MedTech Tax Resumes in 2018, 3 Stocks to Suffer

The year 2018 may bring ample reasons for Americans to cheer from the standpoint of the latest Tax Cuts and Jobs Act that was finally signed by the President on Dec 22. Effective Jan 1, there are seven income tax brackets with five offering reduced tax rates. Corporate tax rates too have been slashed to 21% from 35% earlier. This apart, the new legislation has almost doubled the standard deduction.

While the nation is delighted with these huge tax slashes, economists are quite apprehensive that its damage to the healthcare community will be realized before long. Going by a Vox article, "The bill also includes tax cuts so large that they would trigger across-the-board spending cuts - including billions for Medicare. The last time Medicare was a hit with cuts like this, patients lost access to critical services like chemotherapy treatment."

The Congressional Budget Office (CBO) apprehends that if it doesn't find any alternative to meet the fiscal deficit from the huge tax cut, automatic cuts worth $136 billion from mandatory spending in 2018, including $25 billion in Medicare cuts, may be triggered.

Not only that, the latest law also repeals the individual mandate, which is an essential part of Obamacare proving health coverage to majority of Americans. CBO expects 13 million people to drop their plans with this repeal. As per the Vox article, care for the elderly will be disrupted, bringing about erratic changes in the health care system.

Device Tax Back in 2018 -- Serious Threat to MedTech

Within the MedTech space, the situation is all the more grave. The medical device community was earlier extremely hopeful about Trump's regulatory agenda as it had promised the complete abolition of the infamous 2.3% medical device tax that was first included in the 2010 health care reform law.

The dreaded tax, imposed on the selling price instead of net profit and amounting to a stupendous sum, wiped out almost a quarter of the profits for medical technology companies.

As per an article published on LA Times, "In Congress, it [Device Tax] was unpopular not only with Republicans, but with many Democrats from states such as Massachusetts and Minnesota, which have large numbers of medical device companies." Realizing this, the U.S. House and Senate temporarily suspended it for two years at the beginning of 2015.

Going by the available data, it is quite evident that this partial two-year repeal of the medical device tax has benefited the sector's overall development. Per data provided by the medical device trade group (in a Ken Blackwell article published by The Daily Caller), within this period, there was a roughly 83% rise in research and development (R&D) investments by MedTech players.

The temporary suspension however had taken into account the expectation that the government will permanently put an end to this tax before 2018. Obviously, this is not going to happen.

Undoubtedly, its comeback will be an additional burden on the MedTech fraternity, largely discouraging R&D activities. Per the LA Times article, AdvaMed and the Medical Imaging & Technology Alliance warn that the tax will take a $20-billion bite out of the medical device industry over the next decade.

3 Medtech Stocks to be Affected Most by Tax Back

Per an article by Matt Murphy in wbur, sectors that are likely to be hampered the most by the re-imposition of this levy are X-ray and MRI machines, surgical instruments and pacemakers. In such a tumultuous scenario, we have handpicked three MedTech bigwigs that are playing majorly in these controversial sectors with hefty investments each year, and are hence over-exposed to a significant level of risk associated with the tax reinstatement.

Boston Scientific CorporationBSX

Medical device mammoth and a leading player in the field of heart stent, Boston Scientific's unimpressive pacemaker performance within the core CRM has been a drag in the recent past. According to a USA Today article, this Zacks Rank #4 (Sell) company estimates that the reinstatement of the tax will cost the firm $75 million in 2018. Boston Scientific stated that, post the temporary suspension of the tax, it invested the savings in projects including a partnership with Mayo Clinic that combines manufacturing expertise with ideas for advanced medical device products. However, the reinstatement of this 2.3% tax hints at continued investments in programs like these.

Boston Scientific Corporation Price

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Stryker CorporationSYK

This giant orthopedic device maker is facing hiccups in 2018 with the reintroduction of the device tax. The company, while recently announcing its preliminary 2017 sales numbers, stated that with respect to the U.S. tax reform, its anticipates a modest headwind in 2018. The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank Stocks Here .

Stryker Corporation Price

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Smith & NephewSNN

This Orthopaedic Reconstruction, Advanced Wound Management and Sports Medicine maker is going to face intense pressure out of the medical device tax resume. Earlier, a report by FierceMedical Device revealed that, in 2014, before the temporary suspension of the deal, Smith & Nephew shelled out $25 million as medical device tax.

However, post the suspension of the tax, this company has accelerated investments in product development and manufacturing with the rescued money. The reinstatement will definitely act as a hindrance in the path of Smith & Nephew's new-age innovations and developments. The stock currently carries a Zacks Rank #4.

Smith & Nephew SNATS, Inc. Price

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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