Is Healthcare Reform Curbing Medtech Earnings?

It is, perhaps, one of the more perplexing ironies of modern society: America, a land of incredible wealth and mind-boggling medical innovations, is a seriously ailing nation.

It’s quite the paradox, considering the United States has long prided itself on the quality of its healthcare, physicians, hospitals and academic medical centers. Yet the startling truth is that U.S. residents live shorter lives and experience more injuries and illnesses than people in other high-income countries (Austria, Canada, Denmark, Finland, France, Japan, Norway and Sweden, among others), according to a study released earlier this year by the Washington, D.C.-based National Research Council. The 378-page report grew out of an effort last year that found a large and widening “mortality gap” among U.S. adults older than 50.

The report, “U.S. Health in International Perspective: Shorter Lives, Poorer Health,” finds that Americans fare worse than their wealthy counterparts in nine health-related domains: birth outcomes, injuries and homicides, teen pregnancies and sexually transmitted infections, HIV/AIDS, drug-related mortality, obesity and diabetes, heart disease, chronic lung disease, and disability. The research also shows those deficiencies curiously transcending race, education and income levels, failing to distinguish between poor, uninsured minorities and white, professional college graduates.

While the report lists various contributors to Americans’ subpar health, none are considered sole culprits of the disparity. Rather, the underlying causes are extremely complex, according to the
authors, likely driven by a mix of social and environmental factors in addition to personal choices.

“No single factor can fully explain the U.S. health disadvantage,” the report states at the outset.

“Deficiencies in the healthcare system may worsen illnesses and increase deaths from certain diseases, but they cannot explain the nation’s higher rates of traffic accidents or violence. Similarly, although individual behaviors are clearly important, they do not explain why Americans who do not smoke or are not overweight appear to have higher rates of disease than similar groups in peer countries. More likely, the U.S. health disadvantage has multiple causes and involves some combination of inadequate health care, unhealthy behaviors, adverse economic and social conditions, and environmental factors, as well as public policies and social values that shape those conditions.”

Skipping doctors’ visits doesn’t help either. Four in 10 American adults have ditched their doctors or put off needed medical care in the past year to save money, and 25 percent have bypassed treatment from a specialist, according to a Biennial Health Insurance Survey released on April 26 by the New York, N.Y.-based private foundation, The Commonwealth Fund. Another 20 percent have not filled prescriptions and/or blown off recommended tests, treatment or follow-up doctor visits, the survey also found. Though unwise, these decisions have become commonplace in recent years as U.S. residents grappled with a deep recession, high unemployment and rising healthcare costs. Skyrocketing medical premiums have impacted all residents, regardless of insurance coverage: Healthcare costs for a family of four with a workplace-sponsored insurance plan topped $20,000 for the first time last year. And Standard & Poor’s is predicting costs to rise by more than 6 percent this year.

Now exacerbated in the final year before President Barack Obama’s healthcare law takes full effect in 2014, these trends are beginning to affect company earnings, some industry analysts claim. Medical testing firm Quest Diagnostics Inc., Orthofix International N.V., Zimmer Holdings Inc., Biomet Inc. and hospital operators such as HCA Holdings Inc. all have noticed a slowdown in implant procedures and medical services.

“It’s still early in the reporting season, but so far it all points to softness,” David Heupel, senior healthcare analyst at Thrivent Financial for Lutherans, told MedCity.com last month. “In the U.S., volumes at hospitals, in-patient and outpatient, are soft.”

Softer volumes, of course, slow product demand, which in turn stymies sales. Orthofix came up short in several divisions during the first quarter of 2013, reporting double-digit losses in spine regenerative stimulation and orthopedic devices, and an overall 14 percent decrease in total net sales. Total spine sales dropped 12 percent to $66.3 million, with spine regenerative stimulation revenue plummeting 18 percent to $32 million and spine repair implants/regenerative biologics proceeds slipping 4 percent to $34.3 million, according to the company’s Q1 earnings statement.

Overall product sales at the Netherlands-based firm fell 15.7 percent to $88.3 million for the period ended March 31. Net sales slid 13.6 percent to $100.2 million, while gross profit tumbled 17.6 percent to $77.5 million. Executives linked the company’s disappointing first-quarter sales to the shortfall in spine regenerative stimulation revenue, and blamed the loss on sales rep turnover, a higher-than-historical mix of 2012 wholesale proceeds and fewer selling days rather than weak demand.

Yet “poor macroeconomic conditions led to lower volumes” and ultimately, a 6 percent decrease in spinal implant sales compared with the first quarter of 2012. A 7 percent jump in Trinity Evolution revenue offset a $700,000 decrease in Orthofix’s structural allograft franchise, though the Trinity allograft’s robust performance could not save overall biologics sales, which remained flat at $10.6 million.

