SYS-CON MEDIA Authors: Kevin Benedict, Gilad Parann-Nissany, Michael Bushong, Eric Brown

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Zacks Industry Outlook Highlights: BostonScientific, Medtronic, St. Jude Medical, Stryker and Quest Diagnostics

CHICAGO, Jan. 8, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Medical Technologies , including Boston Scientific Corporation (NYSE:BSX-Free Report), Medtronic Inc. (NYSE:MDT-Free Report), St. Jude Medical, Inc. (NYSE:STJ-Free Report), Stryker Corporation (NYSE:SYK-Free Report) and Quest Diagnostics (NYSE:DGX-Free Report).

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Industry: Medical Technologies

Link: http://www.zacks.com/commentary/30751/medtech-industry-stock-update---jan-2014

We are on the verge of the Q4 earnings season and it is once again time to review the players in the worldwide medical devices market. For the U.S. medical device industry, spending cuts and higher taxes have been a big issue lately. The industry faced sequestration related spending cuts to the U.S. federal budget and the 2.3% medical device excise tax.

Unfortunately, this is not the end of the story. This year, more spending cuts are scheduled to take place which will last through 2021. The sequestration which resulted in a 5.5% cut in the National Institutes of Health's (NIH) fiscal 2013 budget resulted in 640 fewer grants in 2013.  

The NIH was not the sole victim of federal budget austerities. In 2013, under the sequester, there was a 5% cut in the Centers for Disease Control and Prevention's budget, another 5% cut to the U.S. Food and Drug Administration's fund and a 2% cut in Medicare funding that included cut in payments to hospitals, physicians, other medical providers, Medicare Advantage insurance companies and Part D prescription drug plans.

Unless repealed or replaced, NIH apprehends sequestration to take a worse shape in 2014 leading to serious consequences like delaying progress in medical breakthroughs, deterioration in job creation and tempering of economic growth. An NBC news article recently noted that many new researchers, who were trained with the U.S. taxpayer's money, may have to move to Europe and Asia where government funding for medical research is on the rise.

On top of these, the Obamacare's medical device excise tax is taking a heavy toll on the MedTech sector, hurting pricing decisions of companies and subjecting them to tremendous margin pressure. The small and the medium-sized players in the sector (comprising about 80% of the industry) are the worst hit by this public policy. The devastating 2.3% excise tax (effective Jan 2013), which is imposed on the sale price instead of net profit, amounts to a stupendous sum, wiping out almost a quarter of the profit at the med instrument owners.

Conversely, the big players are trying every means to change their business model and cost structure to accommodate the excise tax. They are undertaking various restructuring initiatives to counter costs incurred from the implementation of the new tax. Restructuring especially to offset the effect of the excise tax has already been adopted by key players, such as, Boston Scientific Corporation (NYSE:BSX-Free Report), Medtronic Inc. (NYSE:MDT-Free Report), St. Jude Medical, Inc. (NYSE:STJ-Free Report), Stryker Corporation (NYSE:SYK-Free Report) and Quest Diagnostics (NYSE:DGX-Free Report). The companies are also trying to focus on strategic mergers and acquisitions (M&A), emerging market expansion or are reducing operations in order to weather the tax burden.

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