How the ACA’s Tax Provisions Affect the Medical Device Sector: Johnson & Johnson (JNJ), Medtronic, Inc. (MDT), St. Jude Medical, Inc. (STJ)

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This article is brief look at the medical device excise tax under the Affordable Care Act and its affect on medical device companies.

The $20 billion tax went into play on January 1. That figure is based on a 2.3 percent tax being levied on the total revenues of a medical device company whether or not the outfit generates a profit. According to the Medical Device Manufacturer’s Association (MDMA), some device outfits will owe more in taxes than the revenue generated from their operations.

In sum, the MDMA contends the tax will “stifle innovation, harm patient care and weaken the position of the United States as the global leader in medical device innovation.” However, the Association’s claim is arguable. Recent financial reporting of the top outfits in this sector offer no evidence that business is suffering.

Johnson & Johnson (NYSE:JNJ)The list of top medical device manufacturers includes Johnson & Johnson (NYSE:JNJ), Medtronic, Inc. (NYSE:MDT) and St. Jude Medical, Inc. (NYSE:STJ).

is a leader in pharmaceutical and consumer packaged goods and medical devices. In January, Johnson & Johnson (NYSE:JNJ) reported better than expected Q4 2012 earnings of $2.6 billion or 91 cents per share eventhough total sales of $17.56 billion fell short of the Street’s expectation of $17.7 billion. However, some analysts note sales were off only for the consumer goods (band-aids, shampoos and such). And the improved earnings resulted from better sales of prescription drugs and demand for its medical devices.

Whether such demand will be affected by the excise tax is unclear. But the company’s $20 billion acquisition of Swiss orthopedics giant Synthes in 2012 put Johnson & Johnson (NYSE:JNJ) ahead of the game. The acquisition accounted for almost 8% of the device units’ revenue growth in 2012.

The real challenge for Johnson & Johnson (NYSE:JNJ) is product liability cases connected to problems with artificial hip replacements. Over the weekend, a Los Angeles jury began deliberations over a faulty hip implant. This is the first case to go to trial in a wave of legal actions connected to its metal-on-metal device. Johnson & Johnson (NYSE:JNJ) also recently lost a lawsuit over the failure of a trans-vaginal surgical mesh device. Last week a New Jersey jury awarded a woman $3.35 million in compensatory damages as well as $7.76 million in punitive damages.

There are about 1,800 similar cases facing the company. This might lead to rewards in the billions. In short, these suits are a far greater challenge than the excise tax.

is the world’s largest medical technology company offering a wide range of medical therapies for treating cardio-vascular diseases, diabetes and neurological disorders.

For the quarter ended January 25, Medtronic, Inc. (NYSE:MDT) reported a profit of $988 million, or 97 cents a share, up from $935 million, or 88 cents a share, a year earlier. Further, adjusted earnings from continuing operations climbed to 93 cents from 84 cents while revenue increased 2.8 percent to $4.03 billion (an increase of  4 percent). Medtronic, Inc. (NYSE:MDT)’s fiscal third-quarter earnings rose 5.7 percent as it reported stronger revenue despite soft markets for some spine and heart products.

In particular, sales of defibrillators (which shock hearts to stop potentially fatal rhythm distortions) have faced enhanced government scrutiny by the FDA over implant practices. But the company showed stronger performance is other areas such as neuro-modulation, and catheter-delivered heart valves to lift overall corporate growth.

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