For years, medical-device makers had only one friend and one archnemesis. The ironic part was that they were one and the same: the Food and Drug Administration.
The FDA holds the key to medical-device approvals in the U.S., but significantly tougher safety and efficacy tests lengthen the average approval process domestically to four and a half years. The approval process in Europe and abroad takes considerably less time, causing a select few device makers to begin looking abroad for their future growth -- such as Delcath Systems (Nasdaq: DCTH ) , which is thinking about outsourcing jobs to Europe. That trend, however, may be about to pick up steam, and it wouldn't be the FDA's fault this time.
Death by excise tax
A decision from the Supreme Court on the whether or not the Affordable Care Act (aka Obamacare) is constitutional is looming in just a matter of days. At stake for medical-device companies is the medical device excise tax (MDET), a 2.3% tax on total revenue, not profit, which goes into effect in 2013 and will pay a portion of the costs associated with the ACA.
If approved, medical-device companies will probably be looking to trim costs according to a survey published in March, whereby the Massachusetts Medical Device Industry Council polled top-level executives at medical device companies. A whopping 44% of those surveyed noted that they would be passing along the MDET costs to the end user, which, in turn, makes medical devices more expensive. Of the 39% that said they would internalize the costs, 50% said they would reduce research and development budgets, 25% responded that they'd lay off workers, and 25% said they'd outsource jobs overseas.
If you think this is fearmongering on my part, then you'd be sorely mistaken, because we've already seen this concern expressed by multiple medical-device CEOs.
Alexis Lukianov, CEO of San Diego-based NuVasive (Nasdaq: NUVA ) , predicts that his company will bear the burden of a 60% tax rate and a drastic reduction in R&D spending and may cut up to 200 jobs in 2013 if the excise tax isn't overturned.
Michigan-based Stryker (NYSE: SYK ) announced that it's laying off 5% of its workforce in November as a direct result of the impending excise-tax legislation. The move is expected to save the company $100 million annually.
Even Medtronic (NYSE: MDT ) , the world's largest medical-device company, has been cautious about its hiring. It has stated its intention to hire 1,500 workers over the next 11 months; however, it made it clear that the majority would be in faster-growing overseas markets.
Perhaps the biggest slap to Obamacare came in late July, when Boston Scientific (NYSE: BSX ) announced that it will lay off off 1,200 to 1,400 workers globally. That announcement came just one day before it declared a $150 million investment in China that would create 1,000 jobs in that country.
The prospect that medical-device companies may move their production overseas and may cut back on research and development expensing is very real. We won't have a definitive answer from the Supreme Court for a few more days, but I can tell you one thing: If Obamacare is upheld, the medical-device sector could see an unprecedented number of layoffs in 2013.
Agree? Disagree? A little bit both? Tell me about it in the comments section below.
With the U.S. elections around the corner, our team of analysts at Motley Fool Stock Advisor realizes there's more at stake for stocks than just what we're witnessing in the health-care sector. Find out which stocks could benefit based on which president-elect wins in our latest special report. Get your free copy!