MD+DI Online is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Moody's Sees Bright Future for Medtech

Moody's Investors Service is predicting that medtech companies will experience solid earnings growth of 4% to 5% over the next 12 to 18 months, prompting the ratings agency to upgrade its outlook for the industry from "stable" to "positive."

Nancy Crotti

Moody's expects that cost savings due to major mergers and acquisitions that closed in 2015--Medtronic/Covidien, Becton Dickinson/CareFusion and Zimmer/Biomet -- will contribute 1% to 2% of the sector's aggregate earnings growth during 2015-16. Without these savings measures, the negative effects of foreign exchange would be more noticeable during 2015, the report says.

Other factors the ratings agency cited for its rosy earnings outlook include:

  • Expansion in emerging markets such as  China, India, Russia, and Latin America, despite government-imposed restraints on healthcare costs;
  • New cardiac and orthopedic products that could reduce hospital readmission rates and improve patient outcomes and could boost earnings by Medtronic plc, Boston Scientific Corp., and Stryker Corp.
  • The report also notes that Medtronic has a A3 negative credit rating, indicating that it has a very low risk for defaulting but that it has a negative outlook. By contrast, Boston Scientific Corp. has a Baa3 stable credit rating, meaning it has a moderate risk of defaulting but has a stable outlook. Stryker has a better credit rating than the other two with an A3 stable rating, meaning that, like Medtronic, it has a very low risk of defaulting but has a better outlook.
  • Slightly higher hospital admissions, partly because of Medicaid expansion and broader insurance coverage due to the Affordable Care Act;

The ratings agency based its outlook on earnings before interest, taxes, depreciation and amortization (EBITDA), which eliminates the effects of financing and accounting decisions and can be used to analyze and compare profitability between companies.

The cardiac devices that gained Moody's approval include St. Jude Medical's CardioMems sensor, Medtronic's Reveal LINQ,  and quadripolar cardiac resynchronization therapy defibrillator (CRT-D) lead systems sold by both St. Jude and Medtronic in the U.S.

"In orthopedics, all of the major players are developing products that help improve the precision and outcomes associated with replacing hips and knees," and decreasing hospital readmissions and revision surgeries, a Moody's spokesperson wrote in an email to Qmed. "Stryker's MAKO robotic technology for hip and knee implants is an example of this type of product.  

Moody's expects medtech M&A activity to continue, albeit more slowly in 2016, driven by scale and diversification of product lines and geographic reach.

On the downside, Moody's said that proposed bundling of payments for hip and knee implant surgeries with follow-up care could put pricing pressure on device manufacturers. The Centers for Medicare and Medicaid Services (CMS) wants to require hospitals and related service providers in 75 metropolitan areas to accept bundled payments for these orthopedic services beginning Jan. 1, 2016. This will pay hospitals a set fee for all costs of care, covering the time from admission to 90 days post-discharge.

Stryker CEO Kevin Lobo told analysts last month, though, that he is unfazed over a CMS proposal meant to promote "quality over quantity" with hip and knee replacement procedures, which are big business for the company. "Once they start to focus on the total episode of care in a bundled payment, they tend to make much more focus on post-acute costs, which frankly outpace the cost of an implant," Lobo said.

Learn more about cutting-edge medical devices at MD&M Philadelphia, October 7-8, 2015.

Like what you're reading? Subscribe to our daily e-newsletter.

Hide comments
account-default-image

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish