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Articles from 2013 In March


Could Your R&D Projects Be Making You Money?

Could Your R&D Projects Be Making You Money?

The R&D credit was first put in place as part of the 1981 Economic Recovery Tax Act. At that time, the United States had undergone a period of decline in R&D spending and was being outpaced by countries like Germany and Japan, according to the Joint Committee on Taxation. Since that time, the credit has been extended 16 times, most recently in 2010, as the federal government has sought to encourage growth and development of business throughout the country. Today, medical device companies spend about 10% of their revenues on R&D, according to First Research, an industry trends and analysis tool.

Unfortunately, most companies do not take advantage of the R&D tax credit for a number of reasons. Some companies simply do not know that this credit exists. Many companies lack the time, resources, and expertise to adequately understand the rules and document their R&D activities. Other businesses are afraid of being audited, which can eat up time, money, and resources.  

These are legitimate concerns, but most of these companies underestimate the cash value of the credits. In some cases, the credit amount can be substantial. Companies that have not traditionally taken the R&D tax credit may have the opportunity to amend prior years to claim credits that were previously missed. For flow-through entities, such as S corporations and limited liability companies (LLCs), the credit flows through to the ultimate owners.

As opposed to simply deducting R&D expenses, the R&D credit lowers the overall effective tax rate, which increases a company’s market value and earning potential while providing an immediate return on R&D investment dollars. For companies in a net operating loss position that hope to generate positive income and become taxable in the future, any federal R&D credits generated and not used can be carried forward for up to 20 years. Some of these companies may end up being acquired by other companies. Unused credits may provide future value for an acquiring company. This future value can allow the seller to leverage up the selling price for the business.

How can your company benefit from the R&D tax credit? Let’s take a look at qualifying activities and how to calculate the credit.

Qualifying Activities

The first step in claiming the credit is to understand the technical requirements for determining which of your company’s activities qualify as R&D. You may be surprised to find that most of the technical requirements are familiar. Most medical device companies would argue that they perform these processes continually. Nevertheless, most businesses are unaware that the R&D tax credit can reward their day-to-day efforts aimed at producing new or improved products or processes.

There are certain technical requirements that must be met for expenditures to qualify for the credit. These technical requirements make up what is commonly known as the four-part test. The four-part test requires the following:

  1. At the outset of the project, there must be technical uncertainty as to the method, capability, or design of the business component. In other words, you may know where you want to go but not how to get there.
  2. To resolve the uncertainty, the company must work through a process of experimentation. This typically involves evaluating alternatives and developing, testing, and refining hypotheses to determine success or failure.
  3. The R&D activities must also be technical in nature, meaning they relate to hard sciences, such as engineering, physical, biological, or computer science.
  4. The R&D activity must be intended to develop or improve a business component’s function, performance, reliability, and quality. A business component is any product, process, formula, software, or technique intended to be held for sale, lease, or license, or used in the business.

Once you have determined that your company has met each of these tests, it is important to document the activities. Your accountant or business advisor can provide a great deal of guidance and assistance when gathering the information and preparing the documentation to support the R&D credit. Typically, the process involves interviewing and educating key personnel on the activities that qualify for the R&D credit, documenting as well as analyzing accounting, project, and job costing data to determine the relevant costs.

Calculating the Credit

Once you have determined that a particular activity meets the four-part test, the next step is to calculate the amount of credit.

There are two methods of computing the credit. Certain limitations may affect the amount of credit that can be used in any given year, but a general estimated benefit is 6.5% of the qualifying expenditures for the federal credit. For example, a company with $300,000 of qualifying expenses may qualify for a federal credit in the neighborhood of $20,000. This dollar-for-dollar reduction in the company’s tax liability is in addition to a tax deduction that can be taken for the expenses.

Qualifying expenses include wages paid to internal employees, the cost of supplies consumed in the R&D process, and 65% of the amount paid to outside consultants. Internal wages relate to technical personnel who are directly performing R&D and any employees providing direct support or direct supervision for the R&D activities.

