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How the Corporate Tax Rate Cut Could Affect R&D in the Medtech Industry

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Overview

On December 2, 2017, the Tax Cuts and Jobs Act was passed in the US Senate, and the House version was passed in November 2017. The US medtech industry is expected to be impacted by some key reforms in the bill such as corporate tax cuts, repeal of the tax deduction for people with high medical expenses, and a 20% excise tax imposed on goods manufactured outside the United States by US companies’ subsidiaries.

Major medtech players such as Medtronic (MDT), Becton Dickinson (BDX), Zimmer Biomet Holdings (ZBH), and Intuitive Surgical (ISRG) are closely following the developments around the tax reform bills. This legislation is expected to have a significant impact on their sales and growth going forward.

Investors can consider the iShares U.S. Medical Devices ETF (IHI) for focused exposure to the US medtech industry. Medtronic, Becton Dickinson, Zimmer Biomet Holdings, and Zimmer Biomet Holdings comprise approximately 10.2%, 5.8%, 3.2%, and 5.3%, respectively, of IHI’s total portfolio holdings.

Corporate tax cuts and R&D

The permanent corporate tax rate cut from 35% to 20% is the major tax reform proposed in both tax reform bills. The tax cuts are expected to significantly boost the research and development (or R&D) expenses and innovation in the medtech industry.

However, the repeal of the tax deduction for high medical expenses may reduce the number of taxpayers opting for costly medical technologies and services.

This complex interaction of legislation, tax law, and medtech could also provide benefits to some players in the US medical device industry that offer generic therapies and procedures.

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