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Investors Forgot to Panic Over the Medical-Device Tax

4 October 2013 in Trading Ideas

As the Affordable Care Act neared its Oct. 1 starting date, the heads of medical-device companies weren’t exactly lying down in the wake of a new 2.3% excise tax that is scheduled to be levied on all medical devices made in the US (with a few exemptions).

Indeed, it didn’t seem to be a huge coincidence that the Wall Street Journal was able to run an Oct. 1 interview story with Stryker CEO Kevin Lobo, who – you guessed it – is not in favor of the Obamacare-mandated medical-device tax.1

Lobo couldn’t have been more blunt: “For Stryker, the device tax is clearly a negative. It’s 2.3% of sales, roughly $100 million a year, which represents roughly 20% of our [research-and-development] budget. It’s a very significant burden. Clearly, it does have an impact in jobs, not just within Stryker, but within the broader industry.”

However, what it doesn’t seem to be impacting, at least negatively, is Stryker’s share price, which is up nearly 24% in 2013. Even in the past month, as buzz surrounding the new healthcare law grew, Stryker’s shares have gained 1.27%. (During those same timeframes, the S&P 500 has increased 17.5% and 2.3%, respectively).

senior care motifBut why single out Stryker? In fact, the entire orthopedics-stocks component of our Senior Care motif, which includes Stryker, and carries 25% of the portfolio’s weight, has climbed 23.7% in the past 12 months.

The Senior Care motif itself has increased 4.7% in the past month and is up 15.4% in 2013.

Do investors know something that Stryker CEO Kevin Lobo doesn’t?

Probably not, but it’s at least plausible that many medical-device stock bulls believe that bringing in more potential customers with expanded insurance coverage could outweigh any downside from a 2.3% tax. Hypothetically speaking, if Obamacare boosts a company’s revenue and profit by 20%, is giving back 2.3% of that necessarily a bad thing?

While it remains to be seen how many seniors will now have coverage, the US government is projecting that Medicaid enrollment will increase by 8.7 million Americans in 2014, nearly all of them due to the Affordable Care Act.2

Of course, not all seniors choose Medicaid, but of those that do, how many of them are likely to use senior-oriented health care products and services like medical devices, dialysis and cardiovascular care providers? As some investors seem to be betting, more than you would’ve seen without Obamacare.

1Joseph Walker, “Amid Health Law Rollout, Stryker Boss Braces for Profits and Pain,” WSJ.com, Oct. 1, 2013.

2David Morgan, “US Government Scales Back Obamacare Impact for 2014,” reuters.com, Sept. 18, 2013, http://www.reuters.com/article/2013/09/18/us-usa-healthcare-spending-idUSBRE98H11T20130918, (accessed Oct. 1, 2013).