Bottom Line Up Front
Its earnings season and we reviewed the call transcripts and reports from relevant publicly traded general healthcare supply companies. In general, international freight costs are down, and general OEM supply is outpacing demand for many products giving suppliers (e.g., US Brands) more negotiating power with OEM manufacturers. These factors should lead to decreases in price to the customer, however, that is not what we are seeing in the market. We noticed a few themes emerge from these reports with these suppliers using language like “inflation mitigation programs”, (i.e., raising prices to customers), “margin enhancement” from decreased shipping costs (i.e., shipping costs go down but prices stay high), and “product profitability programs” (particularly when describing what they expect in the back half of 2023.
Many of the publicly traded companies that supply general healthcare products to the US market have reported earnings over the last month. We have reviewed the earnings call transcripts and reports from Becton Dickinson, Cardinal, McKesson, Owens and Minor, and Premier. We have several trends emerge from these reports. To be clear, these trends are not all encompassing, but did impact several of the companies we reviewed this quarter.
1. OEM costs (the product costs paid by large US healthcare suppliers to manufacturers) in certain key categories are declining with supply outpacing current demand, and future demand remaining uncertain with many customers holding significant stockpiles of certain key products. This supply-demand in-balance provides a “favorable sourcing” environment for suppliers, thus driving product costs down.
2. International shipping costs have declined dramatically over the last 10 months. Shipping a 40’ container from Asia to the US East Coast was ~$30k and has declined to below $3k, approaching pre-pandemic levels.
3. Domestic transportation costs remain elevated due to higher costs of fuel, labor, and equipment. These higher costs are not anticipated to decline in the near future, however, typically make up a small portion of the overall cost of products.
Combining these factors, the expectation would be price decreases to end customers. The general sentiment from these companies is that these declining costs would lead to “margin enhancement” and opportunities for “inflation mitigation.”