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Is your medical device tax canary still chirping ?

  

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                             (image credits to istockphoto.com)

I guess we all know that when the ball dropped in Times Square on December 31^st to herald in 2013 that the 2.3 percent medical device tax went into effect. At this point what we can confirm is that the longer term affects of the tax will play out in the coming months but the first reports are trickling in and they are not encouraging.

Here’s a capsule of some recent news snipets …

• Boston Scientific is cutting up to 1,000 more jobs as it deals with a new medical device tax from the U.S. health care overhaul …

• Minneapolis-based Medtronic anticipates laying off around 1,000 workers — and a loss of $175 million in 2013 …

• "Instead of investing in new medical technologies or creating new jobs, innovators across the United States wrote a check for $97 million to the IRS this month (JAN 2013)," said Mark Leahey, president and CEO of the Medical Device Manufacturers Association (MDMA), in a statement.

• Michigan-based Stryker plans to eliminate 1,170 jobs. More than 100 of those cuts will come at the company’s Orchard Park and West Seneca facilities in western New York …

• At Welch Allyn — a medical diagnostics manufacturer headquartered in Skaneateles, NY — 275 jobs will be lost …

• Kem Hawkins, president of Cook Medical, says the tax will cost Cook $20 million this year and slow down the development of new products. The company has halted U.S. expansion because of the tax.

• Global medical technology firm Smith & Nephew announced Thursday the layoff of almost 100 workers at its Tennessee and Massachusetts plants — and placed blame for the drawdown firmly at the feet of Obamacare.

Reading the recent reports of med tech industry layoffs, reduction of budgeted R & D funds to address the implementation and payment of the new tax could be the impending demise for the canary in the med tech coal mine. As a provider of outsourced design, manufacturing and field support services for the medical and biotechnology instrumentation markets, we’re certainly concerned about the potential affects on the R & D budgets and outsourcing needs of our customers.

Late last year I participated in a Price Waterhouse Coopers webinar where there was active discussion not only about the looming affects of the impending tax but also the internal accounting preparation/implementation costs to deal with this tax legislation.

Here’s one of the poignant points that I recall from the webinar about the distressing nature of the implementation of this tax … the medical device tax  (MDT) applies to device sales as opposed to profits. When you examine the costs of a medical device across the product life cycle phases, the early market launch phase still carries the burden of the previous product development phase costs. The profits from the sales in the early market launch years are typically minimal if not negated by the product development costs.

By applying the tax to the sales instead of the profits the ROI breakeven point is further delayed … and significantly. Obviously, that’s not an attractive business investment implication. Budget constrained emerging start-ups, OEM’s looking to add new products to their portfolios, and investors that are looking for improved growth and shorter ROI terms all lose in this scenario.  Oh yah … and let’s not forget the medical professionals looking for improved diagnostic, testing, and therapeutic products for the treatment of their patients … who, by the way, will eventually see these costs trickle down to them.

As a contract manufacturer, KMC Systems is not directly affected by the medical device tax. The manufacturer of record is the responsible party for the payment these taxes. It's the indirect affect of the taxation on our customers that is of concern.

It’s unfortunate, but the reality is that the tax is here and most large medical device companies have planned for the costs through budget reductions for 2013. Although there are still initiatives in Washington to repeal the tax, the likelihood of any immediate action is slim. Now, it’s a game of chicken. Let’s hope that widespread loss of med tech jobs, failure of small med tech companies, and threatening US leadership in the med tech industry is not the price paid before we see reprieve from the medical device sales tax.

KMC Systems provides outsourced services to large OEM Fortune 100 companies as well as emerging startups so we have a broad view of the potential impact of the MDT on medical instrumentation products. In the recent past we have seen some delays of new product development programs. For now, KMC’s bright yellow canary is on his perch, not swaying, and still chirping … and we’re listening intently !