In addition to the federal R&D tax credit, at least 35 states offer their own tax credits as an incentive for companies to perform R&D activities. In some states, the tax credit can equal as much as 20% of the cost of R&D activities. As an added bonus, states such as Georgia offer programs that allow companies, depending on their tax situations, to not only use the credit to offset income tax liability, but to convert it to cash, even if the company has no revenue or taxable income.

R&D tax credits can provide significant value for qualifying businesses. With or without the impending excise tax on medical devices, the federal R&D tax credit offers an opportunity that medical device companies should explore as a way to mitigate some of the costs of the medical device excise tax. Since most medical device companies are likely already performing R&D activities, the credit is an opportunity that should not be overlooked.

If your company has not taken advantage of this credit in the past, it is possible to amend prior year tax returns and claim the benefits at the federal and state level.

Kerry Defler is a tax partner in the technology & life sciences group at Habif, Arogeti & Wynne LLP. He serves clients in the area of state and local tax credits and incentives, focusing on the R&D tax credit. Defler earned a bachelor’s degree in accounting from Bellarmine College and holds and MBA from Georgia State University. E-mail him at kerry.defler@hawcpa.com.

Ori Epstein is a tax manager in Habif, Arogeti, & Wynne’s technology and life sciences practice. He regularly speaks at medical device industry conferences on topics such as the medical device excise tax, business trends within the medical device industry, and tax planning and preparation for medical device companies. graduated from the University of Georgia with a bachelor’s degree in accounting and a master’s of accounting with a concentration in tax. E-mail him at ori.epstein@hawcpa.com.

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Why Sensors Are Critical for Personalized Medicine

Everybody seems to be talking about personalized medicine. But for all of the talk about it being the wave of the future, it has actually been discussed for some time. Many people were talking about personalized medicine a decade ago, when Northeastern University professor Thomas Webster, PhD began work on sensors that can gauge the variability of the human immune system. "Everybody's immune system is different," Webster says. "We have acquired immune systems and innate immune systems. Your acquired immune system changes as you age depending on what you are exposed to through life," he says.

Thomas Webster

Thomas Webster, PhD will speak on advances in MEMs, sensors, and nanotechnology at BIOMEDevice Boston.

"It is puzzling why we are implanting the same materials in people when we know that everybody has a different immune system," Webster observes. "If the two of us are going to respond to titanium differently because we have different acquired immune systems, why would both of us get the same exact implant?"

Why indeed. The average orthopedic implant lifetime is in the range of a decade to fifteen years. "I think that lifetime is so short because we basically insert the same chemistry into patients no matter what their history is--not even determining what their acquired immune system is," Webster says.

A sensor-equipped implant could detect whether a patient is sensitive to the titanium within it, which would trigger an immune cell response. "The sensor  would pick that up and respond by releasing bone growth factors or anti-inflammatory agents to minimize that immune response," Webster says. The drug release would be targeted to the precise area where it is needed. "It is not requiring somebody to take a drug."

Webster's research is not limited to using sensors in implants, however. "You can take the same idea and have a benchtop sensor where you put a drop of blood in the sensor and through this conduction property, you could identify which cells are in blood," he says, "If you have a more activated immune system, you will have changes in white blood cell count, in red blood cells, in proteins in your blood." The sensor could determine the levels of all of those, helping in disease diagnosis.  

To date, the researchers have published a number of papers on their work in journals such as Nanotechnology, The International Journal of Nanomedicine, and Biomaterials. "We've published each step of the way that we have developed along the way," he says. "It feels like a slow process because you have to choose the right materials to make these sensors out of, you have to do the electronics right to make sure that the conductivity can be measured and the information can be sent to a handheld device and then transmit it back to release a drug," he adds. "There are many complicated parts to the whole thing and that is what took us so long, and we are still trying to perfect it."

