Earlier this summer the topic of repealing the 2.3% medical device excise tax resurfaced as a new tax cut bill passed through the Senate. The bipartisan disagreement around the tax only increased the likelihood that the broader $85 million tax extenders bill will join a long list of measures having trouble getting off the Senate floor. Concurrently, there have been a series of mergers between large companies, the latest was the announcement of Medtronic’s plans to acquire Covidien for $42.9 billion, which illustrates a growing movement for device makers to consolidate and relive the pressure of revenue loss forced by the Affordable Care Act.
Grey Matter Marketing was interested in hearing directly from industry insiders to know how this medical device excise tax will affect the medical device industry. We asked a select group of executives in the space to share their thoughts.
We spoke with Jim Vermeersch, President and CEO of inx Medical, a start-up that designs, develops, and sells medical devices related to the anorectal and gastrointestinal markets. His main concern was the affect the tax would have on marketing budgets as he feels it would eat into the project funds they had previously set aside. Also, as a start-up company, he realizes this may force an exit strategy earlier than anticipated. When asked whether or not the tax would reduce product innovation and research development he commented, “I think the tax may postpone future development of new products, extending the lifecycle of start-up companies’ product portfolios.” Regarding requiring a different sales approach to reach revenue goals, Vermeersch was certain from a start-up perspective that it may make more sense to lean towards a distributor/independent rep model initially in order to generate sales quicker with less cash invested into the sales force.
“This tax has a direct effect particularly on start-ups who in most cases, are already strapped for cash. We didn’t realize how much of a dramatic impact this may have on our sales and marketing budget.”
– Jim Vermeersch, President and CEO of inx Medical
Chris Lewis, med tech analyst from Roth Capital Partners, gave further insight with regards to smaller/start-up companies. “They tend to be the innovators within the med tech industry, and further challenges to this group could have a negative long-term impact on its growth potential.” This is bad news for smaller companies but what about larger, more established companies?
Hani Zeini, Founder and CEO of Sientra, a breast aesthetics company, also feels the tax will impact the spend and investment budget. For a growth company, like Sientra, establishing market share in the aesthetics arena, the tax continuously reduces the gain. “Burdensome administration costs are enormous for a company of our size. Competitively, we are not able to pass it along nor can we raise our prices,” remarked Zeini.
With that being said, Zeini was quick to note that he does not believe it will directly result in or directly effect consolidation. “As you branch out into other medical device areas and scale up the magnitude of the operations, it will have a marked impact on the ability to innovate and how given the resultant amount of the money diverted to satisfy the Obamacare beast.”
We think Chris Lewis summarizes the present and future forecast of this topic best: “Despite countless efforts led by GOP Congressional members to repeal and/or amend ACA and the related 2.3% medical device tax, it appears the legislation is here to stay. Generally speaking, assuming the law remains as written, we believe companies with higher growth and higher profit margins should find the easiest offsets to the added expense burdens, regulatory conditions, and hospital purchasing uncertainties.”
How has the 2.3% medical device excise tax affected your company?