Key Analyst Sees Upside in Medical Devices After Midterm Elections

With the Republicans winning control of the Senate Tuesday night, the repeal of the Affordable Care Act’s (ACA) medical device tax is very much a possibility. The removal of this tax has some Democratic support, given medical device manufacturing in states with Democratic senators, namely California, Massachusetts and Minnesota.

Within the Oppenheimer coverage universe, Boston Scientific Corp. (NYSE: BSX) in large cap and Integra Life Sciences Holding Corp. (NASDAQ: IART) in small cap would get the most relative benefit in earnings per share should the tax be repealed.

The ACA will likely be on the chopping block as a Republican majority takes control of Congress. While bipartisan legislation has potential in areas such as the medical device tax, other measures are less certain. Oppenheimer notes that medtec companies have seen little in increased volume or expectations of an acceleration in volume as a result of the ACA, and as a result it sees little pressure on this front.

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Tax reform is expected to be another major issue that this Republican Congress will key in on, specifically tax inversions. In Oppenheimer’s view, the potential for a retroactive bill with additional limits on tax inversions likely will be reduced. In terms of Medtronic Inc. (NYSE: MDT), this appears to be a positive. Oppenheimer notes, the new U.S. Treasury rules on inversions have already created some disincentives, but Medtronic reaffirmed its commitment to the Covidien deal with restructured financing and is pushing forward.

There was a 2013 non-binding vote in the Senate resulting in a 79 to 20 in favor of repealing the medical device tax, demonstrating the bipartisan nature of the issue. In the Oppenheimer large cap universe, the average increase in 2015 earnings per share would be 4% if the tax were removed. The two largest increases in 2015 earnings per share are expected to be Boston Scientific at 6% and Integra at roughly 10%.

Oppenheimer estimates 2015 earnings per share with and without the medical device tax:

• Boston Scientific, $0.90 and $0.96
• Medtronic, $4.38 and $4.49
• St. Jude Medical Inc. (NYSE: STJ), $4.22 and $4.46
• Stryker Corporation (NYSE: SYK), $5.22 and $5.45

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