Hidden within the $1.8 trillion pile of Christmas gifts that Congress miraculously wrangled into its latest spending bill is a present making medical device makers very happy.
The bill puts a two-year moratorium on 2.3 percent excise tax on devices that was introduced by the Affordable Care Act and enacted in 2013. The industry has described the tax in near-apocalyptic terms and lobbied expensively against it. Device makers would prefer that the tax die forever, but this bill raises hopes of that happening. In the meantime, the industry certainly won't complain about two years of relief. It will mean a nice margin boost through 2017 for firms such as Medtronic, Boston Scientific, Edwards Lifesciences and St. Jude -- some of which likely have major new device launches coming in 2016.
The tax was meant to help pay for the ACA, but its targeting was always somewhat odd, given that the government presumably doesn't want to discourage the medical device industry. Company claims that the tax cost 30,000 jobs are likely exaggerated, but the financial impact was serious. Medtronic estimates the tax would have cost it $210 million next year.
To be sure, device companies have pretty high gross margins -- around 63 percent on average, just a bit less than Big Pharma, which tops 70 percent. But no business takes kindly to a highly specific 2.3 percent haircut on a large portion of its revenue.
Device companies also tend to be less research-and-development-intensive than pharma, with an average of 9.34 percent of revenue going into research, compared with 17.3 percent for pharma. So extra revenue will translate fairly directly to extra profits -- though firms have promised to spend more on R&D if the tax is repealed.
Taxes aside, 2015 has been a decent year for the industry. Annual returns are on pace for around 4 percent -- a bit weak compared to past years, but beating the broader market. Device companies are not as susceptible to the pricing criticism that has turned 2015 from a boom to something of a bust for pharma and biotech, though they do get flagged for similar behavior.
The barriers to repealing the tax have weakened. Obamacare has been less costly than expected, and the deficit panic of 2010 has substantially cooled -- as evidenced by the fact that this spending bill passed without much in the way of shutdown posturing. So there seems to be more room to end the tax without needing to find extra money elsewhere.
The House has voted to repeal the tax twice, and the Senate passed a nonbinding resolution repealing it in 2013. Congress has kicked the can with its two-year moratorium, but is likely to stomp it at the next opportunity. For device makers, the biggest gift is yet to come.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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