Wells Fargo Securities LLC recently published The MedTech Manual – 2020 Outlook, in which it says the medical device sector “will continue to be a port in the storm because the political focus will remain on drug pricing and increasing access to [health care].”
Overall, the industry has performed quite well in comparison with other health care sectors during 2019. The financial firm’s senior analyst Larry Biegelsen and colleagues wrote that they expect the medical device sector to continue moving in a positive direction despite Medicare for All (MFA) rhetoric and an upcoming presidential election.
Risks for the industry in 2020 “are largely manageable,” their report says. Despite the repeal of the med-tech tax, there are, however, some issues directly ahead that may continue to affect the industry, including a business slowdown in China and a cautious FDA.
The $1.4 trillion appropriations package for 2020 that included a repeal of the 2.3% medical device tax was expected to be signed into law by the president before midnight Dec. 20. The tax was instituted in 2013 to support the Affordable Care Act, although it was suspended twice from 2016-2017 and again from 2018-2019.
Following U.S. Senate passage of the device tax repeal Dec. 19, Mark Leahey, president and CEO of the Medical Device Manufacturers Association, commented that the day marks the culmination of 10 years of engaging “Congress to stop the medical device tax from punishing patient care and job creation.”
Advanced Medical Technology Association (Advamed) president and CEO Scott Whitaker said that without the repeal, “the industry would be facing massive job losses and cuts to the very research and development we need to save and improve patients’ lives.”
With that obstacle set aside, the industry is now facing the continuing China tariffs. The Wells Fargo report says that through the end of October, U.S. tariffs had applied to $5 billion worth of medical device products from China.
“China has retaliated with its own tariffs on $185 billion worth of goods imported from the United States, including nearly $5 billion worth of medical technology products,” the report says, adding that Advamed and med-tech companies are lobbying to limit the products affected.
Although Biegelsen and colleagues say MFA is unlikely to occur, “the greatest pressure on medical devices would come from commercial pricing coming down to Medicare pricing for procedures.”
Medicare, for instance, pays 35% less than commercial payers, but that loss could be offset by the increase of those with health insurance and because Medicare does not restrict utilization as much as private payers.
Med tech is somewhat insulated from pricing pressures because health care providers purchase devices used in procedures, and the cost is indirectly paid for by payers, “which makes it difficult for a payer such as Medicare to arbitrarily lower the cost of a device,” the Wells Fargo report states.
One other issue facing the med-tech industry is increasing control by the FDA. A Wells Fargo analysis through November 2019 found that there were 57 novel device approvals during the year, implying 64 pro-rated, down significantly from the 101 approvals in 2018, which was a record year.
At the same time, devices have become subjected to increasing FDA post-marketing surveillance.
“The decline in novel approvals in 2019 appears to be due to a drop in submission volume by the companies, as opposed to longer FDA approval times or lower FDA approval rates,” Biegelsen and colleagues wrote. “Regarding post-market data, we believe the FDA is taking a more aggressive stance toward approved devices with potential safety signals.”
According to data tracked by the Wells Fargo analysts, large-cap medical device companies are underperforming the S&P 500 as well as the biotech sector; however, they are outperforming the pharmaceutical and health care services sectors. Small/mid-cap medical device companies, however, are following the same path as the larger S&P 500 index, and they are outperforming all three of the other sectors.
Company financial performance in 2019 “generally exceeded expectations,” according to the report, with most of Wells Fargo’s covered medical device companies announcing quarterly sales and/or earnings per share that exceeded consensus estimates despite “currency headwind being somewhat worse than expected for a number of our companies this year.”
The analysts expect currency to remain a headwind in 2020, but “most companies will likely try to offset as much of the FX headwind as possible, but may not be able to fully absorb the impact” with other looming issues, such as the China tariff.