Bryan Hughes, Director, P&M Corporate Finance01.30.17
Amid much pomp and circumstance, Donald J. Trump has been officially sworn in as the 45th U.S. president, bringing an end to the most inconceivable election cycle in modern history. As Trump’s reign begins, pundits, economists, and ordinary Americans who debated how a polarizing political newcomer beat a seasoned politician have shifted the discussion to understanding what the new administration means for them.
Truthfully, any administration change sparks the same questions. When a new CEO is appointed, or a business is acquired, that company’s employees, customers, and suppliers naturally wonder how the change will affect them. Typically, we try to manage the narrative. For example, when a private equity group acquires a medical technology supplier, its investors, consultants, and management teams spend countless hours putting together “100-day plans,” examining every aspect of the organizations and strategizing an agenda for the next chapter in the combined entity’s life.
Presidential transitions are no different, albeit on a much grander scale. Everyone, both at home and abroad, is invested in what Trump intends to accomplish in his first 100 days and throughout his term. Regardless of your political penchant, the ideological and policy differences between the Trump administration and former President Obama are quite clear.
There are not enough columns available, nor desire on this author’s part, to venture outside the question posed by the headline—how will the Trump administration’s policies affect medical technology merger and acquisition activity over the foreseeable future? As a bit of a disclaimer, while each of the following policy positions may lead to a positive environment for medtech M&A, the downside risk of uncertainty under a president who most are still trying to understand could potentially lead CEOs and corporate boards to hold off on external investments as they seek better clarity.
To best understand the potential environment for medical technology transactions, we must step back and examine the specific elements of Trump’s 100-day action plan as outlined in a late October speech. Central to this plan are three main tenets (in the president’s own words)—clean up Washington, protect American workers, and restore security and the constitutional rule of law; as well as a broad legislative agenda. Specifically, several items outlined in that speech will have an impact on healthcare and the medical technology market:
Economic Policies & Tax Reform
One of the early topics discussed at the recent J.P. Morgan Healthcare Conference was the potential impact of several changes to the U.S. tax code, which would allow for the repatriation of more than $2 trillion dollars in cash that domestic corporations hold overseas. Johnson & Johnson is likely one of the largest holders of overseas cash, estimated at approximately $40 billion, but many other medical device and pharmaceutical companies hold similarly large amounts. In a fireside chat at the conference, J&J CEO Alex Gorsky suggested “the sun, the moon, and the stars may actually align to bring about significant change,” later hinting that the odds of repatriating that cash have increased under the new administration. Besides an estimated $9 billion tax savings under the new plan, the tactical flexibility provided by the tax change will likely lead J&J to be more aggressive in pursuing M&A transactions as a means to bolster platforms and drive further shareholder growth. Once industry leaders like J&J start down that path, other industry participants presumably will follow.
It’s not just the tax cuts and repatriated cash that are expected to significantly impact medtech transaction activity—Trump’s tax plan also calls for lowering the corporate levy to 15 percent. While there is much debate among supporters of the plan, the general goal of driving investment and economic growth is the same. Ironically, these tax changes will cost companies like J&J more, but in aggregate the additional capital not going into government coffers is assumed to drive investment in R&D, new manufacturing facilities, and human capital. In turn, these investments could fuel future M&A.
Moreover, many corporate executives will gain confidence from the recent stock market performance post-election, and parlay that confidence into a more aggressive deal strategy. A more stimulative fiscal policy (increased infrastructure spending) will further support this confidence as expectations for GDP growth are likely to increase. Inflation will somewhat counter this and may ultimately drive higher interest costs for debt used to fund acquisitions. For the largest transactions, the administration’s position on antitrust issues still needs to be clarified. Although Trump the businessman wrote “The Art of the Deal,” Trump the president has criticized many large healthcare transactions, while several of his Cabinet nominees seem predisposed toward a more market-driven approach.
Affordable Care Act
Republicans in the U.S. House of Representatives and U.S. Senate have long made repeal of the Affordable Care Act (ACA) their primary legislative objective. Trump’s healthcare policy proposals have focused on repealing and replacing the ACA, but he has provided few details on what would actually replace it. Rather, his proposals have focused on high-level, free market-based reforms. As such, the two branches’ consolidated view will likely push for elimination of individual and employer mandates and minimum benefit packages, expanding the use of health savings plans and potentially providing Medicaid block grants to states.
If the ACA is repealed without replacement mechanisms in place, an estimated 18 million people could lose health insurance. Moreover, Republican support to allow individuals under age 26 to remain on their parents’ insurance, and a ban on denials for pre-existing conditions would put budgetary pressure on any repeal. These realities are prompting Trump and Congressional Republicans to apparently shift toward a more deliberate approach to repeal and replace the ACA. This may take several months to play out and, in the interim, will only create further uncertainty for healthcare deal makers. However, many observers believe that programs started under ACA will continue to gain “free-market steam” and have a larger positive impact than any potential changes from the repeal/replace process. If so, the uncertainty may end up being more detrimental to near-term transaction activity than any potential change itself.
