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Why investors will continue to embrace the medical device industry

The following post is sponsored by GE Capital Healthcare Financial Services. Against a backdrop of […]

The following post is sponsored by GE Capital Healthcare Financial Services.

Against a backdrop of slowing healthcare expenditures and ongoing implementation of the Affordable Care Act (ACA), the dynamics of the U.S. medical device industry have become increasingly fluid. In this article, Elliot Hyun, a medical device analyst at GE Capital Healthcare Financial Services, discusses the current status of the industry – and what lies ahead for investors.

Q. What is the state of the medical device industry?

A. Broadly speaking, we have seen growth slow in recent years, as the industry has grappled with both persistent utilization softness following the end of the most recent economic downturn as well as the increasingly real headwind of pricing pressure from customers. As such, we believe industry growth has slowed from the mid-high single-digit range prior to the recession to the low single-digit area today.

A more modest organic growth environment, coupled with a rapidly changing healthcare landscape, has impacted the industry’s approach to innovation as well. On one hand, we have seen greater emphasis on product development initiatives aimed at delivering cost savings for both customers as well as the overall healthcare system, while also driving evidence-based improvement in patient outcomes. In addition, we have seen an increasing propensity of device companies to look into adjacent spaces via partnerships/acquisitions to help achieve growth objectives.

Q. What is the latest with regard to industry regulation and oversight by the FDA?

A. On the pre-market side, there has been a perception of a lack of transparency and resulting unpredictability as it relates to the 510(k) and PMA regulatory approval pathways that has led many companies to contemplate commercializing products abroad before attempting to do so in the U.S. While we have seen some improvement in industry sentiment, we continue to sense an ongoing level of heightened frustration among both smaller and larger device companies with regard to pre-market regulatory consistency as it relates to the FDA. One common sentiment we hear is that earlier and more frequent interaction with the agency during the regulatory review process typically leads to a smoother experience.

On the post-market side, heightened enforcement activity (inspection findings, recalls, warning letters, etc.) and greater public scrutiny around post-market safety issues (e.g. metal-on-metal hips, defibrillator leads, infusion pumps, AEDs, etc.) has given incremental pause to investors and operators alike, elevating the prominence of regulatory diligence when evaluating potential deal opportunities.

On balance, we believe the combination of pre- and post-market concerns with respect to the FDA in recent years has certainly increased investor awareness of the risks of pursuing an investment in the device sector and influenced expectations around the potential time frame to realizing a successful exit, but have not significantly dampened investor interest in pursuing opportunities in the space.

Q. What about healthcare reform? Any visible trends investors should know about?

A. With regard to ongoing implementation of the ACA, the most tangible impact on the device industry to date has been the imposition of a 2.3 percent excise tax since the beginning of the year, which is expected to generate roughly $30 billion over 10 years. This burden may be offset to an extent by incremental sales volume resulting from an expected increase in the number of insured people; however, there is a significant amount of industry skepticism around the potential magnitude of such a pickup. Earlier stage companies – which have historically been key drivers of innovation in the device industry – may be particularly vulnerable to the new sales-based (as opposed to profit-based) tax.

Beyond the device tax, an increasingly challenging provider reimbursement landscape and the potential emergence of new payment models represent incremental uncertainties that investors must grapple with as they evaluate opportunities in the device space.

Q. What’s the outlook for investors?

A. By and large, we feel very good about the prospects for the medical device industry going forward. Contrary to the conventional belief that devices are an outsized contributor to growing healthcare costs, studies have shown that device spending as a percentage of overall healthcare expenditures in the U.S. has actually remained remarkably consistent over the past few decades. In addition, I think one would also be hard-pressed to argue that innovation in the device space has not made a significant contribution in improving patient outcomes across virtually every care setting over that time frame as well.

Coupled with the fact that the vast majority of devices are not directly reimbursed; often enjoy a shorter, more predictable commercialization pathway than other healthcare product areas (such as pharmaceuticals); and that many therapeutic sub-segments continue to harbor attractive growth prospects, we continue to see significant interest among investors in the device sector and remain committed to financing opportunities in the space.

The statements above are the personal views of Mr. Hyun and are not representative of the General Electric Company.

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