This article is the second in a series on key trends in the medical device industry in 2022. The first articleexploredmajor trends for diagnostic companies.

As the COVID-19 pandemic enters its third year, the medical device industry may face another year of challenges in 2022, with fluctuating procedure volumes and hospital staffing shortages already intensifying at the start of the year.

Six months ago, medical device companies were recovering from the impact of the first year of the pandemic as vaccination rates rose, procedure volumes steadily recovered, and hospital operations normalized.

However, the Delta variant disrupted recovery plans, forcing companies to prepare for another wave of infections and delaying the timeline for a return to normalcy. At the end of 2021, the highly contagious Omicron variant spread rapidly, delivering another blow.

The emergence of multiple variants and the potential for others in the future have muted discussions of recovery in the medical device industry for 2022 and rekindled questions the industry has been asking for the past two years: When will procedure volumes return to normal? How will hospital staffing shortages affect surgeries? And, if it happens, when will the next pandemic surge arrive?

"For part of 2021, we expected a recovery trade in the medical device industry, and the sector performed relatively well at that time... but now I think that expectation has fallen through," said SVB Leerink analyst Danielle Antalffy.

Although all eyes are once again focused on the pandemic's impact, renewed M&A spending and the continued shift of procedures to ambulatory surgery centers (ASCs) are other important medical device industry trends to watch in 2022.

Fluctuating procedure volumes

Procedure volumes were uneven throughout 2021, and this year may be no exception. At the J.P. Morgan Healthcare Conference earlier this month, medical device company CEOs were relatively silent about Omicron's impact on their businesses, but Intuitive Surgical and Johnson & Johnson indicated in recent earnings calls that procedure volumes could decline in the first quarter or even the first half of the year.

In the coming weeks, more companies will report results for the most recent quarter, providing an initial glimpse into the ongoing impact of Omicron and Delta. Experts expect procedures to face greater pressure.

"If we had this conversation a month ago—before the end of 2021 and before Omicron really started spreading—I would have thought the first quarter would be in recovery mode, gradually improving, even though many hospitals were constrained by staffing shortages. Those conditions still hold true and apply to all of 2022. But Omicron has clearly disrupted the pace," said BTIG analyst Ryan Zimmerman.

Several companies have recently warned that Omicron is limiting non-urgent procedures in the first quarter of this year. Because the variant caused surges in the final weeks of the fourth quarter and the first weeks of the first quarter, the industry may need months to fully assess its impact.

Given this unpredictability, both Antalffy and Zimmerman believe companies may issue conservative 2022 forecasts or pause providing full-year guidance.

Mayuri Shah, a partner at Bain & Company, said that, as in the past two years, procedures like orthopedics will be more affected than those like cardiology, because the former are considered more deferrable.

Nevertheless, Shah noted that cardiac procedures have declined "significantly" overall, raising questions about whether procedures traditionally viewed as more urgent will also face pressure this year.

SVB's Antalffy said that companies like Edwards Lifesciences, which focus on cardiac procedures treating life-threatening conditions, are more "resilient" to the pandemic, but questions remain about when related revenue will be recognized. She noted that some cardiac procedures are labor-intensive and, no matter how necessary, could be delayed by a quarter or two.

Edwards CEO Michael Mussallem said at the J.P. Morgan conferencethatJanuary "started slower than originally planned," but at that time the situation had not yet become severe enough to require adjusting its 2022 sales growth forecast of 12% to 15% for its transcatheter aortic valve replacement business.

Analysts agree that the ongoing pandemic and potential future surges are slowing the pace at which companies work through procedure backlogs. Throughout 2020 and 2021, medical device companies repeatedly noted that, because most procedures must ultimately be performed, backlogs are a positive signal for future revenue.

Over the past two years, non-urgent care has been suspended multiple times to conserve hospital resources and reserve beds for COVID-19 patients. However, the most recent wave may introduce new factors.

With procedure volumes declining again, Bain's Shah said, "This is the first time we've seen staffing shortages play such a significant role."

Hospital staffing shortages

Staffing shortages have been a challenge for hospitals and other healthcare facilities for much of the past year, and the problem appears to be worsening, with several industry executives pointing to staffing shortages as a drag on operations in recent earnings calls.

