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Device Tax Blowback: Fewer Expansions, More Layoffs

The last weeks and months have been filled with big news for the medical device manufacturing sector, from FDA's proposed unique device identification system and moves to develop an artificial pancreas to a spate of medical device recalls and an apparently endless flurry of mergers and acquisitions. But nothing has roiled the industry as much as the Supreme Court's decision upholding the constitutionality of the Affordable Health Care for America Act--particularly its much-reviled provision imposing a 2.3% excise tax on the first sale of medical devices.

Among the first companies to respond in kind to the device tax is Cook Medical Inc. (Bloomington, IN), which has just reported that it is scrapping plans to open several new manufacturing plants in the Midwest over the next five years. Specializing in the manufacture of devices used in endoscopy, cardiovascular medicine, urology, women's health, and other applications, the nation's largest privately held medical device OEM had been planning to open five new manufacturing plants In Indiana and elsewhere. But projecting that it will have to pay $20 to $30 million once the tax takes effect in January, the company feels challenged, according to Pete Yonkman, executive vice president of strategic business units. "We have fewer resources to be able to spend on those kinds of projects," Yonkman told the Indianapolis Business Journal, referring to a plant that the company recently opened in Canton, IL.

Meanwhile, Stryker (Kalamazoo, MI), maker of hip and knee implants, surgical instruments, and other medical devices, has already taken the bull by the horns as it begins the process of slashing 107 jobs at two facilities in New York in preparation for shuttering the plants altogether. The company's objective, according to the Buffalo News, is to reduce its operating costs by $100 million. Joining Stryker is orthopedic titan Zimmer (Warsaw, IN), which plans to cut 450 jobs.

In the midst of these layoffs, one can't help but note that Stryker's second-quarter financial results--notwithstanding problems resulting from the falling Euro exchange rate--were positive. Driven by higher unit volume, new product mixes, acquisitions, and other factors, the company reported $2.1 billion in net sales, up 2.9% over the same period last year. Net earnings also grew, reaching $325 million during the quarter, up 4.8% over the 2011 second-quarter net earnings of $310 million.

That's Stryker's situation, but what about the rest of the U.S. medical device industry? According to the Wall Street Journal, the nation's medical device industry may see stabilized volumes and growth based on solid results achieved in the previous period, in which there were some signs of stability and even a slight gain.

In light of the foregoing, isn't it possible that medical device opponents of the tax are blowing things out of proportion, as the Center for Budget Policies and Priorities has noted? --Bob Michaels

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