Moody's expects trade disputes between the U.S. and China to have a disruptive affect on medical device companies.
As stated in its quarterly report: "Rising trade tariffs are already having a negative impact on costs." The report cites BD's estimate that proposed tariffs rising from 10 percent to 25 percent on some products between the two countries could mean an incremental loss of $45 million, representing 1 percent of the BD's EBITDA.
"While negative, we believe the cost will be manageable. If tariffs become a permanent part of the trade landscape, we believe medical device companies could adapt their supply chains by shifting production to lower-tariff locations, although that would be a time-consuming process," states the report.
However, increased tensions could lead to retaliatory trade restrictions that would ban imports from certain countries or additional rising costs. Several global medical device companies have expressed concern over the escalating tensions between these countries, including Johnson & Johnson, the parent company of DePuy Synthes. In Johnson & Johnson's 2018 earnings report conference call Jan. 22, CEO Alex Gorsky touched on global trade and the relationship between the U.S. and China.
"As a global healthcare company, Johnson & Johnson relies on free trade and open markets to bring its products to patients and consumers around the world. We are hopeful that an agreement can be reached with China that addresses concerns and creates a long-term framework for partnership in the future," Mr. Gorsky said, as transcribed by Seeking Alpha. "We'll continue to work with government officials across the globe because fair and equitable trade is in everyone's best interest, not just for the companies, but for the consumer. We will also continue to monitor developments closely on this front as we expect this to be an issue in motion for some time."
Medical device companies are also facing a potential reinstatement of the 2.3 percent medical device excise tax, which would be triggered again on Jan. 1, 2020, without intervention from both houses of Congress.