- Alex Hattaway
Are Supply Chain Pressures Easing for Medtech?
By Medical Device & Diagnostic Industry
Here's what GE Healthcare, Stryker, Abbott, Boston Scientific, and Intuitive Surgical expect in terms of the global supply chain in 2023.
The COVID-19 pandemic exposed the global supply chain for its weaknesses, and manufacturers of all sizes continued to be impacted by supply disruptions through most of 2022. Finally, we're beginning to see signs that the supply chain is on the mend, at least for most of the larger medtech companies.
Meanwhile, world leaders continue to work toward more long-term solutions. For example, the Wall Street Journal reports that the Biden administration is turning to India for help as the United States works to shift critical technology supply chains away from China and other countries that it says use that technology to destabilize global security. According to the report, Administration officials met with a delegation of Indian officials and U.S. industry executives this week. The discussions centered around technology development and investment in India as part of a broader U.S. push to cultivate alternatives to China.
One of the biggest wins for medtech in 2022 was the CHIPS and Science Act (Creating Helpful Incentives to Produce Semiconductors for America Act) President Biden signed into law in August, opening access to more than $50 billion in research and manufacturing of semiconductor chips. The bill is intended to help the country regain a leading position in chip manufacturing by bringing more facilities back to the United States, which will help lower costs and prevent supply disruptions.
The law will invest $39 billion over five years to expand domestic manufacturing, providing companies incentives to build, expand, and modernize facilities and equipment. Additionally, it creates a new 25% tax credit for companies that invest in semiconductor manufacturing equipment or the construction of manufacturing facilities. However, private companies that receive financial assistance will be restricted from expanding certain chip manufacturing in China for 10 years.
By September 9, Biden was visiting a groundbreaking of a new semiconductor chip manufacturing plant in Ohio that Intel is building with the help of the new law.
Of the public medtech companies that have already reported quarterly earnings for the most recent quarter, most (but not all) are at least cautiously optimistic that supply chain pressures will ease in 2023.
Click through the slideshow to see what executives at GE Healthcare, Stryker, Boston Scientific, Intuitive Surgical, and Abbott said about the current state of the supply chain.
GE Healthcare CEO Peter Arduini said during the company's first solo earnings call that the supply chain does seem to be improving.
"But again, improving isn't back to, say, the good old days," he said. "All our input costs have some added cost to them, it's why we put a lot of focus on variable cost productivity, we're carrying some inventory from spot buys and things that [are] higher rates, and we're going to see much of that continue into '23. But we have good visibility to it, and I think as we see how the economy plays out and how that plays out relative to inflation, we'll have better insights about what we can do about it. But again, our first half visibility looks quite good at this point in time, we're optimistic that we're going to continue to see improvements throughout the year."
Stryker CEO Kevin Lobo said the company's 2023 guidance range assumes a gradual improvement of the global operating environment, including a progressive easing of supply chain disruptions throughout the year.
Although there will continue to be challenges, Lobo said, "it certainly feels like the worst is behind us as."
Stryker CFO Glenn Boehnlein reiterated that confidence. He reported that the supply chain disruption somewhat lessened during the quarter.
"We are seeing some bright spots in supply chain. We are seeing an environment where we think there will be less spot buys," he said.
Most OEMs use strategic sourcing whenever possible, which is more cost effective. However, in times of supply chain disruptions, it is sometimes necessary to make on-the-spot purchases at a higher cost.
"We assume that we will see gradual improvement in the supply chain. We saw some of that in Q4. We actually feel pretty good about our access to supply, we are seeing a reduced volume of spot buys, which are those really high cost items, and we are also beginning to work with our original set of vendors, and also going up the food chain and actually working with chip suppliers so that we feel like we have a good handle on what’s going to happen with supply chain," Boehnlein said. "But it should become better quarter-to-quarter-to-quarter with good improvement and visible improvement in the back half of the year."
Boston Scientific is one of the few large-cap medtech companies so far that have reported no assumed change in the state of the supply chain. The company's 2023 guidance assumes supply chain headwinds will be similar to 2022.
"Is this conservatism, respect for lingering macro issues, or both? ... Why model
Rick Wise on the BSX call:
Is this conservatism, respect for lingering macro pressures or both? The large-cap companies reporting to date, they're not Boston Scientific, but they're all in some way, shape, or form highlighting the improving or [lessened] pressures from macro as they finish the year and start '23," said Rick Wise, an analyst at Stifel, during Boston Scientific's earnings call.
CFO Dan Brennan explained that Boston Scientific has a high-performing global supply chain organization that has been on top of supply chain crisis from the start. This means the company has been given updates at a high level of specificity.
"As we went through our annual operating plan process and guidance preparation process, they really dug in at a detailed level to try and understand what 2023 could bring," Brennan said. "There are some elements that look better, right? Freight does work better. You see fuel prices and oil prices coming down. So, we're optimistic freight costs will be less."
Supply of materials is where things get tricky.
"Supply of materials and the cost of materials is still a bit uncertain and choppy and that direct labor piece that we had in 2022, you've got to annualize that in 2023," he said. "...The prudent course for guidance in February is to assume that we don't get a lot of macroeconomic help in 2023. I'd love to be surprised as we go through the year that we get that help. But I think as we sit here in February, prudent to assume a similar headwind to what we saw last year."
Intuitive Surgical is another medtech company that didn't give overwhelming confidence that we've seen the light at the end of the supply chain tunnel.
CFO Jamie Samath reported that the supply chain environment was challenging in Q4 and indicators of supply and inventory health did not improve as compared to the previous quarter.
However, the company's 2023 outlook is a bit more promising.
"The range does not reflect significant material, supply chain disruptions, or hospital capacity constraints similar to what we experienced at the start of the pandemic," Samath said.
Abbott CEO Robert Ford painted a promising picture of the supply chain outlook.
"Supply chains continue to face challenges and our healthcare customers have been navigating staffing challenges that are negatively impacting certain medical device procedure trends and routine diagnostic testing volumes," Ford said. "As we start the new year, however, while all these factors remain headwinds, I am cautiously optimistic that we are starting to see them peak and, in some cases, ease a bit."
Later in the call he reiterated that he thinks the suppy chain issues are "largely behind us."