Sounding Board: Device Tax Suspended, but What’s Next?

Just before ringing in a new year, the medical device industry received a late Christmas present from Congress and President Obama. A spending package was signed into law, and part of it granted a two-year suspension of the medical device excise tax, which had come about from the Affordable Care Act.
 
After what had been a long battle by industry associations, members of Congress, and executives at medtech OEMs, relief was in sight. The suspension would enable medical device companies to take that “lost” revenue and allocate it into areas that had been perhaps neglected in the wake of the device tax. They could put it toward even more aggressive M&A activities compared to what we saw from the industry in 2015. Other companies could boast the investment in their R&D departments to bring forth innovation at a more rapid pace. Still others might choose to grow a particular sector in which they can gain a competitive foothold over their competition. Whatever companies decided to do with the tax, it had to be better than paying it toward the device tax.
 
Recently, president and CEO of the Medical Device Manufacturers Association and MPO editorial advisory board member, Mark Leahey, issued a public statement regarding the suspension of the device tax. The statement was made in recognition of what would have been the first tax payment for 2016.
 
“For the first time in three years, medical technology innovators are able to invest more resources into improving patient care and creating jobs instead of paying a punitive tax,” said Leahey. “While many thought this day would never come, MDMA remained committed to this important work, and we will not rest until the medical device tax is fully repealed. We look forward to working with the broad bipartisan support in Congress to make sure that the last medical device tax payment has been made, and that medtech innovators are empowered to solve the pressing challenges facing our healthcare ecosystem.”
 
With this in mind, other members of the editorial advisory boards to MPO and ODT were asked for their thoughts on the passage of the device tax suspension. Specifically, they were asked what the response would be to the device tax suspension. How would the industry react? Would the companies squirrel away those savings in anticipation of the device tax being reinstated after the two years, giving them an opportunity to save for the expenditure? Would the money be invested elsewhere such as in R&D or M&A? Would shareholders benefit? What would be the reaction to this sudden “windfall” that benefited every company throughout the medtech industry? Following are the comments that several board members shared.
 

Joe Zuzula, Vice President of Sales & Marketing, Orchid Orthopedic Solutions; ODT Board Member
While the suspension on the excise tax is a temporary relief for OEMs, it still leaves them uncertain. Companies may be hesitant to make long-term investments with recurring cost unless the excise tax is repealed entirely. Their newly found savings may allow them to make smaller investments in R&D and job creation, but they will have to plan their budget as if the excise tax will be reinstated. The suspension of the tax is a good sign and could potentially turn into a repeal.
 
From a contract manufacture perspective, we will have to wait and see what the impact will be. Some OEMs have used the excise tax as a reason to request price discounts, however, most have already been looking at how to remove waste in the process to bring products to market that includes working with the supply base to reduce costs. The excise tax is just one piece of this but certainly a strong factor that can drive certain behaviors with the OEMs (e.g., trickle down to CMs).
 
Thomas F. Taylor, President and CEO, Foxx Life Sciences; MPO Board Member
OEMs will reinvest in R&D. The medical device excise tax collected nearly $2 billion in funds each year it was in existence. Given the need for innovation in this industry, it’s very likely that much of these funds will be channeled in that direction. It’s also likely shareholders and private owners would support a greater R&D spend due to the competitive nature of this industry.
 
While I think it’s fair to assume that some of the research will be done in-house, significant contributions will most likely be made by third party R&D shops—as it always has. Now that there are more resources, you’ll definitely see an uptick in some of the funds going to the service providers who support these needs.
 
Meanwhile, the trends we’ve seen in the M&A space will continue despite the economic head winds. For example, the device tax didn’t exactly put a damper on M&A activity in this space in recent years. Innovation through acquisition has been a major strategy over the past few years.
 
Dave Neal, Plant Manager, IHI Ionbond Inc.; ODT Board Member
The thought is that the medical device industry will use this recent medical device tax suspension as a way to chip away at it, seeing to it that it becomes permanently repealed. I firmly believe that the OEMs will reinvest this money back into R&D, and not into the pockets of the shareholders and private owners, with surface enhancements and additive manufacturing being hot topics at the moment. In the physical and chemical vapor deposition medical coating services sector, OEMs are seeking methods to improve both the performance and life expectancy of orthopedic implants and associated surgical instrumentation.
 
With that being said, the repeal of the device tax should see more M&As occurring. What I’m seeing is several of my orthopedic colleagues starting businesses focused on a specific indication, with intentions of spinning it off to the larger OEMs to expand their portfolio.
 
Where do you think the “found money” funds from the device tax suspension will end up? Share your thoughts and see your comments in a future Sounding Board feature. Send your 150-250 word reply to [email protected].