Michael Barbella , Managing Editor11.13.13
“Oh, oh, oh!” shouted the Queen, shaking her hand about as if she wanted to shake it off. “My finger’s bleeding! Oh, oh, oh, oh!”
“What is the matter? Have you pricked your finger?”
“I haven’t pricked it yet,” the Queen said, “but I soon shall—oh, oh, oh!”
“Take care!” cried Alice. “You’re holding it all crooked!” And she caught at the brooch; but it was too late: The pin had slipped, and the Queen had pricked her finger.
“That accounts for the bleeding, you see,” she said to Alice with a smile. “Now you understand the way things happen here.”
Poor Alice. All she wanted was a quick peek inside the Looking-glass House to appease her curiosity about the world within her living room mirror. From her side (the right side), where she and Kitty were pretending to be royalty, the doppelgänger House seemed rather ordinary and plain. Almost dull.
But Alice was sure there were beautiful things in that parallel world. So she stepped through the glass without hesitation and landed in a realm unlike any she had ever imagined, encountering belittling flowers, agile chess pieces, bungling knights, un-birthday presents, nonsensical mathematics, portmanteau poetry (using word blends to create new terms), a jumping train, and an absent-minded White Queen who lives her life in reverse.
“…to-day isn’t any other day, you know,” the Queen tells Alice shortly after offering her a lady’s maid job.
“I don’t understand you,” Alice replies. “It’s dreadfully confusing.”
“That’s the effect of living backwards. It always makes one a little giddy at first—“ the Queen says kindly.
“Living backwards!” Alice repeats in astonishment. “I’ve never heard of such a thing!”
“—but there’s one great advantage in it, that one’s memory works both ways.”
“I’m sure mine only works one way,” Alice remarks. “I can’t remember things before they happen.”
“It’s a poor sort of memory that only works backwards,” the Queen observes.
Maybe so, but memory is stubbornly unidirectional on the conventional side of the looking glass. It perpetually is stuck in reverse, incapable of moving forward to envision the future consequences of prior actions. Such partiality for the past has its merits, though: Retrospection can be a profound source of insight, understanding and self-knowledge. Leo Tolstoy’s illusory judge Ivan Ilyich, for example, realizes in hindsight that his carefree life, “simple and most ordinary and therefore most terrible,” was a lie. “Forgive me,” he begs of his family before dying.
Besides providing a better understanding of the past, hindsight also removes old blinders, allowing us to reassess history and learn new lessons from prior experiences. Over time, the past can assume a completely different identity, revealing insights that can redefine the significance and meaning of bygone eras. “Indeed, some truths can only be attained in hindsight,” Mark Freeman, a psychology professor at Worcester, Mass.-based College of the Holy Cross, wrote in his 2010 book, “Hindsight: The Promise and Peril of Looking Backward,” “For all the power that ‘now’ may have, it is also saddled with definite limits. So it is that we must often await the future in order to discern more fully the meaning and significance of what has gone on in the past.”
With the future (2014) rapidly approaching, Medical Product Outsourcing is putting Freeman’s theory to the test and reflecting upon the past year in medtech finance to better understand the industry-wide impact of its various triumphs, trials and tribulations. Our analysis follows:
The (Device) Tax Man Cometh: Luck ran out for medtech firms hoping for a repeal or delay of the controversial 2.3 percent excise tax that took effect Jan 1. Valiant efforts to kill the levy fell short in Congress late last year, though a statutory victory would have been meaningless anyway, considering President Obama’s steadfast support of the duty. As the day of reckoning approached, device makers warned of economic and technological Armageddon, claiming the tax would cost America jobs as well as its leading edge in medtech innovation. The Advanced Medical Technology Association (AdvaMed) reckoned the industry would pay an average $194 million per month in taxes to the Internal Revenue Service, with smaller companies making the bigger sacrifice (“It’s the difference between being profitable or not,” Cantor Fitzgerald analyst Jeremy Feffer explained. “Larger companies, with their lobbying clout, will not feel the effects of the tax for another year or so”). OEMs prepared to sacrifice as well based on their own tax bill estimates, but most ceded workers, new manufacturing plants, R&D funding, employee retirement contributions and charitable donations in lieu of profits. The $30 million annual tax bill estimated by Cook Group Inc. executives cost the Bloomington, Ind.-based company a five-facility expansion plan, while Merit Medical Systems Inc. gave up philanthropic gifts and matching 401k funds to cover its anticipated $7 million yearly disbursement. Likewise, Stryker Corp. surrendered 1,000 employees to its projected $100 million annual tax tab.
