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Third-quarter releases are keeping Wall Street on its toes. Even then, uncertainty related to the Trump administration’s Obamacare repeal & replacement effort refuses to fully go away. The President’s latest executive order has added to the issues facing the industry.

Executive Order: A Blunder?

As per critics, this executive order, which seemingly looks not much different from the basic structure of existing health policy, is actually set to break the entire healthcare system from within. According to them, this order, forsaking the consideration of pre-existing health conditions, has been designed to push people to “junk” insurance plans. An article on CNN Money says, “It could lure younger, healthier consumers away from Obamacare with cheaper, but skimpier policies, while leaving sicker folks to pay higher premiums on the exchanges.”

No wonder voices against this proposition move are getting louder. The American Hospital Association has put forward an extremely bearish view on the executive order related to promoting health care choice and competition. The association is apprehensive that the order will solely allow health insurance plans that cover fewer benefits and give fewer consumer protections.

Also, according to a report published in Business Wire, a set of eighteen different patient groups have released a joint statement, visibly threatening the fact that this executive order may destabilize the insurance market by splitting it into two groups — those who need comprehensive benefits that they are getting under the existing law and those who are currently healthy and can gamble with substandard coverage.

As per the joint statement, “This order has the potential to price millions of people with pre-existing conditions and serious illnesses out of the individual insurance market and put millions more at risk through the sale of insurance plans that won’t cover all the services patients want to stay healthy or the critical care they need when they get sick.”

With heavyweight names like the American Cancer Society, the American Heart Association, National Health Council and the American Diabetes Association, this jointly released statement is undoubtedly generating considerable opposition. Even chances that the new legislative change may result in lower taxes and eased regulations for the industry as a whole are not bringing the nation together.

Troubled Times for MedTech, Too

While twists and turns continue to unfold at Capitol Hill, the scenario within the medical device space is getting gloomier. The executive order points to a shrinking customer base, indicating a cut in demand for expensive medical procedures and devices. This may lead to a major supply/demand disequilibrium within the medical device space. 

This apart, tax-related confusion remains a huge burden on the MedTech fraternity. Earlier, this community was quite hopeful of the change in power as Trump’s proposed policies always talked about the abolition of the infamous 2.3% medical device sales tax. This measure, commonly addressed as the fund of the Affordable Care Act, has taken a toll on the entire medical device industry since its enactment in 2013.

A report by FierceMedicalDevices released at that time had revealed that Johnson & Johnson (JNJ - Free Report) made a payment of $180 million as medical device sales tax in 2014. Medtronic (MDT - Free Report) , the legacy Covidien, and Smith & Nephew (SNN - Free Report) paid $112 million, $60 million and $25 million, respectively, during that year.

Realizing the severe linkage effect of this tax among the MedTech majors as well as small players, the U.S. House and Senate temporarily suspended it (for just two years) in 2015. Now, MedTech players will find themselves facing a similar situation (from the beginning of 2018 itself), if the policy remains intact.

Unfortunately, while the Trump administration has been targeting a complete annulment of many other taxes including the abolishment of the Cadillac tax (40% excise tax on high-cost healthcare plans) in the near future, it has not come up with any concrete plan to replace the MedTech tax as of yet.

Zacks Industry Rank

Within the Zacks Industry classification, Medical Device is broadly grouped into the Medical sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level: Medical - Instruments, Medical - Products, Medical - Dental Suppliesand Medical Info Systems.

We rank all 250-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each. To learn more visit: About Zacks Industry Rank.

The Zacks Industry Rank is #153 (bottom 40% of the 250 plus Zacks classified industries) for Medical - Instruments, #87 (top 34%) for Medical - Products, #156 (bottom 39%) for Medical - Dental Supplies, #78 (top 30%) for Medical Info Systems. Our backtesting shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Upon analyzing the Zacks Industry Rank for different Medical Device segments, it can be said that the outlook for these aforementioned MedTech subsectors is overall unclear.

Price Performance

The price performances of these Zacks categorized sub-industries, however, indicate a bullish market sentiment.

Year to date, while the S&P 500 Market Index has gained 15%, the med instruments space has outperformed the trend with a rise of 20.6%. Some of the stocks within this space that have traded above the S&P Index are Varian Medical Systems, Inc. (VAR - Free Report) , Inogen, Inc. (INGN - Free Report) and  Edwards Lifesciences Corp. (EW - Free Report) .

Medical Product stocks grew a substantial 23.1% in this period. Some players from this space are Orthofix International N.V. (OFIX - Free Report) , Abbott Labs (ABT - Free Report) and Boston Scientific (BSX - Free Report) .

Another small subcategory, medical info systems, was also not an exception. The sector has also surpassed the market index, with a 41.1% growth rate. One of the stocks contributing to this outperformance is Cerner Corp. (CERN - Free Report) .



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