Tariff uncertainty has cast a pall over medical stocks, revealing an uncomfortable truth about the supply chain for lifesaving medical devices made by trailblazing companies like Intuitive Surgical and Exact Sciences.
It's particularly challenging for an industry grappling with a supply chain held together by "bubblegum and shoestring," says Dave Evans, chief executive of Fictiv, which helps companies manage manufacturing challenges, including the complicated "spiderweb" that makes up the supply chain.
Supply chains were not a major manufacturing issue in the medical devices industry before 2020. Now, it's a concern in the C-suite, Evans told Investor's Business Daily.
This year, President Donald Trump's tariffs on imports from China, Mexico and Canada have rocked Wall Street and medical stocks are no exemption. Since late January, IBD's Medical-Products industry group has fallen 15%.
"Tariffs are a part of this, but I actually think it's the broader ecosystem of how fragile supply chains have been for decades," Evans said. "Tariffs, pandemic (and) geopolitical have exposed the fragility of really the system that's held together with bubblegum and shoestring."
Medical Stocks: 'Wait-And-See'
Medical device companies are taking a "wait-and-see" approach to tariffs, says BTIG analyst Marie Thibault.
There's still a lot unknown about the tariffs. It's possible medical devices — and the components to make them — could be exempt. Alternatively, Evercore ISI analyst Vijay Kumar said some products move multiple times between the U.S. and Mexico, which could result in stacked-up tariffs.
And then there's this prevailing thought: "This cannot last across the board for very long," Kumar said in a recent report.
Trump's most recent tariffs include an additional 25% on imports from Mexico and Canada. Imports from China will face a 10% additional tariff.
Kumar said Intuitive Surgical and Becton Dickinson are exposed to the tariffs on Mexico. Illumina, Exact Sciences, Mesa Laboratories, Revvity, Waters, Stryker, Zimmer Biomet and Hologic have noted a "minimal" impact due to tariffs on imports from Mexico and Canada.
Will Tariffs Lead To Cuts?
BTIG's Thibault says companies likely won't make any public announcements about tariff mitigation strategies until after the second quarter.
"Companies won't be quick to make cuts they can't take back easily," she said.
But long-term projects could end up on the back burner until the uncertainty has played through, she added. Medical device makers will trim their administration costs and travel expenses before letting their research and development investments take a hit, she predicted.
"R&D is the reason those companies grow ahead of their peers," she said.
Thibault says many medical device makers could also be less exposed. Due to other issues, some already shifted their operations out of China and Mexico, instead focusing on the Philippines, Vietnam or Costa Rica.
Re-Shoring Is Possible, But Expensive
In the meantime, companies are internally discussing ways they can navigate tariffs, Fictiv's Evans said. In a recent survey by Fictiv, 68% of company executives said re-shoring is a key strategy for their supply chain. But 77% say they don't have the resources today to run their supply chains adequately.
"Yes, re-shoring is real. Yes, there's a strong sentiment to want to bring back to the U.S.," he said. But "resources are some of the tightest they've ever been. It's not like three or four years ago when growth was more important than profitability. I think we're at this really challenging operator landscape where it's profitability over growth but with a heavy geopolitical tension."
In other words, re-shoring is the expensive option, says BTIG's Thibault. Companies aren't making the move to do it — yet.
Re-shoring is also particularly tricky for medical companies. Drugs and devices must be made in specific types of laboratories. The capacity in the U.S. is highly constrained. It's why companies like Eli Lilly and Johnson & Johnson have invested deeply this year and last in expanding their U.S. manufacturing footprint.
"Now, imagine you're building a brand-new leafless heart stent and you're trying to compete with Medtronic's version and you need access to a clean room and you want to re-shore that," Fictiv's Evans said. "That capacity just doesn't exist."
Can Medical Stocks Handle A Margin Squeeze?
Ultimately, consumer prices are likely to go up, says Evans.
"If the tariffs that are being proposed today go fully into effect, I don't see a world where consumer prices do not increase," he said. "Businesses don't have the ability to absorb a 25% to 50% margin squeeze. I don't think anyone is running that fat of margins and, if they are, they're not going to expose that. They'll increase prices."
He predicts 2025 will eventually feel a lot like 2020.
"It's very different circumstances," he said. "But the uncertainty supply chains saw and executives felt — and consumers were the recipients of — we're going to see very similar things here in 2025 with very different circumstances and a similar amount of chaos."
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Follow Allison Gatlin on X/Twitter at @AGatlin_IBD.
