Is the Worst Over for Medical Device Stocks? MDT, BSX & STJ

On Thursday, medical device stocks like Medtronic (NYSE: MDT), Boston Scientific Corporation (NYSE: BSX) and St. Jude Medical (NYSE: STJ) continued to decline as it looks like Obamacare is all but assured. So why would medical device stocks fall when there could potentially be millions of new customers thanks to Obamacare? Simply stated, one of the myriad ways that Obamacare will be paid for is with an excise tax of 2.3% on all medical device revenue next year. Of course, that could change under any kind of tax reform that comes about if something is done about the fiscal cliff. The other good news for investors is that some medical device stocks have already prepared for the medical device tax by laying off US workers and shifting more activities overseas but there will still be a limit to what costs can be recouped from patients – especially given the strict rules and bureaucracy that Obamacare comes with. With that in mind, could the worst be over with for investors in medical device stocks and which ones are more prepared than others to whether the coming storm? Here is a closer look:

Medtronic (NYSE: MDT) Will Slash At Least 1,000 Employees

Medtronic is the largest medical device maker in the world and its a medical device industry bellwether. On Thursday, Medtronic fell another 1.08% to $41.06 (MDT has a 52 week trading range of $33.21 to $44.79 a share) for a market cap of $41.89 billion plus the stock is up 7.35 since the start of the year and down 12.4% over the past five years. Earlier in the year, Medtronic announced it would slash at least 1,000 jobs around the world (MDT’s total workforce was around 45,000 at the time) in an effort to save $125 million a year – not enough to cover the 2.3% tax increase as the company had revenues of around $16.2 billion last year. Medtronic will also be hiring around 1,500 new employees who will be mostly overseas in an effort to jumpstart its business by increasing and diversifying its product range and to get into emerging markets where the growth is. Given that’s Medtronic’s strategy, other medical device stocks will likely follow.

Boston Scientific Corporation (NYSE: BSX) Has Already Axed 2,000 Employees (And Will Make More Adjustments)

Boston Scientific Corporation is a developer, manufacturer and marketer of medical devices that are used in a range of interventional medical specialties. On Thursday, Boston Scientific Corporation fell another 1.55% to $5.08 (BSX has a 52 week trading range of $4.79 to $6.41 a share) for a market cap of $6.97 billion plus the stock is down 4.9% since the start of the year and down 61.6% over the past five years. Besides Obamacare, Boston Scientific Corporation has faced weak markets heart stents and implantable heart defibrillators for a number of years now due to more scrutiny over their use and the weak economy. In addition, recent studies have shown that bypasses appear to be more effective than stints – a potentially big problem for Boston Scientific Corporation. Given those issues on top of the medical device tax, the previous CEO of Boston Scientific Corporation slashed about 2,000 jobs (BSX had around 24,000 employees as of last summer). Back in August, there were reports (based on internal memos circulating to employees) of more “manufacturing adjustments” planned for the United States and abroad (Translation: Layoffs in the USA and probably more hiring abroad) plus another restructuring or rather a breaking up of the cardiac unit also being planned. It was hoped that those moves would at least stabilize things by the end of the year and get the company on track for next year.

St. Jude Medical (NYSE: STJ) Will Slash Its Workforce by 5% (And Has Already Made Enough Cuts to Cover the Tax)

St. Jude Medical develops, manufactures and distributes cardiovascular medical devices for the global cardiac rhythm management, cardiology and cardiac surgery and atrial fibrillation therapy areas and neurostimulation medical devices for the management of chronic pain. On Thursday, St. Jude Medical fell 1.36% to $36.87 (STJ has a 52 week trading range of $32.13 to $44.80 a share) for a market cap of $11.58 billion plus the stock is up 7.5% since the start of the year and down 9.6% over the past five years. St. Jude Medical also has a problem with falling heart device sales and in August, it slashed 300 employees as part of a restructuring plan to save $50 to $60 million next year that the company hopes will be enough to cover the new medical device tax. However and last week, St. Jude Medical noted that another 500 employees had been cut and there were plans to slash 5% of the company’s 16,000 employees plus consolidate various functions to achieve more cost savings and accelerate growth.

The Bottom Line. Although the Obamacare medical device tax comes at a time when medical device stocks are already struggling, it appears that Medtronic, Boston Scientific Corporation and St. Jude Medical are prepared to whether the consequences next year thanks to the layoffs and restructurings already done that should make them stronger moving forward.