Life Science/Medical Device Practice
In January 2018, President Trump issued an Executive Order suspending the medical device tax (2.3% on revenue) for an additional 24 months. Further, because the moratorium is retroactive to January 1, 2018 -when the tax did commence, medical device manufacturers, producers, and importers were instructed not make any deposits or report any liability. This leaves medical device companies with a windfall sum to reallocate. This white paper profiles some companies to find out how they are putting the funds to use.
How Companies Are Using These Savings
I figured research would dictate writing about investments this windfall would support such as:
- Hiring and New Job Creation
- Retention Efforts – company raises, higher 401K matches, new training development
- R&D (Innovation) and existing pipeline
Select companies may be doing some or all the above to some extent, but that doesn’t seem the norm, especially for smaller or start up companies. This 2.3% tax is to be paid on revenue regardless of profitability. Although everyone supports the temporary suspension of the tax, true repeal is what most are seeking before they feel comfortable investing this type of windfall.
Denis Harrington, CEO of startup NexGen Medical Systems in Minnesota reiterated his thoughts with the tax, “While the whole notion of the MDET is challenging to rationalize, the real headscratcher here is how Congress could actually provision the tax such that all companies would be accountable regardless of whether they are profitable or not. Taxing Top Line Revenue (as opposed to bottom line profit … if you have any) is especially onerous on the small, start-up businesses that can ill afford any leaks out of its budget buckets. These are the companies just transitioning from the challenges of ideation, development and clinical trials … on the cusp of creating their own organic funding source … closer than ever to potentially “making it”. To be hit w/ another 2.3% pinch on the wallet can be devastating. It seems counter-intuitive and poorly considered. For me, as a start-up CEO, this is where the MDET hurts the most and undermines its credibility.“
When Denis was asked about how he is reinvesting this windfall, he stated: “Reallocation isn’t a real consideration. We are very early Revenue and have little budget flexibility. We recognized what our obligation was going to be and targeted “tradeoffs” we would consider once we got to “payment day.” We are thankful for now, that none of those need be further pondered.”
Carlton St Bernard, CEO of Tryton Medical shared some of the same sentiments on the taxing of smaller companies, “becausewe are a small, single product, company we can’t distribute the cost impact of the tax over a broad portfolio of products and services. Also, because we are an early stage company, we are in the tough position of having to pay a tax on all sales even when those sales aren’t large enough to support the costs of an emerging organization.”
Carl felt that as a company faced with a single technology platform, this tax posed a significant challenge to the effective allocation of their limited resources. However, he said he will try to take some of this saving to use, “At this point, we will be using these unexpected funds to accelerate work on our “Next Generation” platform and develop greater clinical evidence for our technology.”
What are the policy makers saying about the MDET and the reprieve?
Jennifer Jones, VP of the Colorado Bioscience Association provided a statement that read: “Colorado Bioscience Association applauds Congress and the Colorado Delegation on the passage of the suspension as it has a significant positive impact for patients and our industry, allowing us to deliver value to patients while also creating next-generation treatments and providing access to innovative medical technologies.” The statement went on to say, “While we were glad to see this temporary relief, CBSA continues to advocate for a full repeal of the tax as it will provide long term stability and certainty for our sector, ultimately supporting our companies, the industry, jobs and new innovations for patients.”
It seems policy makers and small device companies agree, while it’s nice to have a reprieve from the MDET, companies still seem hesitant to invest those funds without knowing for sure if they will have to pay this tax again in the near future. The Colorado Bioscience Association feels that with full repeal, medical device companies will feel more comfortable with multi-year investments in projects like R&D. These types of investments can take a long time to materialize and it would be challenging to start, then stop because another tax may be coming.
Advamed estimates robust benefits for a full repeal (1):
- 71% of companies surveyed would reinstate previously foregone hiring.
- 85% of companies surveyed would reinstate previously foregone R&D projects.
- 2 million jobs directly and indirectly supported by medical technology all over the United States
It’s obvious that industry wants this tax repealed. What wasn’t obvious is how this windfall would be spent, if at all. Companies remain fearful that they may have to pay this tax again. Permanent repeal may give them comfort in allocating some of these tax savings, but that is yet to be determined. Hopefully we’ll see this full repeal in the future. In fact, the House showed bipartisan support for eliminating the levy by voting 283 to 132 this past July (2). The Senate needs 60 votes to pass but doesn’t appear they will take up legislation before year’s end.
I want to state that this is just a small sample size and other companies may feel different about the tax and if they were able to invest some of this windfall. The opinions expressed here are through some short interviews and meant to simply share some thoughts while investigating the impact of this temporary reprieve. If this tax isn’t fully repealed, that will open up a whole other topic of how it could be reformed. Some of the interviewees suggested having a revenue size “means testing” or staggering taxes based on revenue and profitability for smaller companies. Let’s hope the House passage is a sign of things to come…
Ken Dropiewski is a Principal Consultant with McDermott & Bull’s Life Science and Medical Device practice and has been doing search for nearly two decades. His expertise serves the medical device and biotechnology industry. Ken is especially known for work done in the cardiac, vascular, interventional and oncology segments and has been in the Med-Tech field for over 20 years. Prior to his career in search he worked for Johnson & Johnson and Boston Scientific.