Such belt-tightening measures are not the least bit surprising—device companies historically have gone to great lengths to protect their bottom lines. But the cutbacks may have been a tad premature, or in some cases, unnecessary, as many OEMs miscalculated the tax’s overall impact on their profits.
Medtronic Inc., for instance, was off by $25 million (the Minneapolis, Minn., firm had expected the levy to cost $50 million annually) and Warsaw, Ind.-based Zimmer Holdings Inc., which reduced its 2013 profit forecast by as much as 19 percent, erred by $10 million (the orthopedic device behemoth originally calculated a $60 million outlay). Cook over-compensated for the device tax as well—the company is paying $14 million in additional taxes, increasing its effective tax rate by more than 20 percent but the hit is still considerably lower than its earlier estimates of $20 million to $30 million.
AdvaMed’s appraisal was the most accurate: Through the first half of 2013, the industry paid more than $1 billion in taxes on gross sales of medical devices. The revelation—while not unexpected—nonetheless reinvigorated lobbyists’ efforts to repeal the duty.
“The $1 billion threshold is frightening as every dollar spent paying for this medical device tax threatens medical innovation and American jobs,” Gail Rodriguez, executive director of the Medical Imaging and Technology Alliance, said when the milestone was reached.”…Congress cannot wait any longer to repeal this burdensome tax and protect jobs and essential R&D funding.”
Medtech Funding Still in a Funk: Venture investments in the medical technology sector have fallen steadily in recent years as companies tangoed with economic catastrophe, pricing pressures, shrinking reimbursement rates, regulatory roadblocks and increasing demand to prove both clinical efficacy and cost-effectiveness. They’ve also had to contend with faster turnaround times and spotty insurance coverage, all of which has discouraged long-term investment.
“Products can get approved, but now you can’t get paid for it,” observed Gary Kurtzman, managing director with Wayne, Pa.-based healthcare/IT venture firm Safeguard Scientifics Inc. “This is what is really discouraging the investment in that space. It is pushing people away.”
More like shoving, actually: Venture capital slid 19 percent to $3 billion in the 12-month period ending June 30, 2013, the lowest level since 2006, Ernst & Young statistics show. The total number of rounds (369) and average deal size ($8.1 million) also hit seven-year lows, partly driven by an abominable first-quarter showing in which investments plummeted 20 percent and deal volume fell 10 percent.
There’s still hope for the industry, though. Capitalists funneled $566 million into 65 medical device venture deals during the third quarter (period ending Sept. 30), a 12 percent hike in dollars compared with Q2, according to the latest MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.
Deal volume fell 8 percent from the previous year, but the higher funding level is encouraging, considering investors’ overall reluctance to support medtech firms—particularly early-stage and risky ventures. Companies with approved products or those nearing approval have become more attractive investment targets. Case in point: Bedford, Mass.-based ConforMIS nearly doubled a Series E financing round in Q3 that hit nearly $168 million. The funding, which came from sovereign wealth reserves, government assets and private equity funds in the United States, Europe, Asia and the Middle East, is designed in part to help boost marketing and manufacturing efforts for the company’s iTotal knee replacement system, which is approved for sale in
Europe and America.
Extreme Orthopedics: Long overshadowed by the larger, more established hip and knee replacement market, the trauma and small bone/joint (extremities) sector finally came into its own this year. Projected to double in value by 2017, the market has attracted the notice of major players such as Biomet Inc., DePuy-Synthes Companies, Stryker, Wright Medical Technologies Inc. and Zimmer.
