Zacks Industry Outlook Highlights: AbbVie, Shire, Medtronic and Walgreen

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Dec 08, 2014, 09:30 ET

CHICAGO, Dec. 8, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Medical Tech, including AbbVie Inc. (NYSE:ABBV-Free Report), Shire plc (Nasdaq:SHPG-Free Report), Medtronic Inc. (NYSE:MDT-Free Report) and Walgreen Co. (NYSE:WAG-Free Report).

Industry: Medical Tech

Link: http://www.zacks.com/commentary/35830/will-medtech-gain-from-republican-promises

Medical devices is one sector expected to benefit greatly from midterm election results. With the GOP set to get control both houses of Congress, this sector is expected to get rid of a number of tax overhangs.

Is Corporate Inversion Still "Unpatriotic"?

The Obama administration has all along been opposed companies' attempts offset the impact of the high U.S. corporate tax rate by shifting their tax bases overseas (known as inversion), even going to the extent of calling the act "unpatriotic." Accordingly, in September, the Treasury Department announced its first steps to reduce tax benefits associated with corporate inversions underlining a set of new rules effective immediately.

Treasury Secretary Jacob J. Lew said this reform should help eliminate certain techniques like "hopscotch loan" which inverted companies currently exploit to gain tax-free access to the deferred earnings of a foreign subsidiary. Given the GOP's tax stance, it is hard to see a common ground between the two positions for a bipartisan deal. But it's hard to predict these things any way.

Given the uncertainties, some health care companies are abandoning cross border acquisition deals. AbbVie Inc. (NYSE:ABBV-Free Report) recently walked away from the proposed Shire plc (Nasdaq:SHPG-Free Report) takeover, citing changes in the U.S. tax rule. On the other hand, giants like Medtronic Inc. (NYSE:MDT-Free Report) and Walgreen Co. (NYSE:WAG-Free Report) are still pursuing their overseas opportunities.

Walgreen is in its second leg of the planned acquisition of pharmaceutical giant Alliance Boots. However, it has decided to forego its earlier decision of moving its headquarters to Europe. The company's stock price witnessed a sharp decline after it announced a subsequent reduction in the combined entity's 2016 earnings outlook.

What's the Fate of the MedTech Tax?

The much controversial 2.3% medical device excise tax has also taken a heavy toll on the MedTech sector, hurting pricing decisions of companies and subjecting them to tremendous margin pressure. This tax is imposed on the sales price instead of net profit, amounting to a sizable sum, wiping out almost a quarter of the profit at the med instrument owners.

With the victorious midterm result, the Republicans are in full force to repeal this tax as well. According to a Reuters article, Bernstein Research noted that this repeal could boost the medical device companies' profits by 1–5% annually.

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