The numbers were somewhat better at Zimmer, where overall sales and gross profit remained flat. Net earnings rose 4.3 percent $218 million, though sales in its reconstructive unit slipped 2 percent to $849.6 million. Hip and knee revenue was down, falling 4 percent and 1 percent to $330.8 million and 471 million respectively. Spinal revenue took a significant hit, falling 10 percent to 47.7 million for the period ended March 31. CEO David Dvorak attributed the loss to the company’s fourth-quarter worldwide recall of all PEEK Ardis Interbody inserters, devices used during spinal surgery to insert the PEEK Ardis Interbody Spacer. Zimmer recalled the inserters after they were linked to several incidents of broken implants.

The downturn in device use/demand was particularly harsh on Quest Diagnostics, which posted a 6.4 percent loss on $1.8 billion in first-quarter revenue (period ended March 31). Net income fell 14.7 percent to $143.6 million, and reported diluted earnings per share skidded 25.7 percent to 72 cents.
Diagnostic information services dividends slipped 6.7 percent to $1.64 billion and adjusted operating income decreased 14.4 percent, going from $318 million, or 16.7 percent of revenue in Q1 2012 to $272 million, or 15.2 percent of revenue in the first three months of this year. Volume, as measured by the number of requisitions, declined 3.4 percent despite a 1 percent boost from last fall’s purchase of the clinical and anatomic pathology outreach laboratory businesses of UMass Memorial Medical Center in Worcester, Mass.

While the acquisitions added roughly 50 new patient service centers to the company’s Bay State roster and extended its range of diagnostic information services in New England, they could not offset the overall downward trend in demand for procedures and/or services.

Quest executives, however, blamed part of the lower volume on fewer business days in the quarter compared with 2012 and the impact of severe weather. Still, the dropoff in volume wasn’t totally unexpected. The company’s top brass noticed signs of trouble during the second half of 2012 as Mother Nature (via Superstorm Sandy) and political squabbling dampened economic growth. U.S. gross domestic product (GDP) fell for the first time in three and a half years during the fourth quarter, declining by an annualized 0.4 percent, U.S. Commerce Department figures show.

Consequently, Quest’s Q4 net income took a nosedive, plummeting 24 percent to $140 million.
Revenue crashed as well, falling 4 percent to $1.8 billion as sales of diagnostic information services dropped 4.4 percent and test volume decreased 2.4 percent compared with Q4 2011.

To recoup the lost proceeds, Quest has implemented a plan to save $500 million through 2013. Executives, however, are keeping their expectations in check. Though they’re hoping the restructuring plan and acquisitions will increase annual revenue between 1 and 2 percent, they have downgraded their outlook for the year, anticipating proceeds to match 2012 levels rather than expand by 1 percent.
“If you look at what we’re assuming in our guidance going forward, we’re not looking for a material change in the overall environment in the marketplace,” Quest CEO, President and Director Stephen H. Rusckowski noted during an April 17 conference call with analysts. “And if you look at our second, third and fourth quarter of last year, we did see some softening already in those quarters. So now that’s factored into our guidance as well about the second half. So [there’s] no material change in the environment going forward. What we saw in the first quarter and what we saw in the second half of last year is what we expect to see going forward.”

Rusckowski’s counterpart at Stryker Corp. is more optimistic about the year, in spite of a 3 percent decrease in first-quarter spinal revenue and slumping joint replacement sales.

The sanguinity most likely was triggered by a 1.3 percent boost in net sales and 13.2 percent increase in reported diluted net earnings per share. “We delivered solid sales and earnings performance, and expect this momentum to continue throughout 2013,” Stryker President and CEO Kevin A. Lobo said.
Reconstructive net sales of $969 million increased 1.2 percent compared with the same period last year. Net sales in the quarter grew by 5.2 percent due to increased unit volume and changes in product mix, though hip and knee sales continued to slip, falling 1.2 percent and 2 percent respectively for the period that ended March 31. Executives attributed the losses to lower volumes and “seasonality.”

“We think there was some modest seasonality as we’ve seen in prior years, probably a little bit more so as it’s been accelerating each year, which made the fourth quarter a little bit stronger,” Katherine A. Owen, Stryker’s vice president of Strategy & Investor Relations, said during a first-quarter earnings conference call with analysts. “That’s probably a little bit more so in the case of knees. It is a more deferrable procedural versus hips, and that’s partially why we think we saw a little bit stronger hip growth versus knee growth. I would call that just kind of a normal Q4 to Q1 pattern versus any real deviation from what we believe to be normalized growth.”

Stryker’s endoscopy and instrument sales remained flat, while its first-quarter spinal implant revenue tumbled 3 percent to $176 million.