Does the Decline in Health Care Spending Spell Trouble for These Companies?

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the last few years the global healthcare industry has witnessed significant growth with most countries spending enormously on healthcare. The expenditure on health care varies widely; the U.S. spends the most, at approximately $8,500 per person in 2012.

However, the outlook beyond 2013 looks hazy. Industry experts believe there could be a possible expenditure reduction of as much as $400 billion in the next three years by the U.S. government on health care.  Moreover, as the U.S. is the largest market for medical device manufacturers, this cut in spending could mean a significant hit to their top line.

Therefore, let’s have a look at how these companies will perform in the near future.

Cardiac Rhythm Management segment to be the revenue driver

Recently, St. Jude Medical (NYSE: STJ) launched the “Accent MRI pacemaker” in Japan. This innovative machine will be used for performing full body MRI scans, providing patients and medical professionals a complete scan in a single instance. MRI scans are able to indicate minute diseases and injuries that other imaging methods, such as x-ray and ultrasound, are not able to detect.

As of now, this will be the only commercially available MRI system that will allow full body MRI scans. The Accent MRI pacemaker provides the unique ability to scan patients with pacemaker devices without the risk of affecting their device. This launch will help St. Jude to regain its declining market share in the global Cardiac Rhythm Management, or CRM, market. Further, it is estimated that the global pacemaker market will reach $5.1 billion by 2015, growing at a rate of 11%. Therefore, this launch provides an incremental revenue opportunity for St. Jude.

St. Jude has a 19% stake in CardioMEMS, a medical device company. CardioMEMS has been developing a heart failure monitoring system which is expected to gain approval in late 2013. This heart failure monitoring system will be a permanently implantable wireless device used to monitor the patient’s heart rate. This will allow the heart patient to know the exact duration for which their heart stops beating. Thus, it monitors the heart failure ambulatory management and will reduce the heart failure patient’s hospital stays. The analysts believe that this device provides a $400 million opportunity for St. Jude.

A moderate acquisition

On July 1, Boston Scientific (NYSE: BSX) expressed its plan to acquire the electrophysiology business of CR Bard. The acquisition price is estimated to be around $275 million, and the company expects the takeover to be complete by the end of the current year. The electrophysiology business deals with the heart’s electrical system.

Currently, the global electrophysiology market is estimated to be worth $2.5 billion, and will grow at a rate of 5.4% through 2014. Further, this acquisition will increase Boston Scientific’s presence in the fast growing market for electrophysiology devices and will enable it to treat patients with abnormal heartbeats. However, despite these synergies, electrophysiology device manufacturers are facing pricing pressure across the globe. Therefore, no major contributions are expected to result from this acquisition by Boston Scientific in 2013 and 2014. 

Recently, Boston Scientific implanted its first Vercise DBS system in the U.S. market. This device is used in the treatment of Parkinson’s disease, which is a central nervous system disorder. The Vercise DBS system delivers electrical signals and facilitates the adjustment of current flows to the brain, thereby customizing the brain’s stimulation controls. The device has been approved for sale in Europe, Israel, and Australia and is under the investigational trials in the U.S. According to WHO, about 1 million Americans are living with Parkinson’s disease and 60,000 are diagnosed annually. Once approved, this device will expose the company to a market of $6 billion annually. 

Business segments facing pricing pressure

Zimmer Holdings (NYSE: ZMH) reported sales of $471 million for its knees segment in the first-quarter, which was almost flat on a quarter-over-quarter basis. In an attempt to improve its revenue, the company launched a new personalized knee system earlier this year.

It is estimated that more than 600,000 knee replacements are performed every year in the U.S. However, any new launch in the orthopedics market generally takes three to four quarters to fully materialize and to educate surgeons about the implant. As such, the company will start generating revenue from this product in 2014 and onward. Moreover, this new system is expected to contribute significantly to the company’s overall revenue of $1.91 billion in 2014, which is an increase of $60 million from 2012.

Additionally, Zimmer registered sales of $331 million in its hips segment in the first-quarter, which was a decline of 2% on a quarter-over-quarter basis. This decline was primarily due to the weakening demand of its products in Europe and the Americas. Further, as consumer spending on healthcare is expected to diminish in these regions, it is unlikely that Zimmer will be able to recover the declining revenue from its existing products. Analysts expect the pricing pressure to drag the revenue margin of the company by approximately 2% in the current year. Therefore, the company’s revenue from the hips segment is expected to decline to $1.3 billion in 2013 from $1.35 billion in 2012.

 Conclusion

The Accent MRI pacemaker and the heart failure monitoring system will increase St. Jude’s presence in the CRM market, and will also be a major contributor to the company’s top line. Therefore, I recommend to buy this stock.

I do not see any major contribution flowing to Boston Scientific from the acquisition of CR Bard’s electrophysiology business for the time being due to increased pricing pressure. Also, the absence of any major current catalyst to the company’s profit margins makes me recommend investors hold the stock.

The knees and hips segment together contribute almost 70% of Zimmer’s total revenue. Though the knees segment will marginally improve its revenue from the launch of a new personal knee system, I expect this improvement to be offset by the declining revenue from the hips segment. Thus, a Hold is recommended on the stock.


Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of Zimmer Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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