Medtech Regulatory Environment
After the nomination of U.S. Congressman and orthopedic surgeon Dr. Tom Price for U.S. Secretary of Health and Human Services (HHS), the Medical Device Manufacturers Association commented: “Medtech innovators continue to deliver on the promise of a better tomorrow, and we will work with Dr. Price to bridge the gap between the regulatory pathways and securing fair reimbursement.” The hope underlying this view is that changes at HHS and the U.S. Food and Drug Administration (FDA) will lead to a “pro-innovation” environment through a more transparent and flexible FDA. The FDA nominee is still unknown, but the consensus on those proposed is each would take a more progressive view to drug and device approvals. While this has generated justified concerns around safety standards, many would consider the reduced regulatory burden as being positive for medtech M&A.
One of the first orders of business for the Republican-controlled Congress may be permanently repealing the 2.3 percent medical device tax, currently suspended through the end of this year.
Together with a “pro-innovation” environment, these regulatory changes are likely to spawn new entrepreneurial device companies, which, in turn, will eventually lead to greater M&A opportunities. As Advanced Medical Technology Association President Scott Whitaker shared in a letter to Vice President Mike Pence, “[the] medical device tax has been a significant drag on medical innovation, and resulted in the loss or deferred creation of jobs, reduced research spending, and slowed capital expansion.” A permanent repeal coupled with a more industry-friendly FDA could likely drive continued investment, industry growth, better outcomes for patients, and more deals.
Trade Policy
Trump launched his presidential campaign in large part by vowing to bring American jobs back from low-cost regions and getting tough on “unfair” trade deals with China. With an estimated $45 billion of medical products exported versus $54 billion in imports, the United States is a net importer of medical products; thus, any toughening of trade policy may cause some hesitation in M&A activity.
In a CNBC commentary piece, Wilbur Ross and Peter Navarro, Trump’s picks for Commerce Secretary and National Trade Council, respectively, suggested that tough negotiations could fix U.S. trade policy. Generally targeting China, the two outlined several objectives of new trade deals, including:
As a whole, 2017 will be an interesting year for the medtech industry and for broader M&A activity. At the intersection of the two, the sweeping changes that are likely to occur will have a lasting impact on investment and transaction activity for medical product suppliers.
Bryan Hughes is a director of PMCF and leads the firm’s medical technology team. His practice focuses on assisting clients with mergers and acquisitions, leveraged buyouts, private placements, financings, valuation and strategic consulting. His clients have ranged from global medical technology companies to small, privately held businesses.
Truthfully, any administration change sparks the same questions. When a new CEO is appointed, or a business is acquired, that company’s employees, customers, and suppliers naturally wonder how the change will affect them. Typically, we try to manage the narrative. For example, when a private equity group acquires a medical technology supplier, its investors, consultants, and management teams spend countless hours putting together “100-day plans,” examining every aspect of the organizations and strategizing an agenda for the next chapter in the combined entity’s life.
Presidential transitions are no different, albeit on a much grander scale. Everyone, both at home and abroad, is invested in what Trump intends to accomplish in his first 100 days and throughout his term. Regardless of your political penchant, the ideological and policy differences between the Trump administration and former President Obama are quite clear.
There are not enough columns available, nor desire on this author’s part, to venture outside the question posed by the headline—how will the Trump administration’s policies affect medical technology merger and acquisition activity over the foreseeable future? As a bit of a disclaimer, while each of the following policy positions may lead to a positive environment for medtech M&A, the downside risk of uncertainty under a president who most are still trying to understand could potentially lead CEOs and corporate boards to hold off on external investments as they seek better clarity.
To best understand the potential environment for medical technology transactions, we must step back and examine the specific elements of Trump’s 100-day action plan as outlined in a late October speech. Central to this plan are three main tenets (in the president’s own words)—clean up Washington, protect American workers, and restore security and the constitutional rule of law; as well as a broad legislative agenda. Specifically, several items outlined in that speech will have an impact on healthcare and the medical technology market:
- Broad easing of federal regulations
- Renegotiating the North American Free Trade Agreement / Identifying foreign trading abuses
- Middle Class Tax Relief and Implication Act
- End the Offshoring Act
- Repeal and replace the Affordable Care Act
Economic Policies & Tax Reform
One of the early topics discussed at the recent J.P. Morgan Healthcare Conference was the potential impact of several changes to the U.S. tax code, which would allow for the repatriation of more than $2 trillion dollars in cash that domestic corporations hold overseas. Johnson & Johnson is likely one of the largest holders of overseas cash, estimated at approximately $40 billion, but many other medical device and pharmaceutical companies hold similarly large amounts. In a fireside chat at the conference, J&J CEO Alex Gorsky suggested “the sun, the moon, and the stars may actually align to bring about significant change,” later hinting that the odds of repatriating that cash have increased under the new administration. Besides an estimated $9 billion tax savings under the new plan, the tactical flexibility provided by the tax change will likely lead J&J to be more aggressive in pursuing M&A transactions as a means to bolster platforms and drive further shareholder growth. Once industry leaders like J&J start down that path, other industry participants presumably will follow.
