Why Obamacare creates uncertainty in medical device maker outlooks

Market Realist

Medical device industry risks and opportunities (Part 1 of 2)

Corporate venture capital falls to a five-quarter low

CB Insights found that corporate venture capitalists only invested $369 million in the healthcare market this past quarter, compared to a high of $535 million in Q4 last year. Deals declined similarly by 60% from the last quarter. The drop in investment is most likely due to changes in the economic environment as the healthcare system braces for the majority of Obamacare initiatives to hit in 2014. The drop also follows intuition, as the healthcare industry is generally quite risk-averse and risk is abundant because the individual market for health insurance is opening up and minimum health coverage mandates are going into effect.

Good news for the medical device industry is that the second biggest deal in the industry in Q3 was for ReVision Optics, which raised $55 million from investors, including Johnson & Johnson (JNJ).

McKinsey analysts present a five-year outlook

Hospitals’ margins will improve in the near term, as the amount of insured people will increase. Analysts estimate that by 2016, 70% of hospitals will have their margins increase by 25%. Unfortunately, they expect hospitals will use these dollars to optimize operations rather than on device spending. Also, although they expect margin improvements in the short term, they expect reductions in reimbursement will lead to 50% margin cuts by 2019.

Group purchasing will increase as hospitals try to make more analytics-based decisions. As a result, a stronger lens will be placed on device manufacturers and the value of their products. This can be a stressor on revenue and reimbursement and a significant risk for device companies. Physician buying power will also dwindle, removing brand competition as purchasing consolidates, targeting single brands.

Consolidation will continue into the hospital space. Mergers and acquisitions have been consistently trending upward in the hospital space, and by the end of the decade, 66 hospital systems are expected to account for more than two-thirds of all revenue. This can be both good and bad for device manufacturers. Client consolidation could lead to a reduction in selling expenses, which could be great for device-making behemoths like Medtronic (MDT) and GE Healthcare (GE). However, competition for these large system contracts will be abundant.

Continue to Part 2

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