The future of the medical products and device industry is brightening, according to Moody’s investors Service, which upgraded its outlook from stable to positive. Moody’s predicts “continued product innovation” and synergies from acquisitions will drive growth of earnings before interest, depreciation and amortization (EBITDA) of between 4 and 5 percent over the next 12 to 18 months.
The industry had previously been projected to grow its EBITDA by 3 to 3.5 percent. That was before a 2.3 percent excise tax on U.S. sales, set to be reinstated this year, was suspended through 2019. Additionally, the tax cut legislation passed late in 2017 eliminated any incremental taxes companies would have to pay when their cash is repatriated to the U.S., which Moody’s considered a credit positive if medical device companies, now facing only a mandatory tax of offshore profits, use the money to pay down debt.
“For most companies, product innovation will help drive growth as many mature businesses continue to come under pricing pressure,” said Moody’s senior vice president and report author Scott Tuhy. “Abbott Laboratories, for example, will generate meaningful organic growth from its FreeStyle Libre glucose monitoring system, and Edwards Lifesciences’ from its Sapien 3 trans-catheter aortic valves. At the same time, cost-cutting initiatives will support expansion. Medtronic Plc, for instance, is targeting savings of $3 billion by 2022 from its recently announced cost-savings program.”
Another positive for the industry, Tuhy wrote, was the promised savings from mergers and acquisitions beginning to be realized. Abbott, for example, should begin fully realizing its synergies from its January 2017 acquisition of St. Jude Medical.
These developments should be enough to make up for “ongoing pricing pressures” from their customer base of U.S. hospitals. As those facilities face “weak inpatient volume trends” and pressure on reimbursements from commercial payers and Medicare, it will limit the potential growth for device companies.
“While we expect these pressures to continue, our positive outlook reflects aspects largely within device companies' control—innovative pipelines, operating costs and emerging market growth,” the report concluded.