Note: For more on Webster's sensor research, see "Nanotech Sensors Keep a Close Eye on Orthopedic Implants."

Brian Buntz is the editor-in-chief of MPMN. Follow him on Twitter at @brian_buntz

Court Awards Covidien $176.5 million in Patent Infringement Lawsuit Against Johnson & Johnson

Court Awards Covidien $176.5 million in Patent Infringement Lawsuit Against Johnson & Johnson

Covidien announced Friday that a federal judge has awarded the company $176.5 million in its patent infringement lawsuit against Johnson & Johnson's Ethicon Endo-Surgery involving the latter's Harmonic line of ultrasonic surgical products.

 

The company said that the court felt that Ethicon Endo-Surgery had infringed three of Covidien's patents that are both valid and enforceable. Those patents deal with "ultrasonic cutting and coagulation surgical devices." 

The verdict can be appealed.

"As a global healthcare market leader, Covidien invests significant resources into creating and developing medical innovations. We are pleased that the federal court recognized our innovation in ultrasonic surgical devices, finding our patents both valid and infringed by Ethicon Endo-Surgery. We will continue to vigorously protect our innovative products, solutions and intellectual property,” said Chris Barry, President, Advanced Surgical Technologies, Covidien in a news release.

Covidien filed the lawsuit back in 2010.

"Ethicon firmly stands behind our products and intellectual property which allow us to advance patient care by bringing innovative medical devices to the market," said Bridget Golden, a Ethicon spokeswoman via email. "We are evaluating the court’s decision and our options for appeal."

Novel Interface Could Lead to Improved Cochlear Implants

Pamela Bhatti from Georgia Tech displays cochlear implant.

Despite their importance, cochlear implants leave much to be desired. But now, a group of researchers at the Georgia Institute of Technology has created a new interface between the device and the brain that could eventually lead to the development of hearing aids with improved sound quality.

In a condition known as sensorineural deafness, hearing loss is most often caused by dysfunctional hair cells. However, while traditional hearing aids rely on hair cells to amplify sound, cochlear implants bypass the hair cells, translating sound vibrations captured using a microphone outside the ear into electrical signals.

Such devices consist of an external component that uses a magnetic disk to attach it to an internal component implanted under the skin behind the ear. The external component detects sounds and selectively amplifies speech, while the internal component converts this information into electrical impulses, which are sent to a bundle of thin wire electrodes threaded through the cochlea. This electrode configuration, according to Pamela Bhatti, an assistant professor in the School of Electrical and Computer Engineering at Georgia Tech, is a significant barrier to clear sound transmission.

"In an intact ear, the hair cells are plentiful and are in close contact with the nerves that transmit sound information to the brain," Bhatti explains. "The challenge with the implant is getting efficient coupling between the electrodes and the nerves."

Today's cochlear implants contain between 12 and 22 wire electrodes, each of which conveys a signal for a different pitch. More electrodes should result in a clearer message. However, the cochlea measures only 2 mm in diameter, shrinking down to 200 mm as it coils. "While we'd like to be able to increase the number of electrodes, the space issue is a major challenge from an engineering perspective," Bhatti remarks.

To answer this challenge, Bhatti and her team have developed a thin-film, electrode array that is up to three times more sensitive but no more bulky than traditional wire electrodes. And unlike wire electrodes, the new array is also flexible, enabling it to be placed closer to the inner wall of the cochlea. The researchers believe that this feature will create a better link between the array and the nervous system, improving signal quality.

This Week in Devices [3/29/2013]: When Robotic Surgeons Attack

 
What if Your Robotic Surgeon Makes A Mistake?
 
