Contending Budget Proposals: Which Will Suit the MedTechs Most?
In response to the President’s proposed budget for 2016 in early February, the House Republicans last week came out with a sharp contrast in their budget plan specifically in the field of health care. While President Obama proposed his plan to repeal the long-debated automatic and harmful spending cuts known as sequestration by cutting inefficient spending and closing tax loopholes, he also put forward his idea of a more sustainable growth path by achieving $1.8 trillion in deficit reduction, primarily from reforms in health programs, the tax code and immigration.
The President’s 2016 budget had proposed robust investments in research and development (R&D), which will lead to new products, capabilities and industries needed for sustainable economic growth. The budget has allotted $31.3 billion to the National Institutes of Health (NIH) to support biomedical research, a $1 billion increase over 2015 funding. According to a report by FASEB (the Federation of American Societies for Experimental Biology), this is a 3.3% ($1 billion) year-over-year increase from the enacted fiscal 2015 level. Overall, the budget provides $146 billion for R&D, a 5.5% increase from fiscal 2015.
In addition to NIH funding, the budget also included $7.7 billion in funding for the National Science Foundation (NSF), up 5.2% over 2015 and more than $5.3 billion for the Department of Energy's Office of Science (up 5.4%), among others. The U.S. Food and Drug Administration (FDA) has requested a budget of $4.9 billion to protect and promote public health as part of the President’s fiscal 2016 budget, which is a 9% increase over the enacted budget for fiscal 2015.
The ‘Balanced Budget’ by the Republicans in Congress, on the other hand, offered the repeal of the Affordable Care Act (ACA, or "Obamacare") in its entirety, including all of its taxes, regulations and mandates. As the proposal says, “we end the over $700 billion Obamacare raid on Medicare and ensure Medicare savings go toward improving Medicare solvency, not to pay for a new entitlement.” The proposed budget also repeals Obamacare’s Medicaid expansion plan, which according to them, will help focus on its core mission of serving the neediest.
Although the Republican’s proposed budget has raised questions about Obamacare, some economists are taking this revisionism with a grain of salt. According to recently released government data, about 16.4 million uninsured people have gained health insurance coverage since the enactment of the Affordable Care Act five years back. This resulted in the largest decline in the uninsured rate since 2012. The rate is expected to drop to a mere 13.2% by the end of the first quarter of 2015, from 20.3% at the beginning of open enrollment in late 2013. As per a recent CNN article, Health and Human Services Secretary Sylvia Burwell said the numbers prove "the Affordable Care Act is working, and families, businesses and taxpayers are better off as a result."
FASEB strongly praised Obama’s proposed budget and stated that “the increases in the President’s budget are desperately needed... They should be part of a multi-year investment in the nation’s future.” The economists are also surprised with the Republicans’ strategy to eliminate Medicaid expansion plan without any proper replacement to it.
The 2.3% Medical Device Excise Tax Scenario So Far
So far, the highly controversial 2.3% medical device excise tax has been the most unpopular part of Obamacare. As a result, the Republican-led House proposed budget -- which calls for a repeal of Obamacare in its entirety -- came as a bit of good news for the MedTech majors.
However, arguments in favor of retaining the tax are cropping up. As per J. Gravelle and S. Lowry (The Medical Device Excise Tax: Economic Analysis), an estimation of the economic effects of the tax shows that it will most likely not reduce profits, as it will be passed on to customers as part of the price.
According to a report published in the Center on Budget and the Policy Priorities, “repealing the excise tax would cost $26 billion over 2015-2024.” The report says that only a few large firms account for the lion’s share of the U.S. medical device industry revenues (an estimated $130 billion to $170 billion a year). Johnson & Johnson (NYSE:JNJ)’s worldwide sales of medical devices and diagnostics totaled $28 billion in 2014 while the firm had total sales of $74 billion, on which it earned profits of $16 billion. Medtronic (NYSE:MDT) plc, on the other hand, had $17 billion in sales and $3 billion in profits during its fiscal 2014.
In addition, this counter-lobby is citing concerns regarding finding alternate streams of revenue generation. In the event of the tax being repealed, this group is apprehensive about how the revenue loss might impact the overall economy, given existing concerns about the fiscal deficit.
Zacks Industry Rank
Within the Zacks Industry classification, MedTech is broadly grouped into the Medical sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level: med instruments, med products, med/dental-supp and medical info systems.
We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
As a guideline, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for med instruments is #152, medical info systems is #174, med products is #112 while the med/dental-supp is #167. Analyzing the Zacks Industry Rank for different MedTech segments, it is obvious that the outlook for med products, med instruments, med/dental-supp and medical info systems is neutral.
Earnings Trend of the Sector
The Medical Technology sector is scheduled to kick start its first quarter 2015 earnings season in mid-April.
Earnings are expected to increase by 11.8% in the first quarter 2015. The sector is expected to register growth of 9.6% for 2015 and 11.7% for 2016. In terms of revenue expectation, the sector is expected to register 9.1% year-over-year growth in the first quarter of the year, resulting in an annual growth rate of 9.7%.