Theragenics’ (NYSE:TGX) 1st-quarter financial report appeared to provide the company an opportunity to highlight the negative impacts of the 2.3% medical device tax that took effect at the start of the year.
In discussing the Buford, Ga.-based device makers’ mixed Q1 results, CEO Christine Jacobs invoked the tax as at least partly responsible for upcoming layoffs and outsourcing and she challenged the notion that the Affordable Care Act, which the tax was designed to help fund, represents a windfall for industry.
Jacobs didn’t entirely blame the tax for the company’s decision to shift part of its manufacturing overseas, but it did come up as part of the reason that Theragenics will close a Texas facility by the end of 2014.
"The decision to outsource our vascular access manufacturing outside of the U.S. was driven by an number of factors including the health of the medical device industry, new taxes such as the medical device tax, the regulatory environment in the U.S. and our recent results," Jacobs said in a press release announcing the company’s 1st-quarter earnings.
Theragenics reported that it’s medical device tax obligation amounted to $193,000 for the quarter, $135,00 of that for sales of surgical products and $58,000 for its brachytherapy division.
The company, which released its financial results just days ahead of announcing a private equity buyout offer worth a potential $71 million, swung to a loss in its 1st quarter. Total sales were down 8.4% in the 3 months ended March 31, 2013, and the company posted losses of $34,000 compared to a profit of $934,000 during the same period last year.*
"We experienced mixed results in the 1st quarter," Jacobs said, explaining that sales for Theragenics’ brachytherapy division suffered as overall procedure volume declined for prostate cancer and that the surgical products business "experienced softened demand."
"Both businesses were also impacted by the new medical device tax implemented on January 1, 2013," she added.
Theragenics’ decision to shift its vascular access manufacturing overseas will result in 139 layoffs. The closure affects the company’s Galt Medical subsidiary in Garland, Texas, and the move is expected to be permanent.
Medical device industry lobbying groups have long warned that the tax would drive exactly the type of behavior that Theragenics is exhibiting now- layoffs and outsourcing overseas.
Earlier this year conservative economist Diana Furchtgott-Roth told a U.S. House of Representatives committee that the tax would push as many as 146,000 jobs overseas. That’s a huge increase over the 43,000 cited in a 2011 report that she penned together with her husband Harold Furchtgott-Roth, former chief economist of the House Commerce Committee.
Theragenics’ Jacobs also took the time during a Q1 call with investors to challenge some of the prevailing myths about the medical device tax – particularly that the industry can offset the cost through the supposed increase in customers provided by expanded insurance coverage under the Affordable Care Act.
The windfall rhetoric has proven popular among those who advocate for keeping the tax in place, and industry lobbying groups have fought it before, arguing that the types of patients brought in through ACA aren’t those that generally need medical devices.
In Jacobs’ words:
"The new medical device tax took effect on January 1 of this year.
The device tax, which totaled $135,000 in our Surgical Product segment in Q1, is a dollar-for-dollar reduction in our operating profit. We have no opportunity to pass this cost along in the short-term. In fact, our customers and the GPOs – those are the group purchasing organizations that we contract with – have been very aggressive in not allowing us to pass on any of the new tax. We expect no benefit from the tax.
Now, in theory, you might expect providing insurance coverage to 30 million uninsured people would increase the demand for medical products. However, many of the products provided by the medical device industry are used for people who need hips, stents, knees and procedure for body parts that need repair or replacement.
By design, the 30 million uninsured are meant to capture the young and healthy to offset growing Medicare expenses. This young and healthy patient population is not expected to deliver any appreciable sales to companies like ours, who sell devices for prostate cancer, cardiology, radiology and specialty procedures. These are not typically diseases of the young and healthy.
As investors you should expect that the medical device tax will continue to be a challenge rather than a windfall."
*Correction: This article mistakenly cited Theragenics’ Q1 2013 losses at $34 million and Q1 2012 earnings at $934 million.