Moody's changes outlook for US medical device sector to stable as headwinds mount

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Global Credit Research - 03 Mar 2016

New York, March 03, 2016 -- A strong dollar and to a lesser extent, weaker hospital admission trends, will offset the benefits of a recent excise tax moratorium for the medical products and devices industry, said Moody's Investors Service. This has prompted Moody's to change its outlook for the industry to stable from positive.

Moody's forecasts that the dollar will strengthen against the euro and the Japanese yen through 2017. It will also affect the Chinese renminbi, although the impact will be milder.

"We expect the strong US dollar to continue to weigh on medical device companies' earnings over the next year or so, but not as much as in 2015," said Diana Lee, a Vice President and Senior Credit Officer at Moody's.

Moody's has also tempered its forecast for inpatient admissions due to rising co-pays and new reimbursement incentives that promote quality versus quantity of care. At the same time, pricing pressure will increase as payers seek to reduce spending. This creates another drag on the industry.

These headwinds will only partially be offset by the suspension of an excise tax that was passed by Congress in December. The suspension of the tax will add to aggregate EBITDA growth during 2016, but it will not contribute meaningfully to profit growth the following year, according to the report, "US Medical Products and Devices - Outlook Stable as Strong Dollar Offsets Temporary Elimination of Excise Tax."

The industry will still benefit from sales to emerging markets, even though growth in these regions has slowed. Governments in developing nations such as China will continue to take steps to rein in costs and favor local manufacturers.

The report is available to Moody's subscribers at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1018371.