Hopefully not lost in all the comings and goings of more than 8,500 people at the J.P. Morgan Healthcare Conference in San Francisco last week were some important take-home messages about the future of med-tech, a future that promises many challenges for the industry, but also many rewards for those willing to follow promising trends.
1. Healthcare Information Technology is going to be big this year and probably into the foreseeable future. This is the final year in which hospitals and physicians can demonstrate meaningful use and get maximum healthcare dollars under the stimulus, so there should probably be some clarification coming as to which vendors are winners and which are losers. Additionally, the marriage of smartphones and remote monitoring technologies will continue, but will HIPAA compliance rules put a damper on this rapid integration?
2. Continuing on its current course, healthcare reform in the U.S. will further drive hospitals and surgeons to cut costs, which means that anything not deemed "cost effective" will in all likelihood not be utilized by either group. The downturn in the U.S. economy has also contributed to this trend. Additionally, the rapid rise in high deductible, high co-pay health plans has shifted much of the financial burden for healthcare onto the consumer, which will bolster the trend towards looking for cost efficiencies to all three groups.
3. The lure of international markets to offset problems in both the U.S. and Europe will be of interest to both current med-tech companies and those that invest in the sector. At the meeting, there were tracks on two days dedicated to China and Asia as a whole. Other areas with a rising, and potentially enormous, middle class that could afford more expensive healthcare are India and Brazil.
4. The med-tech excise tax of 2.3% on all U.S. device sales has yet to kick in (it is slated to take effect in January 2013). The average EPS hit to large-cap stocks is 3.7%. For small-cap stocks, the hit ranges from 6% to 13%, depending on the company's U.S. exposure and where it is on the profitability curve. There is still hope that this tax percentage can be lowered, especially for the innovative small-cap companies that are the lifeblood of the med-tech industry in the domestic market
Through September 2011, med-tech outperformed the market by nearly 3%, according to J.P. Morgan. However, 4Q11 was a disaster. Indeed, it was the worst quarterly performance in the sector (-8.5% vs. S&P 500) in more than a decade. If things are going to improve in the sector, either fundementals will need to stabilize and then improve, or there will need to be increasing levels of interest from strategic or financial sponsors.