing with makers of electric vehicles and consumer electronics, ResMed has taken to pitching manufacturers on its high margins and long-term contracts as well as the importance of the chips in helping people with breathing.
“Whenever we talk to almost anyone in any industry, we end up talking to somebody who either has sleep apnea or their loved ones have sleep apnea or their good friends have sleep apnea. So we can get a really strong message through as to why it should be a priority,” COO Rob Douglas said on an earnings call on April 28. “But sometimes, they've got contracts and they need to be able to call force majeure on those contracts before they can supply us.”
“The patients are there. And I think it's awful that somebody might have to wait four weeks or eight weeks. I don't want them to wait more than four to eight hours. But right at the moment, we're in this situation; [it] will be that way for a period of time given these unprecedented circumstances.”
Mick Farrell
ResMed CEO
One temporary solution for ResMed is to redesign its devices so that they don’t use semiconductors. This was done with the company’s AirSense 10 device, by removing the 3G or 4G chip, and instead letting providers upload the data from an SD card to their patient management system manually, as was done with the device’s original manufacturing design.
Resmed also is working on retrieving more parts suppliers, finding new suppliers and validating new parts. However, this process still can be time consuming.
“We can't just throw in a new component and say, ‘let's see if it works.’ We've got to really do all the proper life testing and check through. So that's why it doesn't happen overnight,” Douglas said.
ResMed currently has an estimated 12- to 18-month backlog with patients waiting anywhere between one or eight weeks for a device depending on their location and the flow of products, Farrell said. The company isn't sharing a 2023 guidance yet on the recall.
“The patients are there. And I think it's awful that somebody might have to wait four weeks or eight weeks. I don't want them to wait more than four to eight hours,” Farrell said. “But right at the moment, we're in this situation; [it] will be that way for a period of time given these unprecedented circumstances.”
A complicated supply chain
Other medtech companies also called out challenges in filling orders due to supply chain issues. Baxter International lowered its forecast for revenue and earnings per share for 2022, with CFO Jay Saccaro citing “one of the most complicated supply chain environments I have personally seen.”
Saccaro broke down the earnings forecast for adjusted earnings before special items, which would decrease from $4.25 to $4.35 per diluted share to $4.12 to $4.20, as follows:
- A $0.11 impact from oil costs, one “primary driver.”
- Another approximately $0.11 impact from freight headwinds
- About $0.08 from inflation, due to rising costs of securing parts and raw materials.
“The war in Ukraine, coupled with an already fraught supply chain, creates very significant short-term factors impacting our performance,” Saccaro said. “Do I think we'll be talking about supply chain in two years? I certainly hope not, nor do I expect that that will be the case. But at least for the next nine months as we see it there will be continued pressure on the supply chain.”
CEO Joe Almeida added that the company’s backlog is at an all-time high as it is seeing strong demand for its products. Still, sometimes it struggles to fulfill all of that demand because of the ongoing shortage of chips and microprocessors.
Stryker, which has benefited overall from a rebound in procedures across its medsurg, neurotechnology, ortho and spine segments, still saw a slowdown in placements of its Mako surgical robots because of supply chain and hospital staffing shortages. Each of its segments posted an increase in sales year over year, except for “other orthopaedics,” which dropped 20% because of the slower installations.
CEO Kevin Lobo told investors on Thursday that hospital liquidity is “still very strong” and that Stryker had double-digit growth in orders in the first quarter.
“Large capital has been disrupted partially because of shortages of primarily electronics but also hospitals' ability to actually receive the capital either because of short staffing or because some of their construction projects were delayed,” Lobo said of the Mako placements.
Stryker saw revenue growth across both its main divisions
| MedSurg and Neurotechnology | Orthopaedics and Spine | Total | |
|---|---|---|---|
| Reported sales (YoY change) |
$2.4B (11%) |
$1.9B (5%) |
$4.3B (8%) |
Source: Stryker's first quarter earnings report
Abiomed, which makes a line of heart pumps for patients with coronary artery disease and an extracorporeal membrane oxygenation (ECMO) device for patients with respiratory failure, also mentioned labor shortages. The company noted that patient volumes were their lowest in January. Still, volumes picked up in February and March, CFO Todd Trapp said, given that these patients aren’t “truly elective,” resulting in a 12% revenue increase for the company in the quarter compared to 2021.
In addition, Edwards Lifesciences, which reported earnings on April 26, also cautioned that hospitals haven’t fully recovered from the pandemic, although the company still beat analysts’ estimates for revenue and earnings. CEO Michael Mussallem pointed to a “significant labor crunch,” partially because of workforce turnover and positions that have yet to be filled.
Keybanc analysts pointed to a mixed picture from the companies that have reported so far in the first quarter.
“Positively, procedural volume trends have been exceeding expectations and accelerating into March/April for most regions, excluding China,” they wrote in an April 26 research note. “However, supply chain constraints are a limiting factor in capital equipment causing some shipping delays, particularly [at the] end of March. … Broadly, underlying demand remains healthy and there is optimism on catch-up through the remainder of 2022.”
Looking ahead
While most of the companies that have reported so far expect to see procedures increase going into the next quarter, some expect slower growth compared to last year. This is partly because the spring of 2021 saw a surge in procedures compared to 2020 and COVID-19 cases had hit a low point after vaccines were rolled out.
Here are a few earnings calls to watch this week:
- Zimmer Biomet — Tuesday, May 3 at 8:30 am ET
- Penumbra — Tuesday, May 3 at 4:30 pm ET
- Quidel — Wednesday, May 4 at 5 pm ET
- Tandem Diabetes Care — Wednesday, May 4 at 4:30 pm ET
- Becton Dickinson — Thursday, May 5 at 8 am ET
- Insulet — Thursday, May 5 at 4:30 pm ET
Ricky Zipp contributed reporting.