It’s not just the tax cuts and repatriated cash that are expected to significantly impact medtech transaction activity—Trump’s tax plan also calls for lowering the corporate levy to 15 percent. While there is much debate among supporters of the plan, the general goal of driving investment and economic growth is the same. Ironically, these tax changes will cost companies like J&J more, but in aggregate the additional capital not going into government coffers is assumed to drive investment in R&D, new manufacturing facilities, and human capital. In turn, these investments could fuel future M&A.
Moreover, many corporate executives will gain confidence from the recent stock market performance post-election, and parlay that confidence into a more aggressive deal strategy. A more stimulative fiscal policy (increased infrastructure spending) will further support this confidence as expectations for GDP growth are likely to increase. Inflation will somewhat counter this and may ultimately drive higher interest costs for debt used to fund acquisitions. For the largest transactions, the administration’s position on antitrust issues still needs to be clarified. Although Trump the businessman wrote “The Art of the Deal,” Trump the president has criticized many large healthcare transactions, while several of his Cabinet nominees seem predisposed toward a more market-driven approach.
Affordable Care Act
Republicans in the U.S. House of Representatives and U.S. Senate have long made repeal of the Affordable Care Act (ACA) their primary legislative objective. Trump’s healthcare policy proposals have focused on repealing and replacing the ACA, but he has provided few details on what would actually replace it. Rather, his proposals have focused on high-level, free market-based reforms. As such, the two branches’ consolidated view will likely push for elimination of individual and employer mandates and minimum benefit packages, expanding the use of health savings plans and potentially providing Medicaid block grants to states.
If the ACA is repealed without replacement mechanisms in place, an estimated 18 million people could lose health insurance. Moreover, Republican support to allow individuals under age 26 to remain on their parents’ insurance, and a ban on denials for pre-existing conditions would put budgetary pressure on any repeal. These realities are prompting Trump and Congressional Republicans to apparently shift toward a more deliberate approach to repeal and replace the ACA. This may take several months to play out and, in the interim, will only create further uncertainty for healthcare deal makers. However, many observers believe that programs started under ACA will continue to gain “free-market steam” and have a larger positive impact than any potential changes from the repeal/replace process. If so, the uncertainty may end up being more detrimental to near-term transaction activity than any potential change itself.
Medtech Regulatory Environment
After the nomination of U.S. Congressman and orthopedic surgeon Dr. Tom Price for U.S. Secretary of Health and Human Services (HHS), the Medical Device Manufacturers Association commented: “Medtech innovators continue to deliver on the promise of a better tomorrow, and we will work with Dr. Price to bridge the gap between the regulatory pathways and securing fair reimbursement.” The hope underlying this view is that changes at HHS and the U.S. Food and Drug Administration (FDA) will lead to a “pro-innovation” environment through a more transparent and flexible FDA. The FDA nominee is still unknown, but the consensus on those proposed is each would take a more progressive view to drug and device approvals. While this has generated justified concerns around safety standards, many would consider the reduced regulatory burden as being positive for medtech M&A.
One of the first orders of business for the Republican-controlled Congress may be permanently repealing the 2.3 percent medical device tax, currently suspended through the end of this year.
Together with a “pro-innovation” environment, these regulatory changes are likely to spawn new entrepreneurial device companies, which, in turn, will eventually lead to greater M&A opportunities. As Advanced Medical Technology Association President Scott Whitaker shared in a letter to Vice President Mike Pence, “[the] medical device tax has been a significant drag on medical innovation, and resulted in the loss or deferred creation of jobs, reduced research spending, and slowed capital expansion.” A permanent repeal coupled with a more industry-friendly FDA could likely drive continued investment, industry growth, better outcomes for patients, and more deals.
Trade Policy
Trump launched his presidential campaign in large part by vowing to bring American jobs back from low-cost regions and getting tough on “unfair” trade deals with China. With an estimated $45 billion of medical products exported versus $54 billion in imports, the United States is a net importer of medical products; thus, any toughening of trade policy may cause some hesitation in M&A activity.
In a CNBC commentary piece, Wilbur Ross and Peter Navarro, Trump’s picks for Commerce Secretary and National Trade Council, respectively, suggested that tough negotiations could fix U.S. trade policy. Generally targeting China, the two outlined several objectives of new trade deals, including:
- Prompt triggers and automatic renegotiations if trade gains are unfair
- Prompt relief against non-tariff barriers
- Ironclad sanctions against currency manipulation
- No tolerance on IP theft
- Stringent environmental, health, and safety standards
As a whole, 2017 will be an interesting year for the medtech industry and for broader M&A activity. At the intersection of the two, the sweeping changes that are likely to occur will have a lasting impact on investment and transaction activity for medical product suppliers.
Bryan Hughes is a director of PMCF and leads the firm’s medical technology team. His practice focuses on assisting clients with mergers and acquisitions, leveraged buyouts, private placements, financings, valuation and strategic consulting. His clients have ranged from global medical technology companies to small, privately held businesses.
