Medical device fundraising
2012: $2.4 billion, 313 deals
2013: $2.1 billion, 308 deals
Early-stage investments
2007 (pre-recession peak): $720 million, 116 companies
2013: $165 million, 44 companies
Source: PriceWaterhouse Coopers
As the Trump Administration looks to unravel the Afforadable Care Act, Boulder County’s medical device industry is hopeful that a tax on its products, designed to help fund the law, will be repealed — and soon.
A two-year moratorium designed to give them some relief from the measure is set to expire at the end of this year, but they say true balance won’t be restored until the tax is completely dead.
In the meantime, a local industry known for its flexibility and innovation has seen a 77 percent decline in venture capital as investors look to larger, more established companies.
“Any tax has an impact, but most of the bigger companies can absorb it,” said Robert Kline, newly appointed CEO of Boulder’s EndoShape.
“But when you’re a small, emerging company, you’re talking about the very survival of the company.”
Funding health care
The tax in question is a 2.3 percent tax on the sale price of the medical device. It was passed as part of the Health Care and Education Reconciliation Act of 2010, a modification to the ACA, and went into effect in 2013.
The measure was intended as a means of helping to fund the healthcare law. The Joint Committee on Taxation (JCT) estimated the tax would raise $29 billion over the decade following implementation, fiscal years 2013-2022.
The tax has been under attack since its proposal from industry groups that argued it would force layoffs, impede research and development activity and disproportionately harm smaller operations.
A report from theCongressional Research Office found the impact on jobs to be “relatively small,” no more than .2 percent.
Still, the effort to repeal the tax gained broad bipartisan support, and in December of 2015 a two-year moratorium was approved, suspending the tax from Jan. 1, 2016 to Dec. 31, 2017.
While a repeal seems more and more likely, local biotech firms are wary of the moratoriums’ pending sunset. Several said they are still budgeting for the tax that, they say, is diverting funds away from innovation and hiring.
Medtronic pays $135 million
Irish multinational Medtronic, which maintains operational headquarters in Fridley, Minnesota, is the largest U.S.-based manufacturer of medical devices.
The company, which acquired competitor Covidien in 2014, maintains large facilities in Louisville and Gunbarrel.
In its 2015 fiscal year, Medtronic paid $135 million in excise taxes — about 5 percent of its $2.7 billion self-reported net earnings for that year.
However, the tax is levied on gross revenue, not net profits. So smaller, newer companies were more heavily impacted, experts say.
EndoSphere’s Kline ran two medical device companies during the three years the tax was implemented — Broomfield’s ViroCyt, which he sold to Germany’s Sartorius Group for $16 million in mid-2016, and Louisville-based Medivance, which fetched $250 million from C.R. Bard in 2011.
He declined to disclose how much either of those company’s, or EndoSphere, paid in excise tax. But he said it absolutely impacted decision making, most notably hiring.
“In our annual planning process, we would always evaluate how much we had to invest in either people or resources,” Kline said. “The tax was just taken right off the top: It would always reduce the amount of capital we had to reinvest.
“We would have hired more people and been more aggressive with our growth.”
The Congressional Research Service’s report on the tax concluded that impacts to R&D and innovation would be “minimal” because companies would likely pass on the cost of the tax in the form of higher prices to customers.
But Kline said that was not the reality. Selling new devices to hospitals is difficult enough as it is, he said, so adding cost would discourage them from buying.
“I’m not aware of anybody who was able to pass the tax along,” he said. “We were definitely absorbing those taxes.
“When you think of most of the Boulder and Denver medical device community, they’re all very tiny so this tax hits very hard.”
Small firms, big tax
About 80 percent of medical device companies have 50 or fewer employees, according to the U.S. Department of Commerce.
Most of Colorado’s 300 medical device manufacturers fit that mold, according to April Giles, head of the Colorado BioScience Association.
“We’re really known as a cluster of smaller innovators,” Giles said.
The state’s medical device makers were also known as the sector most likely to be hiring — at least until a couple years ago.
“Five to six years ago, the sector was experiencing 12 percent growth in employment,” Giles said. “That has slowed down over the last three to four years to an average of 3 to 4 percent, and I think part of it is the excise tax.”
Any bioscience pursuit is capital-intensive; most firms rely on venture capital to fund development of products, a process that takes, on average, five to 10 years.
Even after a product is brought to market, profitability can be another decade away.
“It’s not until a company hits $100 million (in revenue) annually that they’re generating a profit,” said Mark Leahey, president and CEO of Washington, D.C.-based Medical Device Manufacturers Association.
MDMA represents 300 small- to mid-size device makers across the U.S., and has lobbied heavily for the repeal of the excise tax.
“We have companies that have $100 million in revenue, but it took 20 some odd years to get there,” Leahey said. “Whether you’re making money or not, small- to mid-size companies usually operate at smaller margins and have less access to capital” than larger competitors.
Leahey and others in the industry believe that funding was made harder by the tax, because it made smaller businesses — with their smaller bottom lines — less attractive to investors.
“The year the medical device tax came into effect (2013) saw the lowest level of medical device start up investment in almost two decades,” said Brenden Benner, MDMA’s vice president of public affairs.
According to data from PriceWaterhouse Coopers, investments into medical device companies in 2013, with $2.1 billion going to 308 deals, were the lowest since 1995.
It was also down slightly from 2012, when 313 deals were funded with $2.4 billion, a 17 percent decline in real dollars and a 4 percent decline in deals.
Overwhelmingly, venture capital in 2013 flowed to more established businesses.
Early-stage investments accounted for only 6.9 percent of the total funds raised, at $165 million. That money went to 44 companies, 14 percent of all who received funding that year.
That was down preciptiously — 77 percent in real dollars — from the pre-recession peak in 2007, when 116 early-stage companies netted approximately $720 million in initial funding.
Small firms hit hard
“There’s no doubt that early-stage medical device companies have seen that capital flowing instead to later-stage companies, or into companies in the tech and health IT space,” said Kristin Johnson, co-founder and CEO of Louisville’s Eximis Surgical.
Johnson said Eximis has been lucky with mostly angel investors, familiar with the company’s executives from their time at Covidien.
Eximis is working on a tool for minimally invasive gynecological surgery, not yet commercially available, so it hasn’t paid any excise taxes.
But looking ahead, Johnson said her team is still planning on figuring in the fee into the budget.
“We’re certainly hopeful that by the time we have sales there isn’t going to be a tax,” she said. “We’d rather take that money and reinvest it into our business.”
The true effects of the tax are perhaps best observed in the actions of businesses during the existing moratorium.
In a recent national survey of 107 companies by MDMA, 70 percent of respondents had increased their hiring in 2016, the first year of the moratorium.
On average, the respondents had also increased R&D spending by 19 percent for the year.
But significant reinvestments still hinge on a full repeal: 75 percent of respondents said they were still awaiting the end of the tax to take on additional hires and development projects.
“Most prudent executives aren’t going to make those investments without absolute certainty,” MDMA’s Leahey said.
Colorado’s Giles said that, if the tax was repealed today, the impacts of reinvesting wouldn’t manifest for another two or three years. Both she and Leahey are both hopeful a repeal will happen this year
Colorado U.S. Senators Cory Gardner and Michael Bennet support repealing the tax, Giles said.
“We have been in lots of discussions with our congressional members. Pursuing a repeal is one of our major policy priorities,” she said.
Shay Castle: 303-473-1626, castles@dailycamera.com or twitter.com/shayshinecastle
Our editors found this article on this site using Google and regenerated it for our readers.
