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Why the shutdown matters to medical device industry stocks

Amritpal Khalsa

Government shutdown

On October 1, 2013, the US government shut down. Budget resolutions sent from the House of Representatives aimed at preventing and stopping a shutdown were repeatedly killed because of amendments included in the measures sought to delay Obamacare.

(Read more: Medtronic purchases Cardiocom: Bad for medical device industry?)

Medical device excise tax

Included in the amendments repeatedly killed by the Senate is a repeal of the medical device excise tax. The 2.3% medical device excise tax went into effect January 2013. As of July 2013, it has collected more than $1 billion in receipts.

After significant push-back from Democrat leaders, Senator Harry Reid announced yesterday that if the House could find a “pay-for” (another source for the $30 billion of funding the tax brings in), they would consider a repeal. The house voted earlier this year for a repeal, which passed in a non-binding resolution of 79-20.

A repeal of the medical device excise tax would be a boon for an industry with waning investment capital. Investors have been continually wary of the industry following the implementation of the tax, reductions in reimbursement, and pricing pressure. Repealing the tax would be a huge boost to profit numbers and drive up valuations.

(Read more: Are Covidien’s layoffs good for the medical device industry?)

Healthcare exchanges

Beginning today, healthcare exchanges became available to the public, who will start purchasing insurance in a new way. The exchanges are meant to make purchasing insurance easier and more accessible to millions more consumers and small businesses. Millions of people are expected to flood the insurance market following the implementation of these exchanges, skyrocketing the demand for healthcare.

Increase in demand for healthcare is expected to be a huge boost for device makers looking to supply their products to millions of consumers with reputable payers backing them. The increasing size of the market is supposed to offset the impact of the device tax. Expect revenues to increase as manufacturers leverage the increase in demand.

(Read more: Medicare’s competitive bidding seriously threatens device makers)

FDA shutdown

The FDA shut down today, as nearly half of its employees are furloughed until further notice. What exactly that means for medical device makers is uncertain. But what we know for sure is that the agency will have to halt many inspections, a majority of its lab research, enforcement actions, and monitoring operations. This could spell trouble for manufacturers who are waiting on device approvals, registration, and other decisions. The FDA has announced that it will operate in a limited capacity, working on critical health issues, high-risk recalls, import entry review, civil and criminal investigations, and similar concerns.

Look for increased volatility in medical device stocks and ETFs. FDA delays could delay revenues, while a repeal and increased demand could make revenue shoot up.

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