Medtech outlook 2013: Major environmental factors for the year ahead

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Wall Street analysts released their predictions for the major medical device industry trends of 2013, and the outlook isn’t much to celebrate.

In a report released late last year Leerink Swann analysts outlined a handful of predictions for 2013, generally projecting dampened sales growth and enduring, if not increasing, pricing and reimbursement pressures as frugality continues to drive healthcare.

"Today medtech companies face maturing end-markets, ongoing macroeconomic challenges, and a changing healthcare environment – all of which are likely to pressure growth acceleration prospects broadly speaking," analysts Danielle Antalffy and Richard Newitter wrote.

Challenges in the U.S. economic climate may spur an increase in medtech M&A activity, they added, and investors will look for companies with "exposure to new product cycles and/or faster-growing end-user markets," they added.

This year will also likely see more restructuring efforts and device makers cope with the medical device tax, and perhaps a stronger push into emerging markets in order to make up for the sluggish environment in developed markets.

The Swann analysts broke down their 2013 predictions into 9 parts:

  1. "Top-line growth acceleration in large-cap medtech likely muted" – That means about 3% sales growth for large-cap companies, with the exception of companies like Edwards Lifesciences (NYSE:EW) and Intuitive Surgical (NSDQ:ISRG). Those companies are operating in the transcatheter aortic valve and robot-assisted surgery segments, which the Swann analysts pegged as ones with faster-growing end-user markets.
  2. "More restructuring and op-ex cuts likely in an effort to offset the medtech tax" – Despite the industry’s best efforts device makers will start making their 1st device tax payments as early as this month, and they’re likely to have a hard time passing on that cost to customers given hospitals’ focus on driving down healthcare costs. Large-cap companies may turn to operational cuts, such as layoffs, in order to offset the new cost.
  3. “small-cap medtech path to profitability likely lengthened” – Smaller companies will generally have a tougher time absorbing the new medical device tax, meaning a longer road to profitability and possibly higher interest in selling to a larger company.
  4. “Industry price/volume/reimbursement pressures unlikely to dissipate and could even intensify” – Major medtech hurdles aren’t going anywhere in 2013, including economic turmoil in Europe, reimbursement pressure, high unemployment and related lack of access to healthcare and more physicians joining hospital groups in order to gain bargaining leverage. Other environmental factors may even get worse, such as the new Medicare cuts included in the fiscal cliff deal, a new Medicare bundled payment imitative that may favor older and cheaper devices, growing price and volume pressures as Accountable Care Organizations look for ways to trim costs from healthcare and a possible increase in scrutiny on procedures deemed controversial or unnecessary.
  5. “Further expansion into faster-growth emerging markets necessary to
    counter slowing growth trends in developed markets”
    – A significant portion of large medtech companies derive between 40%-60% of their revenue from markets outside the U.S., including from the so-called "BRIC" countries of Brazil, Russia, India and China, and those percentages are likely to grow in 2013. This year will likely see more overseas M&A and other measures designed to gain a foothold in emerging markets, including devices tailored to meet local technology and pricing needs.
  6. “Cardiology pricing and procedures likely still under pressure” – The cardiology slump, a major feature of the U.S. healthcare market for the past several years, will keep right on slumping. 2013 will see more declines in the large cardiology markets in the U.S., such as cardiac rhythm management devices and drug-eluting stents. Overseas cardiology markets may make a turnaround from last year’s slide to sees some modest growth this year.
  7. “In orthopedics, at best we expect stable price/volume trends” – The orthopedics market looks to be stagnant for this year as downward pricing pressures look to negate modest volume growth. The orthopedics extremities segment may see above-average growth, but pressure on spinal devices will keep that segment from making any "significant" moves in the next year. Some growth opportunities do exist, such as for MIS spine procedures, and smaller spine companies are poised to continue taking share from the big dogs.
  8. “Higher payout ratios likely on tap” – Device makers this year will likely focus on handing large sums back to shareholders as investors seem to be leaning toward companies with buyback and dividend plans rather than those that put their money back into their business. M&A activity is poised to be the top cash draw for large-cap device makers, but more companies may shift to higher payout strategies.
  9. “‘High growth’ medtech market opportunities are scarce … but ones that
    remain should continue to draw increasing levels of investor attention”
    – Top areas of interest in 2013 include transcatheter valves, left ventricular assist devices, cervical discs, renal denervation and robotics.

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