A tougher Food and Drug Administration approval process and increasingly cost-conscious hospitals are factors pushing medical suppliers and devicemakers to pursue buybacks, dividends or acquisitions to appease shareholders in the wake of slow sales growth, according to a Moody's Investors Service report (PDF).
Suppliers to embrace 'shareholder-friendly' moves: Moody's
Diana Lee, a senior credit officer for Moody's, said in a news release that the rating agency expects manufacturers to engage in “shareholder-friendly initiatives” over the next year and a half to satisfy shareholders and encourage growth.
“Organic growth rates for the medical products and device sector will remain soft over the next 12 to 18 months owing to a weak global economy, pricing pressure from hospitals and declining medical coverage under health-benefit plans,” Moody's said in the report.
Acquisition opportunities will be limited for two reasons, according to the report. Companies need targets that make strategic sense, and both parties need to agree on the value of the assets.
The companies most likely to pursue acquisitions, buybacks or dividends are those that manufacture products considered vulnerable to consumer demand, such as orthopedic implants, and companies dealing with product concerns about safety, efficacy and appropriate use. Manufactures, including Boston Scientific Corp., Medtronic and St. Jude Medical, have been negatively impacted by a U.S. Justice Department investigation into inappropriate use of implantable cardioverter defibrillators, according to Moody's.
And, as hospitals increasingly coordinate with physicians to cut costs on expensive physician preference items such as stents, ICDs and orthopedic implants, they are more likely to evaluate use of new, usually more-costly products.
“Devicemakers have relied on product innovation to sell premium products that can garner higher pricing than existing products,” Moody's said. “We believe that it will become tougher for this strategy to succeed.”
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