Forget U.S. Sales Tax. New EU Rules Won’t Just Hurt, They’ll Kill

These are changing times on both sides of the pond. Stateside the past couple of years have been characterised by the tug-of-war taking place over the imposition of the medical device sales tax. Calls for repeal of what is certain to be a painful tax on medical device companies have not gone away. Indeed late last week the House of Representatives voted overwhelmingly to repeal it. The senate will almost certainly reject the move and will defend its position on this and the rest of the “Obamacare” portfolio of measures relating to so-called “affordable” healthcare provision. The issues are packaged together, because it’s the $20/30/40Bn (variously estimated) sales tax that is intended to pay for a significant chunk of the improved healthcare provision for all. The legislators’ argument is that opening up healthcare provision will increase the audience for medical devices. Medical device companies and their representatives strongly refute that argument and claim that not only will their market not increase, but by imposing a tax on their sales revenue, large companies will pull up the drawbridge when it comes to investing in innovation, and small companies who may see early revenue (and indeed depend on it), will still be taxed on those sales long before they turn a profit. Removing incentive is one thing, they say. Removing lifeblood of early profits is entirely another and this move is quite likely to squash start-ups before they get off the drawing board.

BUT….. and the capitals are deliberate….. if our North American brethren in medtech are worried about a sales tax squashing innovation at the highest level of the industry, they ought to take a look across the pond right now. You see, despite the US being a hotbed of technology, in some ways physicians and patients in the country look enviously at the access to technology that is afforded to their European equivalents. At whatever risk level (classification) a product is deemed to be, getting it to market in Europe is quicker and easier. This gives Europe’s physicians access to some of the most advanced life-enhancing and life-saving technologies on the planet. When it comes to new concepts like transcatheter heart valves, Europeans are enjoying third generation devices with all their improvements, while their counterparts in the US are only just seeing first generation devices crawling into the market. And US physicians can’t even pat their regulator on the back and say “well done for protecting us from these dangerously unregulated devices.” Because there’s no evidence the European set-up is placing patients at any more risk. Quite the contrary. Go back to the heart valve argument and you’ll realise that the devices now on the market in Europe are third generation for a reason…. they’re safer. Implantation is easier and the scourge of transcatheter valves, so-called paravalvular leakage is reduced.

BUT….and here we go again…. one of the biggest advantages of the current European regulator set-up is that, by permitting relatively early market access, technology companies gain a vital source of early sales revenue. Anyone who’s operated a medtech company with higher classification devices, on a global scale, knows they need European revenue. Many never even go the US route, because the clinical/regulatory demands can easily stretch to $20M, and how many start-ups can, with straight face, stand before investors and offer early pay-back on that basis? Most devices are niche products with limited volume potential and a very specialised audience. Churning millions from your brilliant widget is not always easy. Doesn’t make it any less brilliant or indeed necessary.

What about the rest of the world, I hear you ask? Can’t companies scrape early revenue from forays into less well regulated countries? Sadly not to the extent that would make any difference. China, Japan, Korea, Australia…. all sound like lucrative opportunities, but all have stringent regulatory requirements and, if they’re honest, all look to Europe and the United States first. While a US/EU approval doesn’t strictly cut any mustard at all when applying for approval in these countries, the reality is that they would be scratching their heads if neither approval was already in the bag. Many other countries will accept CE marked products, and those that officially don’t, kind of do. South Africa springs to mind. So it’s a tough call to make money without either FDA or CE marking. Really tough. Probably impossible for a western world manufacturer.

Medical Innovation will die without EU market access

So, I’ll say it one more time. Medical technology and innovation therein, needs EU market access to be quick and pragmatic. Of course we don’t want to be seen as a guinea pig market, an accusation once levelled by an FDA chief, but there’s no evidence that European patients suffer at the hands of greedy technologists peddling wares that have undergone less regulatory scrutiny than a kids toy, as some strident politicians and campaigners would have you think.

Now, project onto the scene a recent, and very public, device “problem” in the form of the PIP breast implant scandal. Add in impending European elections, and what do you get?

If you follow the subject you’ll already know, but if you don’t you could guess. Yes, what you get is a quick vote through of a pre-market approval process that not only emulates FDA’s, but adds the multinational factor, so requires a bureaucracy to rival any we’ve ever seen in the industry, ever. So your higher classification devices (Class III) will now take millions more currency units and probably at least three more years to get to market… and the irony is that PIPs weren’t even class III devices.

Further down the risk classification pecking order things will inevitably slow up, with a raft of changes all designed to “catch the PIP”, when in reality the determined law breaker will find a way just like they did in financial circles post-Enron.

So, Mr Medtech company, when you’re worried about the impact of a US sales tax on innovation, imagine losing your first three years revenue completely. I don’t fancy trying to write your investment proposition thanks.

And as a patient, I’d vote for a few pragmatic changes to make me feel comfortable devices used on me have been scrutinised by suitably qualified people with a burden of reasonable evidence required and clinical data transparency. Yes, there’s progressive stuff going on, but the overriding sense is that Eurocrats have the opportunity to chuck the kitchen sink at something that will win votes. When companies stop spending on innovation they might rue the day they fell for it.