Beyond The Medical Device Tax | Experts see several reasons for Stryker, and the whole industry, to worry
Last month, when Michigan medical device maker Stryker Corp., which has operations in Hopkinton, announced plans to reduce its worldwide workforce by 5 percent, it didn’t take long for observers to connect the cuts to a federal tax on medical device makers scheduled to take effect in 2013.
The state industry publication Mass Device headlined its story “Stryker plans to lay off 5% of its workforce ahead of the med-tech tax.” Other news sources quoted business and political leaders who cited the layoffs as a reason to rethink the tax.
The tax was a political issue long before Stryker’s announcement. It amounts to 2.3 percent of companies’ sales, and the proceeds are intended to help fund the 2010 health care reform law.
But some observers point to issues facing the medical device industry that may be more of an impetus for the cuts than the tax is.
In announcing the reductions, which will save $100 million annually, Stryker said it’s making them both to prepare for the tax and react to “the ongoing challenging economic environment and market slowdown in elective procedures.” (Stryker officials declined to comment further for this story.)
Bad News For Industry?
Raj Denhoy, an analyst who covers Stryker at Jefferies & Co. Inc., said the tax is a real issue for medical device companies, especially since it’s based on sales rather than profits. But he said it’s also in the industry’s interest to point to it as a cause of problems for companies.
“I think there’s still a hope in the industry that they can reverse the device tax,” he said. “One of the main arguments is it’s going to lead to job cuts. Here’s a perfect example of it actually happening.”
Denhoy said the general focus on health care costs by businesses and government officials is shrinking medical device companies’ profit margins. In particular, he said, hospitals are getting more aggressive in bargaining over the prices of products they buy. He said these pressures are likely to continue for quite a while, and they’ve already had a big impact on large medical device companies.
“These stocks just haven’t worked recently,” he said.
Thomas Sommer, president of the Massachusetts Medical Device Industry Council, said in an email that the tax, along with proposed revisions to the FDA product review process, are weighing on the industry. Sommer noted that a bill introduced by Sen. John Kerry, D-Mass., would offer help to the industry by allowing for outside experts to help review new devices, potentially decreasing product review times. But he said the Kerry bill would do nothing to mitigate the impact of the tax.
“This is a time of great uncertainty for the medical device industry in the U.S.,” he wrote.
Price And Cost Pressures
A November report by Zacks Investment Research of Chicago, also pointed to issues facing the medical device industry as a whole, including pricing pressure and austerity measures in the health care world, as well as the European financial crisis.
Zacks noted that a particular rough spot is orthopedics — Stryker’s core business — since patients have been deferring elective procedures like joint replacements because of the weak economy. Yet Zacks has also pointed out elsewhere that Stryker has diversified itself aggressively through acquisitions, making it more protected from that kind of pressure than other orthopedics companies.
Dehoy said Stryker is known for its agility in terms of acquisitions, divestitures and changes to its model to deal with obstacles.
“In the sense that [the cuts are] reflective of this, that’s good,” he said.
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