Companies throughout the orthopaedic supply chain stand to benefit from the U.S.’s lowered Federal corporate tax, setting up the industry to invest in themselves in 2018. As you most likely know by now, the U.S. lowered its Federal corporate tax rate from 35% to 21%. Additionally, U.S. corporations with assets overseas face a one-time tax of 8% on fixed assets and 15.5% on cash. Our expectation is that companies will invest their kept earnings in research and development, job creation and potentially, mergers and acquisitions.
As public companies announce their 4Q17 and 2017 earnings, we anticipate they’ll discuss the impact of the tax changes in the context of their 2018 projections. As of the writing of this article, Globus Medical and NuVasive had made public comments on the benefit of the tax. The primarily spine-centric companies derive more than 85% of their revenue from U.S. sales, according to ORTHOWORLD estimates, and paid more than 30% in corporate taxes in recent years.
NuVasive leadership anticipated owing 33% on a non-GAAP basis in 2018 before the law was passed. The company expects that the tax break will boost free cash flow in excess of 10%.
“Innovation requires fuel, and this surplus can support increased investments in R&D to provide solutions that empower spine surgeons to change the lives of their patients,” said Gregory T. Lucier, Chairman and Chief Executive Officer of NuVasive. “This is a tremendous opportunity for the medical device industry, and a major spark in our ability to continue to invest in life-changing innovations.”
Dan Scavilla, Senior Vice President and Chief Financial Officer of Globus Medical, said that the legislation will lower the company’s marginal income tax rates, providing the company additional cash, $14 million of which will be reinvested to increase spending on Emerging Technologies in 2018. Globus’ Emerging Technologies portfolio includes the company’s newly-launched robotic and trauma divisions.
Of course, the tax overhaul is complicated, and it’s likely that not all companies will benefit from the changes. Stryker management, for instance, stated that it anticipates a modest but manageable headwind in 2018. Piper Jaffray analysts expect Stryker’s tax to increase from an estimated 16.5% in 2017 to 28.5% in 2018.
As you also probably know by now, the 2.3% medical device excise tax did not receive repeal and was reinstated in January after a two-year suspension. Legislation has been introduced in the House and Senate to repeal the tax, as of our deadline.
Medical device companies and their trade associations have fought the tax since its inception due to its pressure on company sales and ultimately, its hindrance on company growth.
“During the current suspension, medtech companies have been able to reinvest millions that otherwise would have been lost to the tax, supporting new jobs, capital improvements and R&D to fuel the next generation of life-changing technologies for patients,” said AdvaMed President and CEO Scott Whitaker in December. “We are committed to continuing this reinvestment in innovation if the tax is suspended on a long-term basis going forward.”
We’ll leave further explanation of the tax laws to your accountants, and look forward to covering companies’ investment commitments in the months to come. If you’d like to share your take on the tax, send it to Julie Vetalice by email.