With 10 product liability lawsuits filed against Intuitive Surgical for its da Vinci surgical robot, it warrants examination. Who should be holding the ball if your surgery robot makes a mistake? The manufacture? The hospital? Maybe it's you? [io9]
 
 
21 Graphs About America's Healthcare Costs
 
The Washington Post has released 21 (questionable and misleading?) graphs about the cost of American healthcare in relation to other countries. The problem seems to be America's penchant for letting insurers negotiate their own prices. [The Washington Post]
 
 
 
Building an Atomic Heart
 
The true story of a 1960s government program to build an artificial heart...a heart powered by plutonium! [The Atlantic]
 
Those interested in more current topics about implantable device design may be interested in the “Intelligent Design for Implantable Devices” seminar at BIOMEDevice Boston.
 
 
 
 

Company developing minimally invasive procedure for GERD and obesity raises $3 million

Company developing minimally invasive procedure for GERD and obesity raises $3 million

A small public company based in Miami - SafeStitch Medical - has raised $3 million in a private placement, according to a filing with the Securities & Exchange Commission. The company trades over the counter on bulletin boards.

 

In January, SafeStich Medical announced that its pilot clinical study to test its transluminal devices was able to "restrict gastric acid reflux in three patients and to cause meaningful weight reduction in two obese patients after two years." There were seven patients in the trial.

"By going through the mouth, there is less risk of infection, and only conscious sedation is required," said said Dr. Charles Filipi, Chief Medical Officer at SafeStitch Medical, the lead on the clinical trial and inventor of the devices, in the new release. This should result in lower costs for bariatric and GERD surgery."

The company intends to expand the clinical study and file for an investigational device exemption later this year. An email to a company spokeswoman wasn't immediately returned.

Aside from the GERD and obesity devices, which are being tested, SafeStitch Medical sells the AMID Hernia Fixation Device.

The company was founded under a different name in 2005 and did a share exchange with the publicly-traded Cellular Technical Services Co. and became a public entity known as SafeStich Medical in 2007.

-- Arundhati Parmar, Senior Editor, MD+DI

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Four Cool Technologies and Three Takeaways from SXSW

South by Southwest (SXSW) is unlike any other conference experience.

There's no better place than South By (as Austinites call it) to help foster our digital medical revolution. SXSW added an unofficial health track three years ago. There were more than 50 sessions and events for healthcare marketers, educators, innovators and start-ups.

Reimagining Health, Technology and Design was my standout session for 2013. Frank Moss of MIT labs showed a couple of devices that he and his team hacked together. The refractive diagnosis peripheral for a smartphone (called NETRA) had smart implications for field use in third-world countries, allowing doctors to diagnose different eye diseases in the field. And it comes in at under $10 each.

Several session leaders showed off AliveCor, the ECG screening device that has seen a lot of press lately. It attaches to a smart phone and has instant mobility benefits.

Contextual use of medical devices is the rallying cry – we're now more mobile, with more powerful smartphones and the ability to help others on the go. 

The Interactive Accelerator also had many amazing health technologies that have yet to be funded fully, and a couple were devices that we will keep on our radar. TedCas uses touch free management of 3-D images that enables surgeons to see patient data without having to exit the cleanroom. It can be used with any legacy hospital system and takes Microsoft Kinect technology to new levels.

Truly inspiring. NeuroTrack, a screening device that can help predict Alzheimer's disease three to four years before symptoms occur, will greatly help quality of life and clinical trials. Patients look at images on a screen and eye-tracking software follows their eye reaction time and placement. It seems so simple, yet effective. (The accelerator judges thought so, too—Richmond-based NeuroTrack took top honors in the Health Technologies category of the accelerator.)

All in all, there were three top takeaways from South By that will live with me for the upcoming year (and beyond):

  1. Sensors + data + analytics will keep us moving forward with new and interesting devices.
  2. Apps on smartphones and tablets bring contextual mobile experiences that have never existed before. Peripherals and native capabilities will continue to make our devices (and medical treatment) smarter.
  3. Passive monitoring is the best experience for patients. If you're thinking of new ways to make the old rigor more advanced, know that the less your patients life is interrupted, the higher the likelihood that your idea will be utilized. South By isn't strictly a medical device conference. There's something for everyone, from learning how to make the complex simple, to trying new apps and social media gaming. It's certainly one of my most favorite events of the year.

