The outlook for investment-grade medical device companies remains stable even after a 3-year streak of 9 consecutive downgrades, according to a new report from S&P.

The downgrade of investment-grade medical device companies was mostly caused by debt-financed mergers and acquisitions, according to S&P. Factors like changes in operating performance trends and financial policy also contributed to negative ratings.

The industry has been facing several years of consolidation caused by pressures from U.S. healthcare reform, low interest rates, a desire to use growing foreign cash reserves more productively, increased consolidation among hospitals, and the potential for cost and revenue synergies.

Such consolidations, though, don’t always go smoothly. S&P analysts, for example, saw underperformance at The Cooper Cos. due to integration problems from its acquisition of Sauflon Pharmaceuticals, as well as foreign exchange headwinds. As a result, Cooper was downgraded to speculative grade from investment grade.

Analysts are also keeping an eye on the rising debt levels. S&P downgraded Hill-Rom Holdings to speculative grade because its analysts saw Hill-Rom’s financial policy moving toward a higher tolerance for debt leverage. (They saw the same at The Cooper Cos., too.)

S&P notes, though, that not all medtech mergers and acquisitions resulted in downgrades. Dentsply International and Sirona Dental Systems merged in an all-stock transaction in 2016 that led to positive implications based on the fact that the credit measures were projected to stay the same after the merger.

Based on the operating performance of most investment-grade medical device companies, the industry outlook for 2017 remains stable, according to S&P. The ratings agency even expects that leverage metrics should improve or stay the same through the year.

They also report that they expect a more moderate pace of mergers and acquisitions over the next couple of years. S&P expects industry growth based on demographic trends and a steady pace of technological innovations.

Two major medical device companies—Boston Scientific Corp. and C.R. Bard—received negative outlooks over the next year or two from S&P, due to the pelvic mesh litigation costs the companies are facing.  C.R. Bard, for example, recently settled on some lawsuits stemming from pelvic mesh, after a federal appeals court upheld a $2 million verdict.

The debt leverage of medical device companies over the last couple of years has consistently been a drag on ratings. The debt leverage metrics rose in 2014 for some industry participants. By 2015, they reached their peak. Toward the end of 2016, debt leverage improved as companies got synergies and prioritized debt reduction, bringing debt leverage back to more consistent levels, according to S&P.

S&P says it is too early to predict whether there will be any upgrades in 2017. Medical device companies may put a priority on deleveraging, something S&P expects. Because of this, their ratings could still rise, depending on profitability. And the companies that decided not to consolidate will be at a disadvantage when it comes to market share, according to S&P.

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