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New Year to Bring Back MedTech Tax, 3 Stocks Unfazed

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The infamous medical device excise tax will be back in effect starting Jan 1, 2018. The 2.3% medical device tax dealt a heavy blow to the U.S. MedTech space, since its enactment in 2013. However, a temporary two-year moratorium from 2015 to 2017 raised hopes for stakeholders. But, 2018 might not be a cakewalk for the MedTech companies and investors, considering the re-enactment of the taxes.

Notably, the tax was imposed on selling price instead of net profit, which consumed a substantial amount of medical technology companies’ profits. Consequently, MedTech bigwigs and small players as well as the U.S. House and Senate temporarily suspended the tax for two years.

Not-So-Happy New Year for MedTech

In 2017, the overall market performance has been impressive in the United States. The Fed has projected economic growth of 2.5% for 2018 (up from the prior guidance of 2.1%). Favorable data comprising strong labor market, higher household spending, lower unemployment rate and rise in business activities will drive growth in 2018. (Looking for the Best Stocks for 2018? Be among the first to see our Top Ten Stocks for 2018 portfolio here.)

While the other sectors have been consistent with returns, investors in the MedTech industry are facing the brunt. Their optimism has been dented, thanks to the healthcare policy related debacle pertaining to the repeal and replacement of Obamacare and tax worries.

Small Companies To Bear the Biggest Brunt

 “If you were going to start up a medical company, you were making an investment looking for profitability, would you start it somewhere where you have to pay 2.3% of your revenue?” – Joe DeVivo, Chief Executive Officer at InTouch Technologies.

Rather than competing on price, the small device companies focus on product quality to gain market traction. These companies, in their early years, invested a large sum in research and development (R&D), product launch, geographical expansion and more. Moreover, the small players do not report high profit starting in their initial years. Thus, a significant loss of revenues by paying huge amount as tax is a drawback. In fact, smaller companies will bear bigger expenses, as a percentage of revenues and will suffer the most when the taxes are brought back into effect.

MedTech Innovations to be Stalled

 The comeback of the medical device tax in 2018 will lead to a $15 billion rise in taxes, discouraging R&D activities in the niche space. The tax would also pave ways for reduced capital investment and massive job cut.

AdvaMed, a leading American medical device trade association, referred to the medical device tax as a 'significant drag on medical innovation' and has called on President Trump for reconsideration for Tax enactment. Thus, when the healthcare space has been accelerating at a lightening pace with robotic technologies and value-based models, a massive tax burden is a woe.

Per data provided by the medical device trade group (in a Ken Blackwell article published by The Daily Caller), the partial two-year repeal of the MedTech tax resulted in a roughly 83% rise in R&D investments by MedTech players. Once the tax is re-enacted, MedTech R&D activities will become sluggish and mar investor’s optimism in the space.

Job Cut in the Cards

Various reportscite the medical device taxes as one of the major factors that contributed to the massive layoffs from 2013 to 2015. In February 2017, AdvaMed announced that the MedTech space has witnessed 29,000 job cuts in these two years.

Per an article by Matt Murphy in wbur, sectors which are going to be hampered most by the reimposition of this levy are X-ray and MRI machines, surgical instruments and pacemakers. Thus, when the tax is put into effect, President Trump’s efforts to dampen the country’s jobless stature are likely to be marred. In this regard, reports suggest that the U.S. unemployment rate was pegged at 4.1% in November, the lowest since Feb 2001.

3 Stocks to Beat the Heat

In such a tumultuous scenario, we have taken the help of the Zacks Stock Screener to save investors from the lengthy process of identifying favorable MedTech stocks which may brave the industry threats in 2018. We have selected three MedTech growth stocks which are poised for impressive returns in 2017. These stocks boast a solid Zacks Rank #1 (Strong Buy) or 2 (Buy), has a Growth Style Score of A or B.

We note that our Growth Style Score encompasses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of growth. Our research shows that stocks with Growth Style Scores of A or B when combined with a Zacks Rank #1 or 2 offer the best investment opportunities in the growth investing space.

Tandem Diabetes Care, Inc. (TNDM - Free Report) designs, develops and commercializes products for people with insulin-dependent diabetes. This Zacks Rank #2 stock has a Growth Style Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The demand for Tandem’s next-generation t:slim X2 pump is expected to stay high. The company recently received FDA approval for t:slim X2 with Dexcom G5 CGM integration. Among other recent developments, Tandem has commenced pivotal study enrollment for its first automated insulin delivery product. The company has also announced the commercial launch of t:lock, a custom infusion connector. Added to this, stellar growth in insulin pump sales is expected to drive the company’s top line in the long haul.

The Zacks Consensus Estimate for Tandem’s sales is pegged at $139.1 million for the next year, signifying growth of 42.4% on a year-over-year basis. The stock has a market cap of $24.9 million.

Tandem Diabetes Care, Inc. Price and Consensus

 

Chemed Corp. ((CHE - Free Report) ), based in Cincinnati, OH, purchases, operates and divests subsidiaries engaged in diverse business activities. The stock has a Zacks Rank #2 and a Growth score of A.

Chemed’s raised guidance banking on Roto-Rooter business strength buoys optimism. Roto-Rooter is currently the nation’s leading provider of plumbing and drain cleaning services. Through its network of company-owned branches, independent contractors and franchises, Roto-Rooter offers plumbing and drain cleaning services to over 90% of the U.S. population.

The Zacks Consensus Estimate for Chemed’s sales is pegged at $1.73 billion for the next year, refelcting growth of 3.8% on a year-over-year basis. The stock has a market cap of $3.75 billion and a long-term expected earnings growth rate of 10% now.

Chemed Corp. Price and Consensus

 

PRA Health Sciences, Inc. ((PRAH - Free Report) ) operates as a global contract research organization providing outsourced clinical development services to the biotechnology and pharmaceutical industries. The stock has a Zacks Rank #2 and a Growth Score of B.

PRA Health offers therapeutic services in the areas of cardio-metabolic, biosimilars, infectious diseases, immunology, neurology and psychiatry, oncology and hematology, rare diseases and respiratory needs. Consistent revenue performance on the back of strong contribution from pharmaceutical and biotechnology companies contributed to overall growth. Considering the favorable foreign exchange scenario strong and balanced geographic expansion, we expect this trend to continue in the upcoming period. The recent acquisition of Symphony Health Solutions, a pharmaceutical and data healthcare company has proved itself to be a strategic addition to PRA Health’s overall business.

The Zacks Consensus Estimate for PRA Health Sciences’ sales is pegged at $2.34 billion for the next year, reflecting growth of 21.5% on a year-over-year basis. The stock has a market cap of $5.65 billion and a long-term expected earnings growth rate of 18.1% now.

PRA Health Sciences, Inc. Price and Consensus

 

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