Hope to see you in Austin in 2014.

Joe Doyle is Interactive Director for HCB Health. Headquartered in Austin, Texas, HCB Health serves the entire healthcare sector, including manufacturers of medical devices, pharmaceuticals, diagnostics and genetic engineering products; physician groups, hospitals and managed care organizations; and patients and consumers.

Sensing the Winds Shifting, Medtronic Applauds Efforts to Repeal the Device Tax

Sensing the Winds Shifting, Medtronic Applauds Efforts to Repeal the Device Tax

Even as companies like Boston Scientific and Stryker and smaller ones like Cook Medical have complained loudly about the medical device tax, Medtronic has largely stayed aloof.

To my knowledge, the company has not signed formal petitions that industry trade groups like Medical Device Manufacturers Association have sent to Congress saying that the tax should be repealed because it willl hurt jobs and innovation. Medtronic executives like CFO Gary Ellis and CEO Omar Ishrak have simply said that the device tax is a cost of doing business in the U.S.

 

In fact in November, when an analyst asked Ishrak on an earnings call whether he is hopeful that the tax would be repealed, Ishrak provided the obligatory nod to AdvaMed's efforts in trying to undo the 2.3 percent tax. And then he said something that demonstrated his pragmatic nature.

"Right now, that’s what the law is and that’s what the projection is going to be, and we can assume that that’s going to come into play and therefore we have to build our business to deal with it,” Ishrak said. “[As I said before] we like to focus on things we can control and that’s why we have taken this approach."

But now sensing that the winds are shifting with the recent symbolic bipartisan vote in the Senate to repeal the tax, the company seems to be getting into the fray. Earlier this week the device maker issued a statement applauding the efforts of members of Minnesota's Congressional delegation - Democratic Senators Al Franken and Amy Klobuchar and Republican Congressman Erik Paulsen - in trying to get the tax repealed. Here's the full statement:

 Medtronic recognized Senators Franken and Klobuchar, and Congressman Paulsen for recent efforts to introduce bipartisan-supported legislation to repeal the medical device excise tax. The tax went into effect January 1, 2013 adding a significant challenge to the medical device industry in its ability to continue to deliver innovative research and development and create jobs in an innovative sector of the Minnesota economy. We applaud continued efforts to address this challenge through a variety of options and recognize that a repeal of the tax will be an uphill battle. The building debate on international and corporate tax reform holds similar consequences for the industry’s ability to compete both here and abroad.

These members of Minnesota’s congressional delegation have demonstrated persistent and thoughtful leadership around the medical device tax from the beginning in an attempt to exclude it from healthcare reform, and when a separate vote was not possible, worked to limit its size and impact. We need policies in the U.S. that will encourage investment and job creation in this high skill industry and maintain a favorable balance of trade, providing tremendous opportunity for growth in emerging markets around the world. For companies like Medtronic, these efforts will protect our ability to continue to deliver world-class clinical research and product development that advances care and patient access to innovative therapies.

Note that the sense of pragmatism is still there in the acknowledgment that getting the industry off the hook is still an "uphill battle."

-- By Arundhati Parmar, Senior Editor, MD+DI

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FDA Sends Out a Slew of New Warning Letters

FDA had a busy week sending out warning letters. The unlucky recipients include a laser-device company, a distributor for a therapeutic massagers and an orthopedic implant manufacturer. Body, Mind & Soul is a Canadian medtech distributor subject to one of the warning letters. One of their products, the Celluderm therapeutic massager, was cited due to premarket approval violations. According to the warning letter, advertising for the device included unapproved therapeutic uses. The device was advertised as a tool for reducing congestion, breaking up fat and stimulating the lymphatic system. Regulators at the FDA inspected the contract manufacturer's plant (run by Innovative Med) prior to issuing the warning. Fisioline, an Italian laser-device company, also faced the wrath of the federal watchdog agency. According to its warning letter, the company faces several quality-system violations based on an inspection in late 2012. The company was also cited due to violations of Medical Device Reporting regulations. Instratek, a medtech manufacturer based in Houston, Texas, received a citation for quality-systems violations. Instratek makes surgical instruments and orthopedic implants. Based on an inspection in April of last year, the FDA noted that the company did not have adequate procedures for the correction and prevention of future manufacturing issues. The agency also cited Hyphen BioMed with a warning letter for reagents determined to be adulterated. The company was cited for a variety of quality-system violations related to its Class II biological reagents for hemostatis and thrombosis.