Growth in trauma and extremities products at these OEMs significantly outpaced hip and knee joints as the industry grappled with a feeble economic recovery and continued fallout from defective implants. Stryker’s third-quarter trauma/extremities sales more than tripled the gains in artificial hips (18.1 percent growth rate vs. 5.5 percent) and obliterated flat knee revenue. “Trauma and extremities continues to roll, having now reported seven quarters in a row of double-digit growth, including a 39 percent increase in foot and ankle this quarter,” President/CEO Kevin A. Lobo told analysts earlier this fall.
The small bone/joint sector’s “roll” benefited Biomet as well—robust growth in sports, extremities and trauma (S.E.T.) devices helped boost the Warsaw, Ind.-based company’s first-quarter 2014 net sales by 3.3 percent. S.E.T. sales swelled 17.4 percent worldwide (18.8 percent in constant currency) and 18.1 percent domestically in the three months ended Aug. 31. Hip and knee sales, by contrast, climbed only 1.9 percent and 3.5 percent respectively.
Zimmer’s extremities revenue growth beat its Q3 knee sales by a near 3-1 margin (likely amplified by U.S. Food and Drug Administration approval of its latest Patient Specific Instruments Shoulder System), and Wright’s hip/knee sales were so abysmal in the second quarter (ended June 30) that the company sold its large joint reconstructive business to Chinese manufacturer MicroPort Medical, a subsidiary of MicroPort Scientific Corp., for $290 million. The Shanghai firm’s primary market is China, but the acquisition gives it access to the United States, Europe, Japan, Brazil, India and Argentina, where Wright Medical currently sells its hip and knee products.
The influx of cash has enabled Wright to focus on reinforcing its burgeoning extremities business. In mid-October, the firm purchased French orthopedic extremities company Biotech International for $80 million. The implant manufacturer reported $15 million in extremities revenue in the 12 months ended June 30, and its portfolio of foot and ankle products compliments Wright’s long-term growth strategy.
“We plan to utilize Biotech’s established…presence in emerging markets to extend the reach of our international distribution network and further accelerate growth opportunities in our global extremities business,” President and CEO Robert J. Palmisano said.
“What is the matter? Have you pricked your finger?”
“I haven’t pricked it yet,” the Queen said, “but I soon shall—oh, oh, oh!”
“Take care!” cried Alice. “You’re holding it all crooked!” And she caught at the brooch; but it was too late: The pin had slipped, and the Queen had pricked her finger.
“That accounts for the bleeding, you see,” she said to Alice with a smile. “Now you understand the way things happen here.”
—Lewis Carroll, “Through the Looking Glass”
Poor Alice. All she wanted was a quick peek inside the Looking-glass House to appease her curiosity about the world within her living room mirror. From her side (the right side), where she and Kitty were pretending to be royalty, the doppelgänger House seemed rather ordinary and plain. Almost dull.
But Alice was sure there were beautiful things in that parallel world. So she stepped through the glass without hesitation and landed in a realm unlike any she had ever imagined, encountering belittling flowers, agile chess pieces, bungling knights, un-birthday presents, nonsensical mathematics, portmanteau poetry (using word blends to create new terms), a jumping train, and an absent-minded White Queen who lives her life in reverse.
“…to-day isn’t any other day, you know,” the Queen tells Alice shortly after offering her a lady’s maid job.
“I don’t understand you,” Alice replies. “It’s dreadfully confusing.”
“That’s the effect of living backwards. It always makes one a little giddy at first—“ the Queen says kindly.
“Living backwards!” Alice repeats in astonishment. “I’ve never heard of such a thing!”
“—but there’s one great advantage in it, that one’s memory works both ways.”
“I’m sure mine only works one way,” Alice remarks. “I can’t remember things before they happen.”
“It’s a poor sort of memory that only works backwards,” the Queen observes.
Maybe so, but memory is stubbornly unidirectional on the conventional side of the looking glass. It perpetually is stuck in reverse, incapable of moving forward to envision the future consequences of prior actions. Such partiality for the past has its merits, though: Retrospection can be a profound source of insight, understanding and self-knowledge. Leo Tolstoy’s illusory judge Ivan Ilyich, for example, realizes in hindsight that his carefree life, “simple and most ordinary and therefore most terrible,” was a lie. “Forgive me,” he begs of his family before dying.
