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1. A Huge Question Around Suspended Device Tax

The medtech industry may be celebrating Congress' two-year suspension of the medical device tax. How big a difference the suspension really makes is another matter entirely.

Chris Newmarker

    Arrow  backTaxes

A major question hangs over the medical device industry in 2016: Will Congress' two-year suspension of the United States' 2.3% medical device excise tax actually spur more R&D, not to mention jobs? After all, one of the biggest complaints about the tax is that it would siphon away money from R&D while also resulting in layoffs.

"No, I don't think it's going to have any substantial impact," says Debbie Wang, a Morningstar analyst following the medical device industry.

Medical device companies were already accelerating the offshoring of their manufacturing in order to help pay for the tax, and Wang does not expect plans to change now that medtech companies are getting a windfall.

"They're still aiming for greater penetration in foreign countries and foreign markets, and trying to move as much of their cost base as possible into tax advantaged or low cost areas," Wang said.

Industry advocates, naturally, are quick to say the device tax suspension will have a positive impact.

"Given the innovative nature of the medtech industry, I expect that our companies will be ploughing some of the MDET funds back into R&D. The newly available revenue could also be used to hire engineers to take on stalled product development," says Thomas Sommer, president of the Massachusetts Medical Device Industry Council (MassMEDIC).

George Montague, chief financial officer of Smiths Medical (Plymouth, MN), told Minnesota Public Radio that the $10 million a year the company is getting back from the tax suspension will go toward improving Smiths' product portfolio, which includes everything from infusion pumps to airway management products. Smiths will also add more jobs, though Montague did not immediately know how many jobs.

The device tax suspension could especially be a "godsend" for smaller companies by freeing up working capital, says Shaye Mandle, president and CEO of the Minnesota-based Medical Alley Association.

Wang acknowledges that the one area of improvement under the device tax suspension could involve the small, still-unprofitable, young medical device companies--still trying to get a product developed and approved by regulators. "When the device tax is in effect, it moves the time until profitability farther out into the future," Wang said. Now that the tax is suspended, such companies could have an easier time securing investors.

No matter what, though, the device tax suspension should do some good because it will direct U.S. politicians' focus toward positive, helpful programs for the industry, says Bill Betten, director of Business Solutions at Devicix (Eden Prairie, MN).

"We have real challenges with regard to funding of startups in the medical device arena as well as with dealing with the regulatory maze that needs to be traversed in order to successfully launch a product, particularly in underserved patient populations such as pediatrics," Betten says. "Perhaps with the distraction of the device tax debate now gone, we can focus on real programs to develop new technologies and treatments that can enhance life, not just sustain it."

More Help on the Way?

Indeed, Congress may be doing that somewhat already: The budget deal that suspended the device tax also included a host of other measures that should benefit medtech, from increased NIH and FDA funding to a permanent R&D tax credit that can also be used by startups.

President Barack Obama said in his Tuesday night State of the Union address that he wants the federal government to help cure cancer, and he's put Vice President Joe Biden in charge of the effort.

U.S. politicians appear to be agreeing that this is a country that wants to be a "world leader in terms of treatment," Mandle says.

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