Medical Device Tax Suspension Reflects on Stocks

In late December, many medical device companies experienced a dip in their share price, which was felt until the medical device tax was supposed to return. 
That said, on Monday (January 22) the senate voted in favour of the medical device industry, to again suspend the 2.3 percent medical device excise tax—just before the first payments would have been due on a week later on January 29. The tax, which began in 2013, was imposed on the sale of certain medical devices by the manufacturer or the importer. It was part of the taxes and fees in place under the Affordable Care Act to pay expanded health insurance.
Some companies experienced a dip in their share price, although it’s not clear the news was the reason for the dip. Over the last month, some micro-cap medical device stocks have increased, including Nuvectra (NASDAQ:NVTR), which has risen 11 percent over a 30 day period, and Tactile Systems (NASDAQ:TCMD) which has increased 4.73 percent.

Investor Insight

The suspension of the tax means it could be a good time to invest in the medical device industry, before it is again threatened with the tax which could return in 2020. Even if the tax does make its way back, it only affects companies by a tax rate of roughly 1.5 percent because they are able to claim deductions from their federal taxes.
With its share price increase over the last month, Nuvectra released their unaudited preliminary fourth quarter and final year revenue in the beginning of the year. If the actual results are close to its predictions, Nuvectra may have nearly quadrupled consolidated revenue from $4.2 million to $12 million year-over-year for the fourth quarter, meaning a huge increase for the company. Additionally, the full year consolidated revenue should more than double from $12.5 million in 2016, to $32 million in 2017. With preliminary results like this, it’s no doubt 2018 should see an even bigger increase if sales continue.
Tactile Systems also reported their preliminary 2017 full year and fourth quarter revenue results, representing an growth of approximately 29 percent to $109 million of overall revenue. The company’s primary source of revenue is expected to come from its Flexitouch system, which had a growth of 36 percent to $100.1 million. Analyst research from Post Analyst indicated the company maintained an average ‘Buy’ rating from seven stock analysts.

The year ahead for medical devices

As mentioned above, the suspension of the tax is still an overall win for all medical device corporations. For Nuvectra, TipRanks suggests stocks should increase to almost 40 percent to a $12 stock target. Even though the last year was a bit of a roller coaster for the company, but even with the highs and lows, they managed to increase 70.58 percent, according to Google Finance.
At the start of 2017, shares of Tactile Systems were valued at $15.40 a share and have since increased to$31.15. TipRanks projects a high of $37.00 for the next year, based on analyst ratings with a strong buy.
Now at $389 billion the medical device market’s largest component is in the US—even though the majority of sales on made outside the US—according to a report by Kalorama. And, though the global pharmaceutical industry is more than double the revenue of the medical device, it’s supposed to grow more than the pharmaceutical industry. This is due to challenges with patent expirations and regulatory activity with pharmaceuticals.
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Securities Disclosure: I, Gabrielle Lakusta, hold no direct investment interest in any company mentioned in this article.