Besides providing a better understanding of the past, hindsight also removes old blinders, allowing us to reassess history and learn new lessons from prior experiences. Over time, the past can assume a completely different identity, revealing insights that can redefine the significance and meaning of bygone eras. “Indeed, some truths can only be attained in hindsight,” Mark Freeman, a psychology professor at Worcester, Mass.-based College of the Holy Cross, wrote in his 2010 book, “Hindsight: The Promise and Peril of Looking Backward,” “For all the power that ‘now’ may have, it is also saddled with definite limits. So it is that we must often await the future in order to discern more fully the meaning and significance of what has gone on in the past.”
With the future (2014) rapidly approaching, Medical Product Outsourcing is putting Freeman’s theory to the test and reflecting upon the past year in medtech finance to better understand the industry-wide impact of its various triumphs, trials and tribulations. Our analysis follows:
The (Device) Tax Man Cometh: Luck ran out for medtech firms hoping for a repeal or delay of the controversial 2.3 percent excise tax that took effect Jan 1. Valiant efforts to kill the levy fell short in Congress late last year, though a statutory victory would have been meaningless anyway, considering President Obama’s steadfast support of the duty. As the day of reckoning approached, device makers warned of economic and technological Armageddon, claiming the tax would cost America jobs as well as its leading edge in medtech innovation. The Advanced Medical Technology Association (AdvaMed) reckoned the industry would pay an average $194 million per month in taxes to the Internal Revenue Service, with smaller companies making the bigger sacrifice (“It’s the difference between being profitable or not,” Cantor Fitzgerald analyst Jeremy Feffer explained. “Larger companies, with their lobbying clout, will not feel the effects of the tax for another year or so”). OEMs prepared to sacrifice as well based on their own tax bill estimates, but most ceded workers, new manufacturing plants, R&D funding, employee retirement contributions and charitable donations in lieu of profits. The $30 million annual tax bill estimated by Cook Group Inc. executives cost the Bloomington, Ind.-based company a five-facility expansion plan, while Merit Medical Systems Inc. gave up philanthropic gifts and matching 401k funds to cover its anticipated $7 million yearly disbursement. Likewise, Stryker Corp. surrendered 1,000 employees to its projected $100 million annual tax tab.
Such belt-tightening measures are not the least bit surprising—device companies historically have gone to great lengths to protect their bottom lines. But the cutbacks may have been a tad premature, or in some cases, unnecessary, as many OEMs miscalculated the tax’s overall impact on their profits.
Medtronic Inc., for instance, was off by $25 million (the Minneapolis, Minn., firm had expected the levy to cost $50 million annually) and Warsaw, Ind.-based Zimmer Holdings Inc., which reduced its 2013 profit forecast by as much as 19 percent, erred by $10 million (the orthopedic device behemoth originally calculated a $60 million outlay). Cook over-compensated for the device tax as well—the company is paying $14 million in additional taxes, increasing its effective tax rate by more than 20 percent but the hit is still considerably lower than its earlier estimates of $20 million to $30 million.
AdvaMed’s appraisal was the most accurate: Through the first half of 2013, the industry paid more than $1 billion in taxes on gross sales of medical devices. The revelation—while not unexpected—nonetheless reinvigorated lobbyists’ efforts to repeal the duty.
“The $1 billion threshold is frightening as every dollar spent paying for this medical device tax threatens medical innovation and American jobs,” Gail Rodriguez, executive director of the Medical Imaging and Technology Alliance, said when the milestone was reached.”…Congress cannot wait any longer to repeal this burdensome tax and protect jobs and essential R&D funding.”
Medtech Funding Still in a Funk: Venture investments in the medical technology sector have fallen steadily in recent years as companies tangoed with economic catastrophe, pricing pressures, shrinking reimbursement rates, regulatory roadblocks and increasing demand to prove both clinical efficacy and cost-effectiveness. They’ve also had to contend with faster turnaround times and spotty insurance coverage, all of which has discouraged long-term investment.
