Dive Brief:
- Fitch Ratings' sixth edition of The Checkup, a look at the largest issuers of high-yield debt in the healthcare industry, predicts organic revenue growth of 3% to 4% for most of the 20 U.S. providers, specialty pharmaceuticals and medical device companies it profiled.
- The report forecasts median operating margins will continue to thin as customer consolidation, healthcare consumerism and regulation constrain the industry's "ability to increase pricing." Fitch also noted that "cost-cutting will not provide a sufficient offset."
- The report differentiates among healthcare sectors, seeing providers and drugmakers facing the most regulatory and structural reform risks. Medtech and devices, IT and diagnostics fall at the lower end of the spectrum.
Dive Insight:
The Checkup analyzed the business profiles and capital structures of 20 highly leveraged healthcare companies, including several large health systems like Tenet Healthcare and a handful of drugmakers, including Teva Pharmaceutical Industries. The 20 companies had an aggregate total of $178 billion in outstanding debt.
The report found the companies best positioned to find success have "innovative new products or breadth of offerings." Most of the companies examined have "compelling value propositions and relatively low risk of secular obsolescence," according to the report.
That said, M&A activity remains an important factor that can adjust business models and cause disruption.
Only five of the 20 companies have negative rating outlooks: Endo International, Mallinckrodt, Owens & Minor, Quorum, and Teva. Those negative outlooks are connected to "operational challenges," Fitch said.
Divestitures and operational improvement programs are on tap for some of the companies in the report.
The report calls out recent Trump administration proposals, including one to move certain drugs from Medicare Part B to D and commitment to faster generic approval as moderately negative. But Fitch says pharmas can likely weather the storm.
"Fitch views these initiatives and recently instituted programs as moderately negative for branded pharmaceutical firms, in terms of pricing and margins. However in the aggregate, these programs should remain manageable as long as branded firms continue to develop drugs that offer improved therapies that are safer or more effective than current treatments for unmet medical needs."
Hospitals are also closely watching news from Washington. Though Republicans were unable to repeal the Affordable Care Act, the Trump administration continues to take aim at the law. Weakening the ACA further would likely result in hospitals feeling the brunt of fewer people insured and more uncompensated care.
However, even without changes to the healthcare law, health systems, including major hospital operators, can expect continued tight operating margins for the foreseeable future.