Wells Fargo: Procedure Volume to Offset Device Tax

The cumulative benefit to U.S. volume surgical procedures due to Obamacare will increase 3.6% by 2022 and will likely offset the 2.3% medical device tax under the new healthcare law.

That’s not the political rhetoric of a partisan political pundit, but the result of a new analysis from one of Wall Street’s top orthopedic analysts, Larry Biegelsen of Wells Fargo Securities. And we don’t think Larry was kidding, even though he announced the new analysis on April 1, 2013.

Tax and Pricing Pressures Offset

Biegelsen said device companies will be able to offset the tax based on their average gross margins of 60–70%. Biegelsen also expects procedure volume benefit to “offset at least some of the potential incremental pricing pressures from implementation of Accountable Care Organizations (ACOs) and bundled payments.”

Based on an update of a Wells Fargo January 15, 2013 analysis, Biegelsen estimates the increased healthcare coverage of newly insured patients, “represents a 1.5% tailwind to U.S. volumes across 10 key device categories in 2014 versus our previous estimate of 0.6%.” Why the change? Biegelsen said his previous analysis used the Medicaid population instead of the overall insured population. Children account for over 50% of the Medicaid population.

Orthopedic and Spine Winners

In general, Biegelsen believes incremental utilization benefit in 2014 is greater for orthopedic procedures at 1.8% vs. cardiovascular procedures at 1.0%. He noted that orthopedic procedures may be considered elective and thus may not be affordable for the uninsured. In contrast, some of the cardiovascular procedures are performed on an emergency basis regardless of healthcare coverage.

“Across the five orthopedic procedure categories—hips, knees, spine, shoulders and lower extremities—that we evaluated, the median incremental utilization impact was 1.8% in 2014 and 0.7% in 2015…spine procedures are estimated to see the greatest incremental volume benefit at 3.4%.”

Among the large orthopedic device makers, Biegelsen says company’s like Zimmer Holdings, Inc. and Medtronic, Inc. will see median incremental sales growth of 0.8% in 2014, “which represents an 18% increase over our current 4.5% estimate.” He says those two manufacturers have the potential to increase their current low-to-mid single-digit top-line growth rate by over 20% in 2014 as a result of the increased device utilization.

NuVasive, Inc., based on its business mix and applying a 3.3% utilization rate for spinal fusion, looks like a big winner in 2014. The potential for NuVasive, says Biegelsen, “Yields upside potential of $20 million or 2.9% in sales.”

AdvaMed: Device Tax is “Toxic”

Stephen Ubl, president and CEO of AdvaMed, said on February 26, 2013 that the device tax is already having a “toxic effect on innovation, jobs and U.S. leadership of the medical technology industry.” Ubl said repealing the device tax, “is critically important to companies large and small that already are living with the real-world harmful impact this tax is having—including layoffs, cuts in R&D and delayed expansion plans. While we understand and support action to address the deficit, the negative impact of the tax is compounded exponentially by the repeated cuts to the industry and the customers it serves.”

Repealing the tax, while Congress tries to reduce the deficit, is an uphill battle, particularly when Wall Street and Ortho Main Street send mixed messages. The Wells Fargo analysis was titled: “Healthcare Coverage Expansion A Shot In The Arm For MedTech.”

Biegelsen said he’d be happy to send the Wells Fargo analysis to OTW readers by emailing him at: Lawrence.Biegelsen@wellsfargo.com.