Medical device tax would mostly hit the biggest firms

President Barack Obama signed the landmark healthcare reform bill into law March 23, initiating a monumental series of changes to the way healthcare is delivered and paid for in the U.S.

Not least among those changes, at least from the perspective of medical device makers, is the 2.3 percent excise tax on revenues contained in the law.

Unsurprisingly, the industry’s reaction to the tax ranged from dire predictions of mass layoffs to fears of its impact on medical technology innovation. A MassDevice poll showed that most of our readers despise the healthcare reform act, with 55 percent of the 130 respondents reporting “I hate this bill. I hate the idea,” and only 32 percent saying “The bill isn’t perfect, but the spirit is right.”

But the exact impact of the reform’s excise tax provision on medical device manufacturers’ balance sheets is unclear. We wanted to try to get a rough sense of its impact, using revenue and profit data from fiscal 2009. Results from our preliminary investigation follow, but first a few caveats:

1. The tax applies to U.S. sales of medical devices ranging from bedpans to surgical instruments. It’s unclear whether it applies to diagnostics products, so we excluded those companies from our analysis.
2. We tried to isolate U.S. medical device sales for companies with multiple product lines (we’re looking your way, Covidien, with your medical products and pharmaceutical divisions); in cases where that wasn’t possible, we used medical device segment sales (i.e. Analogic Corp.), which might include foreign sales.
3. Lastly, our aim here was to provide a rough first guess at the tax’s impact on individual companies. It’s only a guess, and with a companion bill still being wrangled over inside the Beltway, a lot could change before the tax goes into effect.

That said, here’s what we found:

• The 57 companies we looked at would have generated about $1.87 billion in excise taxes last year, had the law been in effect then. That’s on track to meet the prediction that the tax will generate $20 billion over 10 years, once it goes into effect in 2013.
• Because the tax is based on revenues, the lion’s share is generated by the industry’s largest players. For example, Medtronic Inc.’s $14.6 billion in 2009 revenues would have meant a $336 million excise tax tab; Boston Scientific’s share on its $8.19 billion in sales last year would have meant a $188.4 million tax bill. Together, the 10 largest players in terms of revenues would have generated $1.61 billion of the $1.87 billion total.
• The tax’s impact on smaller firms might be more pronounced. The tax would have reduced Stryker Corp.’s $1.1 billion profit by 14 percent last year. But take NxStage Medical as an example: Its $148.7 million in revenues last year would have meant a $3.4 million tax bill. That doesn’t sound like a lot, especially next to the larger companies’ share, but when you consider that NxStage posted losses of $43.5 million last year, the extra tax burden would have pushed that figure to $46.9 million. For some firms with narrow profit margins, the tax would have cut profits in half (Exactech Inc. and Theragenics Corp., for example).
• And for three of the firms in our sample, the tax would have pushed them into the red. Analogic’s $7.5 million tax bill (which we calculated by excluding sales from its security division) would have transformed its $3.7 million net income to a $3.8 million loss. NuVasive Inc.’s $5 million profit would have gone to a $3.5 million loss and Rochester Medical’s meager $100,000 profit would have plunged to a $700,000 loss.

Here’s how things break down for each company, in terms of 2009 revenues, the excise tax that would have generated, and its impact on each firm’s bottom line (figures in millions):

*U.S. medical device segment sales only