Avoiding Medical Device Failure by Choosing the Right Resin

Last year, an article titled "Five Common Causes of Medical Device Failure" from Impact Analytical (Midland, MI) proved to be among the most popular on pieces of content on Qmed. The five causes cited in that article were contamination, poor molding, manufacturing and design problems, overstress, and incorrect material selection. Here, Eric Hill, business marketing and business manager of Impact Analytical builds on several of those topics.

When selecting a material for use in a device or a product, Hill says one of the most important points is to carefully consider the level of stress the material will be under in the end application. "Make sure you consider this when you design the material both from a geometry standpoint but also if it can stand up to the stress level required," he says.

Molding Concerns

Hill points out that improper molding is one of the most common problems Impact Analytical encounters when testing resin-based medical device components. "When you are molding a resin, you are heating it in almost every case, and this process will cause degradation of the resin," Hill says. "In some cases, you are heating it multiple times to high temperatures." Medical device companies should understand precisely how much a particular resin degrades during molding and whether that degradation affects the performance of the resulting molded part.

Size exclusion chromatography (SEC) is a tool that can help determine how a resin changed during the molding process and can ascertain whether failed polymer components faltered as a result of damage from molding. If that is the case, a reduction in molecular weight during molding of at least 25% is typical.

SEC also can be useful in selecting materials up front. When selecting resins, it is important to consider more than the basic materials in question. "You want to understand the molecular weight of the polymers employed in that resin because a different molecular weight is going to give you different properties," Hill explains. "And those properties are going to affect how that material behaves during the molding process and also in the environment when it is in use."

On Recycled Resins

There are some instances where recycled resins can be used in components. When using recycled resins, Hill stresses the importance of clearly understanding the stream of materials involved. "The recycled material will be different than a virgin one, and not just from a standpoint of price," he says. "The properties will be different. I think you need to, number one, understand those properties and determine whether they are acceptable." 

Occasionally, a medical device company working with a contract manufacturer will specify a virgin material and the contract firm will produce the component from a recycled resin instead. "The overarching issue is everyone needs to document and fully disclose which materials they are using and not just substitute one for the other without disclosing that and assuming they will be the same because they will not be."

"Again, this goes back to understanding the stream, which involves knowing whether the stream is consistent," Hill says. "With virgin, you know exactly what you are getting every time, or, at least, you should know. With recycled, are you getting it from the same stream every time? Or is it going to vary depending on how much material was combined at the recycling plant in that given week or lot?"

Conclusion

Although it doesn't specifically relate to sourcing resins, there are lessons to be learned from metal-on-metal hip implant failures that have made headlines in recent years. When asked what makers of hip implants could have done to avoid high-profile recalls, negative publicity, and litigation related to metal-on-metal products, Hill states the following: "First, I'll just qualify that we don't do a lot of metal material characterization testing. But from a broad sense, clearly there was testing that could have been done to simulate better how those products were going to operate in the environment that was not done."

The take home message is that it is vital to do adequate testing when selecting materials for use in a medical device. "You have to understand how that material is going to behave in the environment that it is going to be acting in," Hill says. "If you have a medical device that is going to operate inside of the body, that is a much different environment than having the material in the open air. The same thing if it is operating on the skin or near the skin."

Brian Buntz is the editor-in-chief of MPMN. Follow him on Twitter at @brian_buntz