Love it or hate it, the Patient Protection and Affordable Care Act (aka Obamacare) is the law of the land and its repeal is unlikely, even in a Republican-controlled Congress. But there’s one part of the sweeping bill that is despised by both sides of the aisle: the medical device tax.
This potential source of accord is rare news on Capitol Hill — and great news for medical device marker Medtronic (MDT). The company is a developer, manufacturer and marketer of medical devices for clinical and home-based care.
MDT is poised to become the biggest player in the industry when it completes its $42.9 billion merger with rival Covidien (COV), which is headquartered in Dublin, Ireland. Medtronic’s robust earnings report yesterday is further icing on the cake.
Partisan enmity continues in Washington, D.C. and compromise is hard to find. However, even between the two polarized parties, all sides agree that Congress should repeal a central provision of Obamacare that raises funds by taxing medical device makers. President Obama has indicated that he would get on board.
Device industry executives and their lobbyists have condemned the 2.3% medical device tax as an albatross around the industry’s neck ever since Congress in 2009 agreed to include it as part of Obamacare. The tax is projected to generate about $29 billion over 10 years to help subsidize health coverage of the uninsured.
Medical device makers have been collecting and remitting the new tax since it went into effect on Jan. 1, 2013, but the industry hasn’t flagged in its efforts to get it repealed.
If the despised tax is lifted — a prospect that incoming Senator Majority Leader Mitch McConnell (R-KY) recently promised to put on the front burner — MDT would likely get a huge boost. At the same time, the medical device business is booming.
According to research firm Lucintel, the global medical device industry will post a six-year compound annual growth rate of 6.1% and reach $302 billion in annual sales by 2017.
Medical devices are closely connected to the human body as part of their regular operation, which also makes them a valuable source of patient information. The collection and analysis of data is a huge growth driver in the health care sector and another significant source of future revenue for MDT.
MDT’s Healthy Vital Signs
Meanwhile, MDT yesterday reported second quarter fiscal 2015 earnings. Adjusted earnings per share (EPS) came in at 96 cents, an increase of 5.5% compared to the same quarter a year ago and in line with Wall Street estimates. Revenue in the quarter came in at $4.4 billion, an increase of 4.1% year over year.
Medtronic’s proposed merger with Covidien is scheduled for a shareholder vote on Jan. 6. If the deal goes through as expected, it would create a medical device colossus that’s relocated to low-tax Ireland.
Solid operating results, an imminent merger, the likely repeal of the medical device tax and the upward trajectory of health care spending all add up to the right prescription for Medtronic stock.
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As of this writing, John Persinos did not hold a position in any of the aforementioned securities.