I’m a college student. One day my professor began discussing the new 2.3% excise tax on medical devices caused by the Patient Protection and Affordability Care Act (otherwise known as Obamacare). Much to my surprise (and probably the professor’s) the other students in the class were really engaged in the discussion. They were asking questions like, “Does the government have the power to impose this tax,” and, “will other countries follow suit?” However, being the avid investor that I am, my thoughts went straight to the bottom line of one company, Medtronic, Inc. (NYSE:MDT)
My research first brought me to the company’s 10-K. One page 21 of the company’s annual report, the company reported that, “our annual excise tax fee would be within the range of $125 to $175 million after tax.” In fiscal year 2012, Medtronic, Inc. (NYSE:MDT) reported gross revenue of $16.184 billion. Assuming a modest growth rate of 5% in gross revenues for 2013, that would bring gross revenue to $16.993 billion. If the company’s estimates of the new tax are correct, then Medtronic, Inc. (NYSE:MDT) is facing an added expense of 1.03% of sales.
Investing is all about putting stuff into perspective. I did a little digging and found out the following about Medtronic’s competitors regarding the new excise tax:
- Boston Scientific Corporation (NYSE:BSX) is expecting an extra tax burden up to $80 million. Given that their net sales have been declining at a 7.1% rate, I estimated net sales to be $6.734 billion in fiscal year 2013. That means Boston Scientific is going to be facing an additional 1.2% expense. Pretty comparable to Medtronic, Inc. (NYSE:MDT).
- St. Jude Medical and Edward’s Lifesciences weren’t brave enough to make estimates of the new tax burden.
The new tax might increase the selling, general and administrative expenses category of the income statement; it has the potential to increase sales as well. All of the aforementioned companies made a special note in their 10-K’s that the new law is going to look for ways to lower the costs of health care in various ways.
This could be done by reducing the length of hospital stays, encouraging noninvasive surgeries and creating new technologies that make surgeries faster and easier. According to the Encyclopedia of Global Industries’s article on the medical device industry, in 1980, 16% of surgeries were performed without overnight hospitalization. Compare that to today’s 80% of surgeries without hospitalization and you will see huge cost savings.
And who is one company that is at the forefront of making surgeries easier, faster and safer? You guessed it, Medtronic, Inc. (NYSE:MDT). If the government wants to lower health care costs, they won’t be able to ignore the products Medtronic, Inc. (NYSE:MDT) is able to provide. In theory this should drive up demand for advanced medical devices. Basic economics tells us that an increase in demand should raise prices.
Will the potential increase in prices or demand offset the new tax? Only time will tell….
The article Medtronics vs. Obamacare: A Fight to Remember originally appeared on Fool.com and is written by Kyle Dickinson.
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