“Products can get approved, but now you can’t get paid for it,” observed Gary Kurtzman, managing director with Wayne, Pa.-based healthcare/IT venture firm Safeguard Scientifics Inc. “This is what is really discouraging the investment in that space. It is pushing people away.”
More like shoving, actually: Venture capital slid 19 percent to $3 billion in the 12-month period ending June 30, 2013, the lowest level since 2006, Ernst & Young statistics show. The total number of rounds (369) and average deal size ($8.1 million) also hit seven-year lows, partly driven by an abominable first-quarter showing in which investments plummeted 20 percent and deal volume fell 10 percent.
There’s still hope for the industry, though. Capitalists funneled $566 million into 65 medical device venture deals during the third quarter (period ending Sept. 30), a 12 percent hike in dollars compared with Q2, according to the latest MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.
Deal volume fell 8 percent from the previous year, but the higher funding level is encouraging, considering investors’ overall reluctance to support medtech firms—particularly early-stage and risky ventures. Companies with approved products or those nearing approval have become more attractive investment targets. Case in point: Bedford, Mass.-based ConforMIS nearly doubled a Series E financing round in Q3 that hit nearly $168 million. The funding, which came from sovereign wealth reserves, government assets and private equity funds in the United States, Europe, Asia and the Middle East, is designed in part to help boost marketing and manufacturing efforts for the company’s iTotal knee replacement system, which is approved for sale in
Europe and America.
Extreme Orthopedics: Long overshadowed by the larger, more established hip and knee replacement market, the trauma and small bone/joint (extremities) sector finally came into its own this year. Projected to double in value by 2017, the market has attracted the notice of major players such as Biomet Inc., DePuy-Synthes Companies, Stryker, Wright Medical Technologies Inc. and Zimmer.
Growth in trauma and extremities products at these OEMs significantly outpaced hip and knee joints as the industry grappled with a feeble economic recovery and continued fallout from defective implants. Stryker’s third-quarter trauma/extremities sales more than tripled the gains in artificial hips (18.1 percent growth rate vs. 5.5 percent) and obliterated flat knee revenue. “Trauma and extremities continues to roll, having now reported seven quarters in a row of double-digit growth, including a 39 percent increase in foot and ankle this quarter,” President/CEO Kevin A. Lobo told analysts earlier this fall.
The small bone/joint sector’s “roll” benefited Biomet as well—robust growth in sports, extremities and trauma (S.E.T.) devices helped boost the Warsaw, Ind.-based company’s first-quarter 2014 net sales by 3.3 percent. S.E.T. sales swelled 17.4 percent worldwide (18.8 percent in constant currency) and 18.1 percent domestically in the three months ended Aug. 31. Hip and knee sales, by contrast, climbed only 1.9 percent and 3.5 percent respectively.
Zimmer’s extremities revenue growth beat its Q3 knee sales by a near 3-1 margin (likely amplified by U.S. Food and Drug Administration approval of its latest Patient Specific Instruments Shoulder System), and Wright’s hip/knee sales were so abysmal in the second quarter (ended June 30) that the company sold its large joint reconstructive business to Chinese manufacturer MicroPort Medical, a subsidiary of MicroPort Scientific Corp., for $290 million. The Shanghai firm’s primary market is China, but the acquisition gives it access to the United States, Europe, Japan, Brazil, India and Argentina, where Wright Medical currently sells its hip and knee products.
The influx of cash has enabled Wright to focus on reinforcing its burgeoning extremities business. In mid-October, the firm purchased French orthopedic extremities company Biotech International for $80 million. The implant manufacturer reported $15 million in extremities revenue in the 12 months ended June 30, and its portfolio of foot and ankle products compliments Wright’s long-term growth strategy.
“We plan to utilize Biotech’s established…presence in emerging markets to extend the reach of our international distribution network and further accelerate growth opportunities in our global extremities business,” President and CEO Robert J. Palmisano said.
