Congress in 2010 passed a law that would charge 2.3% excise tax on the gross sales amount for medical-device manufacturers that would go effect in 2013. Over 400 health-care companies have pushed for a repeal of this tax.  Following aggressive lobbying from the industry, the original version of the tax has been already slashed by half to its current level. Also given the significant $20 billion in additional revenues this could fetch the U.S. government within just a decade and the current deficit situation, we believe that the government may not budge much further on this. This will a small impact on impact Kimberly-Clark’s (NYSE:KMB) medical disposables business and will also impact competitors like Procter & Gamble (NYSE:PG) and Johnson and Johnson (NYSE:JNJ).
Kimberly Clark makes medical disposables such as surgical drapes and gowns, infection control products, face masks, exam gloves and respiratory products which are sold under Ballard, ON-Q and its namesake brand names, which together make up over 5% of our $65.80 Trefis price estimate of its stock – that is just ahead of the market price.
Profit Margins Under Pressure
Despite revenues from medical disposables sales rising by a healthy 6.7% in 2010, its EBITDA margin took a hit dropping from over 21% to less than 16% on account of higher selling and general expenses, inflation in key inputs and overall lower selling prices. Since the cost and pricing pressures still persist, we do not expect much improvement in EBITDA in the coming years.
However, EBITDA margins could fall further with the imposition of added excise duty. If EBITDA margins were to flatten out at 13% by the end of our forecast period instead of near 16% according to our forecasts, Kimberly-Clark’s stock could see just under 5% downside to our current estimates.
You can drag the graph below to see the impact on Kimberly-Clark’s stock price estimate.
(Chart created by using Trefis' app)
- Medical-Device Industry Urges Repeal of Excise Tax, NASDAQ.com, July 18’ 2011
Disclosure: No positions