Medical Supply Stocks To Get Hit By The Taxman, Yeah, The Taxman

(By Rich Bieglmeier) In keeping with our taxman craze theme earlier today; the IRS announced its final rules for a new tax surcharge on medical devices on Wednesday, November 5, 2012. Unfortunately, the Beetles had it right with their Taxman song. We paraphrase:

Should 2.3 percent appear too small

Be thankful I don't take it all

'Cause I'm the taxman, yeah I'm the taxman

Essentially, any medical device/supply you cannot buy at your local supermarket or pharmacy is subject to the new 2.3% tax as of January 1, 2013. The exempt devices include eyeglasses, contact lenses, hearing aids, and are "generally purchased by the general public at retail for individual use."

Everybody's favorite agency says if the "design of a device demonstrates that it is primarily intended for use in a medical institution or office, or by medical professionals, and therefore not intended for purchase and use by individual consumers.  The factors are (i) whether the device generally must be implanted, inserted, operated, or otherwise administered by a medical professional; (ii) whether the cost to acquire, maintain, and/or use the device requires a large initial investment and/or ongoing expenditure that is not affordable for the average consumer," it will be taxed! 'Cause I'm the taxman, yeah I'm the taxman.

Reading through the finding, so that you don't have to, it seems the dental industry needs to hire better lobbyists. The final regulations do not create a special rule for dental devices, except for the stuff you can buy at the store i.e. toothbrushes, floss, toothpaste…

Now, that the rule is final, iStock anticipates a slew of announcements from medical supply companies detailing the impact on their earnings. According the Wall Street Journal, research firm, Bernstein believes the new tax could shave industry earnings by 3 percent or 4 percent annually; however, some if the impact could offset by increased demand from expanded coverage.

iStock broke out the trusty screener to search for medical supply stocks with trailing-twelve-month pre-tax margins that are greater than zero and less than 10%. Many of the qualifying companies have net and operating margins that hover in neighborhoods where the tax could be the difference between posting a profit or a loss.

We feel many of the names in the table below could see their stock prices decline as the new tax kicks into effect. Of course, many companies will try to pass the tax increases to the consumer through their health insurance, which could mean the average person will pay most to all of the tax in the form of higher premiums, deductibles, and co-pays.

Now my advice for those who die

Declare the pennies on your eyes

'Cause I'm the taxman, yeah, I'm the taxman

And you're living for no one but me.