Despite a robust jobs market and strong economy, the rising U.S.-China trade war tensions are pretty upsetting for investors.
The trade war has rattled majority of the industries, MedTech being one. According to the Advanced Medical Technology Association (AdvaMed), around $4.7 billion worth of U.S. medical devices have been dealt a big blow by China’s retaliatory tariffs.
AdvaMed CEO Scott Whitaker was quoted saying, “If the trade war continues and escalating continues to grow, there will be more impact,” at the group’s annual MedTech Conference in Philadelphia.
This has made investors, who had once considered the MedTech space as relatively safe, jittery.
Tariff Retaliation: Tit-For-Tat Game On
The Trump administration and China government have long been levying tariffs on each other’s goods, with the last move made by the U.S. government.
On Sep 17, the Trump government announced a new round of tariffs (almost 10%) on about $200 billion of Chinese imports (effective Sep 24). Starting Jan 1, 2019, the tariffs are likely to rise to 25%. Not to forget, a significant amount of these imports are medical instruments, devices and imaging components.
Trump has threatened China of a fresh round of $267 billion tariffs if it retaliates. Notably, the countries have already imposed $50-billion tariffs on each other’s goods. Interestingly, the value of U.S. imports from China, was about $505 billion in 2017.
On Sep 18, China struck back with a 10% tariff on U.S. goods worth $60 billion, also effective Sep 24. This targets more than 5,000 U.S. products.
Furthermore, the Chinese government has indicated that any fresh round of U.S. tariffs will jeopardize trade negotiations, compelling China to retaliate.
How Grave Are Things for MedTech Players?
Commenting on the trade war, GE Healthcare spokeswoman Kelley Sousa wrote in an email, “We remain concerned that these tariffs could make it harder for U.S. manufacturers to compete in the global economy, and will shrink rather than expand U.S. exports,” per an article on MedTech Dive.
Needless to say, the medical device lobby is pretty apprehensive about the tariff battle as it could significantly affect international trade.
Going by data provided in an article by Christian B. Jones in Mondaq, MedTech firms in the United States currently export $4.7 billion annually to China, while the nation imports a total of $5 billion worth of medical devices from China. U.S. exports of medical devices last year totaled $52 billion, creating a $1-billion worldwide trade surplus.
According to a recent survey conducted by the Medical Imaging & Technology Alliance (MITA), the tariffs will cost medical products companies nearly $138 million every year.
Thus, the companies will be compelled to reduce U.S. workforce and investments in R&D to fund this ‘new and unnecessary expense.’ This also increases the chances of the costs being passed on to end users, making healthcare more expensive.
The odds are higher for companies with manufacturing facilities in China. According to a MedTech Dive article, they will be subject to double taxes on the import/export of components or whole systems.
A Silver Lining in Sight?
The trade situation between the United States and China is pretty tense, with no respite in sight.
However, it isn’t a concerning factor for most investors as the tariff revisions are not as bad as apprehended. In this regard, the United States did not stick to the initial 25% tariff imposition plan while levying the fresh set of tariffs. Even the Chinese counterparts levied rates which were much lower than the 20-25% band that was discussed earlier.
Furthermore, on Sep 24, Trump signed his first major trade agreement with South Korea at a meeting in New York. Trump said that it would provide fresh scope for U.S. exports to South Korea.
The signing of the deal has instilled hope among experts that other trade disputes, especially with China, will eventually get resolved.
Meanwhile, U.S. ties with North Korea seem to be improving.
Per data published on the Korea Country Commercial Guide, in 2017, total imports of medical devices by Korea grossed $3 billion, with the United States contributing more than $1.4 billion. Furthermore, the U.S. market share represents approximately 47% of the Korean import market.
These deals seem to be opening up avenues for MedTech players, providing a breather from trade tensions.
4 Stocks to Beat the Heat
For investors interested in the Medical sector, we have shortlisted companies based on strong fundamentals and domestic business along with a solid Zacks Rank.
athenahealth, Inc. ATHN: Headquartered in Watertown, MA, athenahealth is a cloud-based network provider of services that manage the administrative duties of medical providers.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company’s Business and Services revenues have been consistently strong. Strength in core ambulatory services is also noteworthy. Unique applications like athenaClinicals, athenaClinicals-Streamlined, athenaCommunicator, athenaOne, athenaCollector for Hospital and Health Systems and the brand promise of ‘Unbreak Healthcare’ are worth a mention. A strong client base along with a solid domestic footprint has been a key catalyst for athenahealth. An upbeat guidance for 2018 also instills investors’ optimism.
This Zacks Rank #1 company has gained 7.1% over the past year.
Amedisys, Inc. AMED: Headquartered in Baton Rouge, LA, provides home health and hospice services throughout the United States to the growing chronic, co-morbid, and aging American population.
At the Home Health and Hospice divisions, the company witnessed encouraging in Medicare and non-Medicare revenue growth in the last reported quarter. Amedisys is currently exploring opportunities in these segments. We are also impressed by the company’s solid performance in Personal Care division. A favorable demographic trend and strategic acquisitions also bode well. We look forward to the company’s recent buyouts like Bring Care Home and ETPCS intended to expand its hold in personal care.
This Zacks Rank #1 company has gained 118.4% over the past year.
Edwards Lifesciences Corporation EW: Headquartered in Irvine, CA, Edwards Lifesciences deals in products and technologies aimed at treating advanced cardiovascular diseases, especially structural heart disease in critically ill patients.
The company continues to see strong transcatheter valve sales in the domestic market as well as overseas. Further, management seems to be upbeat about CMS opening a National Coverage Analysis to reconsider the National Coverage Determination released in 2012 for transcatheter aortic valve replacement. Over the long term, Edwards Lifesciences expects to generate organic underlying sales growth at a meaningfully higher rate than the industry average.
This Zacks Rank #2 (Buy) company has rallied 57.5% over the past year.
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HMS Holdings Corp HMSY: Headquartered in Irving, TX, HMS Holdings provides cost-containment solutions in the U.S. healthcare space. The stock has a Zacks Rank #2.
Last year, HMS Holdings announced the acquisition of patient engagement specialist Eliza Corporation. Eliza offers SaaS services to employers, providers, health plans, hospitals, pharmacies and clinics for medication adherence. In the last-reported quarter, Eliza completed a special project, which generated revenues of approximately $1.5 million. Management expects Eliza growth to be relatively flat in the upcoming quarter. However, revenues are expected to grow significantly in the fourth quarter.
HMS Holdings has rallied 63.7% in a year’s time.
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