Healthcare Market Restructuring to Surge in 2013

Mergers and acquisitions in the medical device market will increase sharply, joined by accelerated restructuring and cost cutting. These are the latest findings of Leerink Swann (Boston, MA, USA), a leading equity research and investment bank.

The report blames a bad global economy, health care reform, and the resulting cost pressures caused by the new US medical device tax—slated to go into effect on January 1, 2013—and an expected hike in dividend tax. The taxes, seen by the healthcare industry as job and innovation killers, are expected to be an accelerator for future restructuring initiatives, beyond plans that have already been announced by Johnson & Johnson, St. Jude Medical, Stryker, and others. And as a result of the device tax, the report predicts that small-cap medical technology companies will now face a longer path to profitability, which could lead many of them to seek a buyer with more financial reserves, rather than face a much harder time reaching profitability on their own.

During 2012, according to the report, medical device companies faced a number of outside factors that lead to major pricing pressure, starting from financial austerity in the European Union to high US unemployment, all leading to fewer medical procedures. That, and continued push-back from governments and insurers around the world to reduce costs will likely continue in 2013, with new threats from the US Centers for Medicare and Medicaid Services (CMS; Woodlawn, MD, USA) that will push for bundled payments and other health care payment changes that could affect sales levels.

On the positive side, the report predicts an accelerated push into emerging markets as a possible road likely giving device companies a new income source while markets in developed countries continue to stagnate. The report also predicts healthcare stocks once again to outperform in 2013, given a slow but steady US economic recovery, and the absence of inflationary pressures. The sectors that will outperform in 2013 are those where powerful and defensible intellectual property is being created, leading to improving healthcare products, compelling economics, and valuable competitive moats. Examples of such sectors include biotech and biopharma, where advances in Hepatitis C, dyslipidemia, and age-related macular degeneration (AMD) are eminent.

The new medical device tax imposes an excise tax on the sale of certain medical devices by the manufacturer or importer of the device, and will apply to sales of taxable medical devices after December 31, 2012. The tax is set at 2.3% of the sale price, with specific statutory exemptions for eyeglasses, contact lenses, and hearing aids. There is also an exemption for other devices that are of a type that are generally purchased by the general public at retail for individual use.

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Leerink Swann
US Centers for Medicare and Medicaid Services