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Industry Outlook

Fate of U.S. Healthcare: Trump Policies to Replace Obamacare

The United States is clearly divided into “we need” and “don’t need” when it comes to existing healthcare policy. Currently we envision the change not just a makeover, but a high chance of full retraction and replacement of Obamacare. And most economists believe that the transition is not going to be an easy one.

Why a Strong ‘No’ to Obamacare?

A number of times during his presidential campaign, Donald Trump labeled Affordable Care Act (ACA) as a disaster which requires immediate, less-expensive replacement. According to him, Obamacare is replete with special interest handouts, budget gimmicks and tax increases, all leading to higher premiums and deductibles with reduced access to care. In particular, he talked about the adversities of the Medicaid expansion plan and the two highly controversial taxes — the “Cadillac plan” and the temporarily repealed medical-device tax.

Replacement Outlined by the Republicans at a Glance

The President-elect recently released a sketch of his healthcare offers which highlight a patient-centric healthcare system endorsing choice, quality and affordability with health insurance and healthcare. According to him, the new policy aims at taking necessary actions to alleviate the burdens imposed on American families and businesses by the law. 

He also talked about Health Savings Accounts (HSAs), a tax-exempt account in which anyone can deposit funds on one’s behalf, and about his plan to once again return the role of regulating health insurance to the States. According to the plan, the States, with maximized flexibility in administering Medicaid, can go for innovative methods to deliver healthcare to low-income citizens. Also, the plan aims to modernize Medicare to better cope with the pressure of the imminent retirement of the Baby Boom generation.

What the Nation Is Thinking

We await a detailed Trump action plan and are not yet clear on how Obamacare, which has extended health insurance to 21 million Americans, can totally be substituted. Don’t forget, this was the plan that drove the rate of the uninsured to an historic low.

According to a survey released by the Pew Research Center, 54% of Americans disapprove of the 2010 ACA while 44% favor it. However, US News reported that though more Americans say they oppose the law than support it, data also show that people find certain provisions of the law favorable, including mandating coverage to those with pre-existing conditions and allowing children to stay on a parent's plan until age 26.

MedTech Is Hopeful

The Republican win marked a great victory for the entire medical device industry as the likelihood of a permanent repeal of the 2.3% medical device excise tax will come as a big bonus for both the behemoths and the small players. According to medical device trade association AdvaMed, the entire MedTech fraternity is looking forward to the new policymakers who are expected be work toward improving the FDA regulatory process, repealing the medical device tax, and ensuring that the coverage process allows patient access to the latest innovations.

According to the MedTech community, the repeal of this dreadful tax, commonly referred to as ‘fund of the ACA” will directly address issues like lack of opportunity in research and development, innovation, pipeline development and in making investments needed to accelerate patient and provider access to innovative health care products. This will also help in boosting job creation and quality of patient care, enabling the companies to strengthen their position to cope with any new situation that they can after this two-year period.

MedTech Trend at a Glance

Let us now keep aside the political game change and its consequences and see what’s there in it for MedTech investors to gain from. While this sector is generally not in the limelight from an investment perspective, what makes it a compelling choice in this extremely volatile global market is its fundamental defensive nature. Products of this sector are mostly essential and hence less sensitive to business cycle fluctuations.

A recent EvaluateMedTech World Preview claims that the MedTech space is positioned for impressive growth in the near term. Worldwide, Medtech sales are expected to grow at a CAGR of 5.2% to $529.8 billion by 2022.

Steering ahead of Cardiology and Diagnostics, In Vitro Diagnostics (IVD) is expected to emerge as the sector leader in 2022 (13.4% of the industry’s total sales). Neurology, meanwhile, holds promise as the fastest growing division by 2022 (CAGR of 7.6%). On the other hand, Orthopedics, which is already going downhill, may prove to be one of the slowest growing segments in 2022 with a CAGR of 3.8% per year.

While Johnson & Johnson (JNJ - Free Report) was the largest device maker of 2014, the picture altered last year following Medtronic’s (MDT - Free Report) $50 billion acquisition of Covidien. Medtronic is expected to retain this position in 2022 with a revenue forecast of $39.9 billion.

While Medtronic enjoys a competitive edge with its huge and growing Cardiac and Vascular portfolio, J&J’s forte lies in the orthopedic space (24.1% of market share in 2022). However Zimmer Biomet (ZBH - Free Report) is fast catching up to be the second lead in the orthopedic market with 20.6% share by 2022. Roche (RHHBY - Free Report) , as usual, is expected to remain the leading player in the IVD market in 2022, too.

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: med instruments, med products, med/dental-supp and medical info systems.

We rank all the 260-plus industries in the 16 Zacks sectors based on their earnings outlook and fundamental strength of their constituent companies. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries with a Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

The Zacks Industry Rank is #99 for medical services systems, #101 for medical instruments, #153 for medical products, #156 for medical info systems and #211 for medical dental supplies. Analyzing the Zacks Industry Rank for different Medical Device segments, it is obvious that the outlook for medical services, medical instruments, medical products and medical info systems  is Neutral. Medical dental supplies subsector however holds bearish outlook at present.

Earnings Trend of the Sector

Of the S&P 500 members in the Medical Device space, 95.2% reported third-quarter results as of Nov 18. The beat ratio (percentage of companies coming up with positive surprises) was an impressive 73.1% for earnings and 45.8% for revenues.

So far, the sector has witnessed 6.2% year-over-year growth in earnings on 7.5% revenue growth. The sector is expected to register earnings growth of 3.2% and revenue growth of 5.7% year over year in the fourth quarter.

For more information about earnings for this sector and others, please read our ‘Earnings Trends’ report.