Many large devicemakers see profits climb despite new excise tax

Despite the new excise tax that medical devicemakers intensely oppose, large multinational companies have so far weathered the additional expense while still earning profits that impress Wall Street.

Many medical device players have seen their share prices climb after the controversial 2.3% tax went into effect Jan. 1. On Tuesday, St. Jude Medical, the St. Paul, Minn.-based manufacturer of implantable cardiac devices, announced that it would repurchase $700 million in shares.

The move reflects “our confidence in the continued growth of St. Jude Medical's business, our sustainable free cash flow and our commitment to enhancing shareholder value,” President and CEO Daniel Starks said in a news release. The company also said it would pay shareholders a quarterly dividend of $0.25 per share, bringing its annual dividend to $1 per share.

Devicemakers have lobbied aggressively to kill or delay the device tax, which was included in the Patient Protection and Affordable Care Act. The tax, expected to raise $29 billion over 10 years, was considered the industry's contribution to funding the 2010 law in exchange for millions of newly insured customers. This fall, a White House concession on the tax was floated as the potential linchpin of a deal to end the budget stalemate and government shutdown.

St. Jude has seen its share price increase 61% since January. At an investor conference last week, Chief Financial Officer Donald Zurbay said the tax represented a “50 to 60 basis-point headwind on gross margin for the year.”

Debbie Wang, an analyst at Morningstar, said the tax is expected to have a modest impact on devicemakers. “The big companies are definitely absorbing it well.”

Companies like St. Jude, Boston Scientific and Medtronic have significant sales overseas, which are exempt from the excise tax, she said. In addition, the three years between when the law was passed and the tax went into effect meant that companies had plenty of time to move their manufacturing operations to lower-cost countries.

St. Jude, for instance, has increased operations in Costa Rica and Malaysia while Edwards Lifesciences scaled up capacity in Singapore.

Medtronic, which has a market cap of $57 billion and likewise has an expansive international reach, has seen its share price increase nearly 40% this year while forecasting a $120 million hit from the medical device tax in fiscal 2014.

Hologic, a $6 billion company whose share price has risen a more modest 8%, said the tax increased its operating expenses by $3.8 million last quarter.

Wang said she expected the tax to have an even smaller impact on the industry as companies continue to manufacture and sell more of their products overseas.

Smaller companies, however, will take longer to reach profitability as a result of the tax, she said, such as Bedford, Mass.-based Insulet Corp., which has yet to turn a profit on its OmniPod insulin pump.

Development-stage companies may also feel the effects—but for a different reason.

“We are seeing an impact, but it's happening at the very, very early stage where venture capital firms are reluctant to invest in development-stage companies,” she said. “Med-tech companies with an idea are having a harder time getting private financing before they go to the capital markets.”

Follow Beth Kutscher on Twitter: @MHbkutscher