Moody’s estimates med-tech tax impact

The 2.3% tax on revenues slated to go into effect next year for medical device makers could top $650 million for the med-tech companies covered by Moody’s Investor Services, according to a report by the ratings agency.

The tax will help slow EBIDTA growth rates for the med-tech sector to between 1% and 4% over the next year to 18 months, according to Moody’s, with organic growth rates of between 2% and 3% during that period.

"Companies, however, will be able to recoup some of this expense because it will be tax deductible. Still, the amount of excise tax companies will pay could be significant. Companies with low cash flow relative to revenue will feel the greatest impact from this tax," according to the report, "US Medical Products and Devices: Profits to Rise Modestly; Cost Cuts Will Offset Weak Sales and Pricing, Regulatory Pressures.”

Several diversified companies – Moody’s cites Baxter (NYSE:BAX) and Hospira (NYSE:HSP) – that sell products in the med-tech space will not be affected by the tax, but "already face the negative effects of taxes and changes in rebate provisions for the pharmaceutical industry" under other provisions of the health care reform act.

Still others make over-the-counter products that are exempt from the tax, Moody’s notes, such as Becton, Dickinson & Co. (NYSE:BDX), Bausch & Lomb and DJO Finance.

"We believe that most rated device companies will continue to focus on cost-cutting initiatives, including reducing headcount and improving operating efficiencies. These efforts will help offset the added tax as well as ongoing pricing and demand pressures. Some companies have already put cost-cutting programs in place, including Stryker Corp. (NYSE:SYK) and Boston Scientific (NYSE:BSX),” according to the report.

Here’s a look at Moody’s estimates for the after-tax impact of the medical device tax on the 21 companies in its med-tech coverage universe: