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MedTech Industry Outlook - March 2017

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Obamacare to Trump’s AHA: What’s the Fate of Medical Devices?

The Trump administration’s bid to replace Obamacare has caused quite a stir in the healthcare space. Industry leaders heaved a sigh of relief on President Trump’s promise of repealing major healthcare taxes including the two signature taxes of Obamacare: the unpopular Cadillac tax (40% excise tax on high-cost healthcare plans) and the controversial 2.3% MedTech tax. These taxes, which were commonly addressed as the ‘fund of the Affordable Care Act (ACA),’ simply took a toll on the entire medical device industry.

A Vicious Cycle?

According to MedTech majors, the abolition of the ACA taxes will directly address issues like lack of opportunity for research and development, innovation, pipeline development and increase 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.

On the other hand, going through the just-released proposed Trump action plan – The American Healthcare Act (AHA) – the first thing that comes to mind is whether the intensive research and development, which will result in the development of expensive cutting-edge healthcare products, will be a fruitful investment. This is because the industry is likely to witness a shrinking customer base post-enactment.

Let’s dig deeper inside for a better understanding of this:

What Does AHA Say?

Although Trump has proposed a full replacement of Obamacare through the enactment of AHA, there is uncertainty regarding this. It’s, after all, difficult to find a substitute for a policy that has extended health insurance to 21 million people. Not to forget, this was the plan which drove the rate of uninsured to a historic low.

The replacement bill talks about stopping the Medicaid expansion plan in its entirety, which may reduce federal deficit at the cost of stripping healthcare coverage for millions of poor Americans and non-American inhabitants. A projection by the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) has added fuel to the debate.

Per the projection, federal deficit will fall $337 billion between 2017 and 2026 under the replacement bill. According to the CBO and JCT, the reduction in outlays for Medicaid and elimination of the ACA’s subsidies for nongroup health insurance will contribute to the majority of this deficit reduction. Apparently, this may lead the economy to touch new highs.

At the same time, CBO and JCT also indicated that if the Obamacare replacement act is passed, in a decade from now, approximately 24 million Americans would lose insurance coverage. In 2018 alone, 14 million people would be left uninsured under the legislation.

Boon or Bane for the Medical Device Community?

There is mixed sentiment in the medical device community. The medical device trade association AdvaMed is one of the few who are in favor of the replacement policy. According to them, the entire MedTech fraternity is looking forward to the new policymakers who will be working on improving the FDA regulatory process, repeal of the medical device tax, and ensuring that the coverage process allows patients access to the latest innovations.

However, the data from CBO and JCT discussed above is a dampener. A shrinking customer base indicates an impending slash in the demand for expensive medical procedures and devices. While the White House and Capitol Hill responded to the forecast as ‘just absurd,’ they have yet to justify their stance. Economists worldwide are divided on this proposal. If it materializes, it may lead to major demand supply disequilibrium within the medical device niche. 

Zacks Industry Rank Overall Negative

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 Supplies and Medical Info Systems.

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

As a guideline, the outlook for industries with 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 for med instruments is #98; Medical Info Systems is #169 while Med/Dental-Supp is #176 and med products is at #181. Analyzing the Zacks Industry Rank for different Medical Device segments, it is obvious that the outlook for these aforementioned MedTech subsectors is overall negative.

Bearish Price Performance

The price performances of these four Zacks categorized sub-industries also symbolize a bearish market sentiment.

It has been observed that since the election results on Nov. 8 last year, these four subsectors have performed below the market at large.

Over this period, while the S&P 500 Market Index gained 10.7%, the med instruments space grossly underperformed with a rise of 7.61%. Some of the stocks within this space that have grossly underperformed the S&P Index are Varian Medical Systems, Inc. , T2 Biosystems, Inc. (TTOO - Free Report) and  Edwards Lifesciences Corp. (EW - Free Report) .

Medical Product stocks grew a mere 5.06%. The stocks belonging to this space include ABAX, Orthofix International N.V. (OFIX - Free Report) , Meridian Bioscience, Inc. and INSYS Therapeutics, Inc. .

Another small subcategory medical info systems was no exception either. Since the Republicans occupied the chair, the sector has failed to surpass the market index with 9.1% growth rate. One of the stocks that contributed to this underperformance is Cerner Corp. .


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