Will the ObamaCare Excise Tax Kill the Medical Device Sector?

By Roger Baettig | January 08 2013 7:47 PM

There is little doubt that the 2.3 percent excise tax on medical devices, imbedded in the Affordable Care Act, will have an impact on medical device stocks. The question is how big?

Reuters

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A battalion of naysayers has predicted doom and gloom for medical device manufacturers and importers because of the implementation of the excise tax that took effect January 1.

One is Dr. Henry I. Miller, founding director of the Office of Biotechnology at the FDA, who says, “This tax is especially pernicious because it is assessed on sales, not profits.”

Elizabeth Warren, before she became Senator, came out against the excise tax saying, “When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential.”

The tax will reportedly raise $29 billion over 10 years and lead to the closing of promising companies and the loss of jobs—something that is already happening according to the Center on Budget and Policy Priorities.

President Obama framed the tax as the medical device industry being ‘willing to do a little bit' to increase the number of newly insured customers by the Affordable Care Act and therefore eventually recoup the 2.3 percent tax over time.

Will this cause companies to consider overseas tax havens more seriously?

Medical device company, Boston Scientific (NYSE: BSX [FREE Stock Trend Analysis]), up about 3 percent Tuesday, recently invested $150 million in China and announced layoffs in the U.S. A soft market combined with the tax could be affecting their decision.

While it's too early to measure the full impact of the excise tax on the medical device industry, the reaction in the market has been mixed.

Over the last five trading days shares of Minneapolis-based Medtronic (NYSE: MDT) the world's largest medical implant maker, are up 5 percent.

The company raised the lower end of its guidance due to the renewal of the U.S. Research and Development (R&D) tax credit. The company said that the tax credit will likely boost its 2013 revenue by $30 to $35 million.

Some medical device companies are already under pressure. St. Jude Medical (NYSE: STJ) was down about 1 percent Tuesday ahead of tomorrow's earnings report that could shed light on how the excise tax could affect future earnings. The 38 percent short interest in the stock is evidence of concern on the part of investors.

Shares of radiation oncology equipment provider Accuray (NASDAQ: ARAY) is down more than 2 percent today and 23 percent since Friday following a disappointing preliminary second-quarter revenue report.

While problems with changes to Accuray's sales force, manufacturing, and supply chain are all weighing on its bottom line, the company also announced plans to cut its workforce by 13 percent--primarily in the U.S. There is some speculation this move is due, at least in part, to concerns about the excise tax.

J.P. Morgan analyst, Tycho W. Peterson, downgraded Accuray to "Underweight" from "Neutral" and Jefferies analyst Raj Denhoy lowered his price target on the stock to $6.50 from $10, but kept a "Buy" rating.