The U.S. Supreme Court’s decision to uphold the healthcare reform law – and therefore the medical device tax – could bode well for medical device companies over the long term, Wall Street analysts say.
Companies have already baked the impact of the 2.3% revenue tax into their assumptions, as have most med-tech investors, the analysts say. That likely means a short-term hit on The Street, as the upside of repeal evaporated this morning, but longer-term growth as 30 million to 40 million new patients gain health insurance.
Smaller companies that log fewer overseas sales will feel the medical device tax’s impact the most, according to Leerink Swann analyst Richard Newitter.
"On average, we project a 32% impact to 2013 EPS for small-caps vs. just 4% for large-caps," Newitter wrote this morning in a note to investors. "To us, the 2.3% med-tech excise tax on U.S. device sales was, in our view, the key aspect of the ACA in med-tech investors’ minds. With the tax now upheld, this ruling removes a potential source of upside to EPS estimates in 2013 and beyond."
For companies such as Stryker (NYSE:SYK) and Zimmer (NYSE:ZMH), which have already put plans in place to offset the tax, the Supremes’ decision today kills any upside they might have drawn from a repealof the med-tech levy, he added. But companies with large hospital contracts stand to gain from increased procedure volumes, particularly Covidien (NYSE:COV), CareFusion (NYSE:CFN), C.R. Bard (NYSE:BCR), Teleflex (NYSE:TFX) and Johnson & Johnson (NYSE:JNJ).
The silver lining is the likely increase in procedure volumes as 10s of million more Americans join the health insurance rolls, particularly for companies that cater to younger populations that might not have had coverage before the ACA: Insulet (NSDQ:PODD), Dexcom (NSDQ:DXCM), Thoratec (NSDQ:THOR) and HeartWare International (NSDQ:HTWR).
Looking ahead, Newitter wrote, the focus will turn to companies’ 2nd-quarter earnings releases to see how they plan to deal with the tax, for example "where the tax would be reflected on the [profit & loss statement]" and the "potential to offset via restructuring initiatives, cost-cutting, and/or other method, i.e., share buybacks."
"And with the election upcoming, this issue is likely not yet fully resolved," Newitter noted.
Over at Goldman Sachs, analysts Jami Rubin and Asad Haider downplayed the effect today’s ruling will have on the medical device sector.
"We do not expect a material impact to med-tech, as the tax impact has already been included in consensus forecasts and we see limited upside to estimates stemming from the individual mandate (device utilization has high Medicare exposure and surgical procedures typically carry a large out-of-pocket fee component)," they wrote in a note to investors. "Recall that ACA does not require the changes to high deductible health plans or out-of-pocket expenses: The act only mandates people purchase health insurance."