Johnson & Johnson Chief Financial Officer Joseph Wolk noted multiple times during an earnings call with investors on Tuesday that hospital staffing shortages were a reason for limited procedure volumes in the fourth quarter and said the company could be affected throughout the year.

With labor shortages seen as a primary driver of pressure on procedure volumes in the coming year, each new pandemic surge could exacerbate issues of staff burnout or fatigue. Additionally, even when hospitals are not experiencing a COVID-19 surge, reduced staffing limits the number of procedures a facility can perform.

"This is not an easy problem to solve. Hospitals are doing their best to operate with fewer staff, or paying huge sums to hire travel nurses," Antalffy said. "I think this will be something we're still discussing six months from now."

BTIG's Zimmerman said that, due to the nature of the pandemic, multiple waves have strained hospital staff, and with more surges potentially ahead, staffing shortages may get worse before they get better.

"It's not just hiring a nursing school graduate or an ultrasound technician—these people need time to become technically proficient and then efficient in a specific area. The skills gap lost over the past 18 months or two years is a problem that takes time to fix," Zimmerman said.

Although labor shortages have been exacerbated by the COVID-19 pandemic, this is a long-term, complex issue that is unlikely to be resolved simply because the pandemic eases.

Renewed M&A activity

This year's M&A kicked off with Stryker's nearly$3 billionacquisition of Vocera Communications. However, since the Stryker deal was announced, M&A spending has slowed compared tothe 10 deals announced in January 2021.

That may not last. Medical device companies are still holding cash because spending was more conservative during the pandemic. Although M&A has been a major theme in the medical device industry over the past several years (except 2020), analysts expect deals to continue occurring across the sector.

"We know valuations in the medical device space are near historical highs, and that's still happening. But companies have to grow, and even with expensive assets, companies in the space are still acquiring assets to drive innovation growth," said Truist Securities analyst David Rescott. "We don't necessarily expect the high level to slow down."

Stryker's announcement of its acquisition of Vocera did not trigger a flurry of deals in January, although the deal continues a broader trend of medical device companies moving beyond their traditional business lines to invest in digital health.

The orthopedic company's $3 billion acquisition follows Baxter's$10.5 billionacquisition of Hillrom last year, which aimed to expand Baxter's digital health and connected care offerings.

Although medical device companies may also expand into digital markets through M&A, Rescott said this "could be a five-year story rather than something immediately visible in 2022."

Bain's Shah said category leadership will continue to be a key driver of M&A.

"Category leaders have stronger commercial relationships with physicians and institutions, typically have more clinical expertise in their categories, and maintain important connections with key opinion leaders," Shah said, adding that these companies are then well-positioned to further invest in these areas.

In addition to increased deal activity, Rescott said 2022 could be another bumper year for medical device IPOs, following a five-year high in the number of IPOs last year.

Growth of ambulatory surgery centers

A byproduct of paused hospital procedures is the shift of procedures to ambulatory surgery centers (ASCs)—a trend that began before the pandemic but hasacceleratedsince, forcing companies to rethink their business strategies.

ASCs provide an alternative care setting for certain procedures, allowing hospitals to free up beds and conserve resources. Over the past few years, the U.S. Centers for Medicare & Medicaid Services (CMS) has allowed Medicare to cover more ASC procedures, and medical device companies such as Stryker, Johnson & Johnson, and Zimmer Biomet have also increased their focus on these facilities.

BTIG's Zimmerman said factors such as staffing shortages during the pandemic and the desire to prevent patients from contracting the virus have all driven the shift of procedures.

"It's like pouring gasoline on a match," the analyst said.

Companies are not only using ASCs as a substitute for procedure volumes lost in the early pandemic, but are now tailoring products for these specific facilities. Bain's Shah said orthopedic companies are marketing their robotic surgery systems—Zimmer's Rosa, Stryker's Mako, Johnson & Johnson's Velys—as specific value propositions for ASCs, a trend that is likely to continue.

A key question is how much of this procedure volume will flow back to hospitals when the pandemic improves. Stryker CEO Kevin Lobo said in January 2021 that the shift is permanent and will only accelerate. As the pandemic persists, that prediction may prove correct.

"There is a possibility that some (complex cases) will continue to primarily remain in the hospital setting," Shah said. "But the continued improvement of ASCs in providing these procedures will solidify their position as a key part of this ecosystem."