Moody's Investors Service has released its Healthcare Quarterly newsletter, which is focused on developments to watch for in 2016 in a number of sectors, including the medical device industry.
Here are three insights:
1. M&A integration and deleveraging. Moody's expects the companies created by Medtronic, Becton, Dickinson and Co., and Zimmer Biomet Holdings to continue to deleverage in 2016. The companies' ratings were downgraded by Moody's in 2015 due to increases in their leverage. Synergies will help boost these companies' earnings and cash flow and help support an overall positive outlook for the medical device sector in 2016. Additionally, the legislation stalling the U.S. medical device tax will help boost the industry's earnings growth in 2016.
2. Pricing pressure on orthopedic implants. Hospitals' ability to negotiate more favorable prices will continue to increase as they employ more physicians in 2016. CMS' bundled payments initiative for hip and knee replacements, beginning on April 1, is credit negative for the largest orthopedic device companies, including Stryker, Zimmer Biomet and Johnson & Johnson. Zimmer Biomet is the most vulnerable to bundling because it derives about 65 percent of its revenues from hip and knee devices.
3. Product pipeline and reimbursement coverage. A number of device companies have recently received or are expected to receive U.S. and EU regulatory approvals for new products, which will contribute to sales growth in 2016. However, hospital reimbursement from CMS and other payers will ultimately affect sales the most.