During a recent flight from Washington, D.C., to Detroit, a fellow business traveler noticed me bangingaway on my trusty MacBook and asked what I do for a living. I said I was an editor in the
medtech field. All he said was: “You’ve had plenty to report on recently.” (He was a pharmaceutical company rep.) Yeah, you could say that. The recent news of possible fees levied against the device industry as part of proposed healthcare legislation in the House and Senate has fanned the flames of uncertainty in the past few months, created more doubt (if that’s possible) and even more press.
This has been an all-around-tough year for most businesses. Take a large dose of economic upheaval and mix it with the industry’s trepidation about healthcare reform and you’ve the makings of difficult time for medical device manufacturers. This, of course, isn’t news. We’ve discussed this ad nauseam in the pages of Medical Product Outsourcing, online, at conferences—you name it—during the last year.
Being the eternal optimist, I’m inclined to think that 2010 will be better for the industry. But, unfortunately, optimism alone won’t get the job done. Traditionally, the November/December issue of MPO has been our time to take stock of the past year and predict—with the help of industry experts and some educated hindsight—what the coming year may hold. Our year in review (page 40) reveals that medical device executives are bullish on the prospects for a new year, but can’t shake the wait-and-see attitude. Unanswered questions breed nervousness.
Industry analyst Rick Wise, with Boston, Mass.-based investment bank Leerink Swann said that the overall outlook for medtech firms “depends in part on full resolution of the healthcare reform issue, so Washington is out of the mix.”
Wise told medical device industry veteran journalist Jim Stommen (former executive editor of Medical Device Daily) in this issue of MPO that 2010 should be “a better year” for medical device firms from a financial perspective, especially the large-cap companies, because some form of healthcare reform will then be in place.
“Uncertainty is greater than actual negative news, which can be defined, analyzed, discounted. [So] if the uncertainty of healthcare reform can be resolved, it seems to me that investors will once again be free to look at the fundamentals of these excellent companies who have strong balance sheets, global franchises, solid top- and even faster bottom-line growth because of leverage, mix, etc.”
Ben Dunn, managing director with Covington Associates (also in based in Boston), was a little more cautious.
“My sense is there still is going to be uncertainty, even when the bill is signed. The bill is so lengthy, so arcane and confusing, that it is going to take a while for people to figure out how it will specifically impact device companies, because medtech companies are one step removed. That said, it will be a relief for people to say, ‘OK, at least this thing is out there and we at least know what it is.’ But in terms of seeing the full effect, it’s going to take a couple of years.”
Dunn said it would take time to see how a healthcare bill, if passed, would affect individual sectors. “Those are all things that will take some time to play out. But at least if we have the bill out there, there will be something there for people to sink their teeth into and begin to think about,” he added.
Ernst & Young analyst Richard Ramko said firms are going to have to improve outcomes and cut costs. “Companies will have to be careful,” he said. “With healthcare reform, more people will be covered, but we’ll see growing pricing pressures across healthcare.” He noted cardiovascular, orthopedics and women’s health as particular medtech sectors that may do well in 2010.
New cost pressures already are playing out. In early November, Johnson & Johnson announced plans to lay off as many as 8,200 workers worldwide in order to save up to $1.7 billion in 2011. According to the company, the cuts were prompted in part by expectations for more economic pressure that has hurt device industry sales all year (though the layoffs will impact the entire company, not just device-related units). While the government says the economy is growing again, a move like this by J&J could signal that the industry needs more time to adjust and recover from shrinking hospital budgets, a slowdown in elective procedure rates and pressure on device prices. William Weldon, the company’s CEO, said pressure on devices and consumer products won’t alleviate until the employment picture also improves, and that’s expected to take a while. Elective surgery rates and hospital spending on capital equipment are closely tied to U.S. unemployment.
Analysts did say that over the long term, the industry is still poised for growth and fundamentals are strong, though this current “adjustment” period may test companies’ mettle. In the coming year, one of our goals at MPO is to closely chart the interconnectivity of different sectors of the medical device industry—from OEMs to contract manufacturers, suppliers, raw materials and service providers, and even hospitals—and find out how the market and technology challenges of each affect each other as well as the overall industry’s health. We hope this provides a little clarity, perhaps a few “aha” moments, and tools to do business better and smarter. As you reflect on the past year and move into the new one, please feel free to share any lessons learned. We’d be happy to hear from you.
Here’s to a robust 2010!