As with other manufacturing industries, the medical device sector is being hit by price inflation. While many companies in the consumable market pass the extra costs on to their customers through higher prices, a fair amount of medical device companies keep prices steady or down.
The US Bureau of Labor Statistics reported that producer price indexes for medical equipment and supplies manufacturing were significantly higher in 2022 than in previous years. The average increase in 2021 was approximately 1.2%, while this number was more than doubled to 3.4% in 2022. The latest price index of November this year was up to a record high of 4.2% compared to a year ago. The rising cost of materials such as metals, plastics and chemicals, is driving production costs. Prices of raw materials for medical devices have skyrocketed in the past two years. Many medical device companies are dealing with shortages of semiconductors and other critical components. The medical sector has been facing a significant rise in transport costs and longer and more unpredictable delivery times. The increases over the last two years are due to the effect of both the Covid-19 pandemic and the Russo-Ukrainian war. The trend is expected to continue in 2023, as there is not a very clear path toward the resolution of these issues for the medical device industry.
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Medical companies have not yet passed the extra costs on to hospitals. According to GlobalData’s SKU Premium product, device pricing has been stable for the majority of devices, continually following historic trends from 2019 in the US. Companies with more commoditized portfolios such as hip and knee implants will have less pricing power and a more limited ability to pass pricing on to hospitals. Many medical companies have suffered a major revenue loss during the pandemic, as they are unwilling to increase prices and risk losing share to their competitors. Some companies may be unable to pass prices on to customers due to previous contracts. Additionally, many healthcare facilities have noticed the potential short supply and inflation risk, and they are instead proactively reevaluating suppliers and pre-ordering their most critical supplies. Large purchasing deals depressed the average selling price in recent months. These large deals led to pricing fluctuation in some key cardio markets, such as prosthetic heart valves and transcatheter aortic valve replacement. As costs remain high, brands that keep the same price will be suffering further margin erosion.
While passing the extra costs on to customers in the form of higher prices for the same product line seems impractical, Medtech companies have developed more innovative portfolios driven by technology differentiation and new product launches to stay profitable. Constant updating and reworking of a product’s strengths create opportunities to increase company markups and profits, releasing inflation pressure. During an economic recession, some companies may want to cut R&D budgets; however, this would delay the development cycle of the devices and further affect profitability in the future.
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Bureau of Labor Statistics