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SOURCE Zacks Investment Research, Inc.
CHICAGO, May 2, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the MedTech, including Zimmer Holdings (NYSE:ZMH-Free Report), Thermo Fisher Scientific (NYSE:TMO-Free Report), Smith & Nephew plc (NYSE:SNN-Free Report) and Arthrocare Corporation (Nasdaq:ARTC-Free Report).
The medical devices industry, which was once acclaimed for its high-paying jobs and research and development opportunities, has been subject to the much controversial 2.3% medical device excise tax since its enactment in the beginning of 2013. Sequestration-related spending cuts to the U.S. federal budget have also undermined the medical devices industry's prospects. In fact, this has significantly restricted the industry's bottom-line improvement in the past year.
Partial Repeal: A Boon?
However, as a slight respite, in Jan 2014, the National Institutes of Health (NIH) got a $1 billion or 3.5% boost to its fiscal 2014 budget from the prior-year post-sequestration budget (according to fiscal 2014 Omnibus Appropriations bill, released on Jan 13, 2014). According to a statement by appropriators, this hike, although insignificant, is expected to result in 385 million new grant opportunities for researchers compared to 2013. We note that the sequestration, which resulted in a 5.5% cut in the NIH fiscal 2013 budget, resulted in 640 fewer grants in 2013.
Apart from NIH, the National Institutes of Standards and Technology, The National Science Foundation (NSF), health professions and nursing workforce development programs are some of the others to gain from this bill.
The U.S. Food and Drug Administration (FDA) has also managed to get $2.552 billion through this omnibus spending package, a $166 million (7%) increase over the fiscal 2013 post-sequestration funding level. The Centers for Disease Control and Prevention (CDC) received a $370 million or 6.8% increase over the year-ago post-sequestration funding level.
Situation Remains Bleak
Even more than three months after the Senate passed the Omnibus Appropriations bill, the research funding scenario continues to look bleak. Most economists are of the opinion that with cost of research rising astronomically, this nominal revision can hardly bring any reprieve. While the additional funding for NIH will help sustain current projects and begin funding for new research grants, this is still $714 million short of NIH's pre-sequestration budget.
Further, things are not at all cheery for the Centers for Medicare and Medicaid Services (CMS). While the bill included $3.7 billion for the CMS, this was $195 million less than what was enacted in the previous fiscal.
Unless totally repealed or replaced, these spending cuts will last through 2021. NIH expects sequestration to turn graver in the coming years leading to serious consequences like delaying progress in medical breakthroughs, deterioration in job creation and tempering of economic growth. An NBC news article recently noted that many new researchers, who were trained with the U.S. taxpayers' money, may have to move to Europe and Asia where government funding for medical research is on the rise.
Moreover, the medical device excise tax is taking a heavy toll on the MedTech sector, hurting pricing decisions of companies and subjecting them to tremendous margin pressure. The 2.3% excise tax (effective Jan 2013), which is imposed on the sales price instead of net profit, amounts to a sizable sum, wiping out almost a quarter of the profit at the med instrument owners.
The big players are trying out ways to change their business model and cost structure to accommodate the excise tax. These companies are undertaking various restructuring initiatives to counter costs incurred from the implementation of the new tax. Restructuring especially to offset the effect of the excise tax has already been adopted by several key players. The companies are also trying to focus on strategic mergers and acquisitions (M&A), emerging market expansion or are reducing operations in order to weather the tax burden.
MedTech M&A continues unabated in 2014. Wary of an uncertain economy, MedTech giants have resorted to the acquisition route to harness their strengths and diversify offerings.
The first quarter earnings season in the medical device sector kicked off with such a mega acquisition announcement. Last week, on its earnings call, Zimmer Holdings (NYSE:ZMH-Free Report) disclosed that it has entered into a definitive agreement to acquire Biomet, Inc. -- a provider of surgical and non-surgical products -- for a transaction value of $13.35 billion. According to Zimmer, with the successful completion of this acquisition, it will be better able to capture the $45 billion musculoskeletal industry.
Another noteworthy move in recent times is the colossal $13.6 billion takeover of Life Technologies Corporation by its major peer Thermo Fisher Scientific (NYSE:TMO-Free Report) which closed in February. In the same month, artificial knee and hip maker Smith & Nephew plc (NYSE:SNN-Free Report), entered into an agreement to buy Arthrocare Corporation (Nasdaq:ARTC-Free Report) for $1.7 billion in order to expand its product line in sports medicines.
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