Medical device companies feel economic pressure, see record M&A levels
Medical device manufacturers are feeling the effects of a sluggish economy and a revamped reimbursement model, which are leading to slow growth and record levels of mergers and acquisitions activity.
Ongoing financial pressure on U.S. for-profit hospitals is affecting the medical device sector, according to Moody's Investors Service.
Moody's stable outlook for the U.S. for-profit hospital sector reflects the expectation that same-facility aggregate EBITDA growth will remain in the low-single digits in percentage terms over the next 12 to 18 months as weak patient volumes continue and pricing pressures mount.
Moody's sees a similar trend in the medical products and devices sector with aggregate EBITDA growth likely to remain around 1 to 4 percent through 2012, a key factor supporting its stable outlook for the sector. U.S. hospitals are key customers for device companies.
In its report, "U.S. Medical Products and Devices: Profits to Rise Modestly; Cost Cuts Will Offset Weak Sales,” Moody's notes that U.S. hospitals and device makers are suffering as consumers defer non-urgent healthcare amid high levels of unemployment and ongoing healthcare benefit plan design changes that are pushing a larger portion of healthcare costs onto patients.
Moody's also notes that rising reimbursement rates will support hospitals' EBITDA growth this year, but payment rates will be much less certain beyond 2012 as Medicare cuts take effect and states struggle with budget shortfalls.
Hospitals will continue to push for lower prices on medical devices as reimbursement pressures mount. Device makers will also face ongoing regulatory scrutiny and challenges in obtaining reimbursement coverage because payers will increasingly focus on product cost-effectiveness.
Medical device companies must also contend with a new medical device tax in 2013 that's part of the 2010 healthcare reform legislation. Moody's expects most companies will offset their tax payments with additional cost-savings initiatives.
Additionally, device companies' increased focus on emerging markets, including China and India, will help to counter sluggish U.S. and European growth as well as support EBITDA growth. The near-term impact will be limited, however, as emerging markets represent a small portion of the sector's overall sales.
In this difficult financial environment, the strong are devouring the weak. January 2012 was a record month for healthcare M&A volume and among the individual sectors, medical devices led the pack with 21 deals worth $6.9 billion representing 22 percent of the transactions, reported Irving Levin Associates, whose Deal Search Online database also noted that medical device M&A activity has increased in terms of dollar value in the later part of the last 10 years reaching a total of $320.4 billion in the past decade.
Sanford Steever, PhD, editor of Irving Levine’s publications, The Health Care M&A Monthly and The Health Care M&A Report said the brisk market is being driven in part by low interest rates and a desire to squeeze excess cost out of the healthcare delivery network.
He expects the fast pace of M&A activity to continue.
“The only things that could slow it down are election-year jitters over the continued future of healthcare reform (companies will still undertake deals, but will have a longer due diligence period),” Steever told Healthcare Finance News in February. “More peripherally, another economic downturn, which is increasingly remote, could also slow down, but not stop, healthcare M&A.”
Follow HFN Editor Rene Letourneau on Twitter @ReneLetourneau.
[See also: M&A: What is driving the market?]
