US Device Tax: Looking For Beneficiaries Is Like Playing “Where’s Waldo?”

In short

Following last week’s coverage of Joe Hage’s no2point3 campaign, John Eckberg, Cook Medical’s Director of Media Relations has provided us with his own (and presumably Cook’s) view of the matter. It’s no surprise, given Cook’s previous well-expressed vehement antipathy towards the bill, to find the company broadly supportive of the campaign to repeal the act, specifically the medical device company tax levy. If anything John Eckberg’s correspondence with us rather suggests that Joe Hage’s campaign doesn’t hit hard enough. In John’s words; “We strongly disagree with some of Joe’s answers but he’s entitled to his opinion.”

If not a revenue tax, what about a profit-based tax?

The issue at the heart of this difference of opinion is that while Joe advocates a profit-based tax in order not to penalise companies not yet in the black, John’s position is that the tax burden per se on US companies is already too high, so should actually be reduced for companies like Cook, especially when they make new investments and create jobs in US, as the company has just done with its Canton facility.

If there is a windfall it won’t be spread evenly

Joe Hage and John Eckberg do appear to be on the same page in their disagreement with the assertion that the affordable care act will generate more healthcare demand and as such drive growth in the medtech industry, a windfall which will offset the new tax.

It’s difficult to know whether there will be winners as well as losers, which at first glance one could imagine being the case. Companies who’s patient/procedure base increases with extension of insurance provision must presumably see some benefit, however intangible.

For a company with Cook’s portfolio that’s less obvious. Indeed Cook’s position is clearly that it will see no revenue uplift because its products are in specialties and areas that are already unconstrained in any way that PPACA will relieve. John Eckberg says; “We will not see increased sales because most of our products are late-stage life products (angioplasty balloons, for instance, stents and grafts, too) and individuals now receiving coverage skew younger and do not need these critical care products. Also, these products are already in use whether individuals have insurance or not. For instance, if you get in a car accident and are taken to a Baltimore hospital today, they will place blood drainage catheters for internal bleeding whether you have insurance or not. It’s a life-threatening calamity, therefore by law you get the product.”

So far then, all pain, no gain for Cook.

It’s already taking effect

There’s pretty much weekly news that one company or other is now doing things (or not doing things) with the impending tax burden in mind. John Eckberg helpfully lists a few:

• Stryker Corporation announced a layoff of 1,000 workers due to the tax.

• Boston Scientific, a $35+ million research and development center built in Ireland instead of North America;

• Zimmer to lay off 450 and take a $50 million charge against earnings;

• Boston Scientific is girding for a $100+ million charge to earnings in 2013.

• In Cincinnati two weeks ago at the Xavier University MedCom convention, the CEO of Meridian Bioscience, a publicly traded company said point blank that his company would shift production outside the U.S. if this tax stands. He detailed that he was not referring to new job growth but to existing U.S. jobs.

• Cook Medical has shelved plans to build a medical device factory annually in the U.S., a factory just like the plant opened in 2010 on the site of a former tractor factory in Canton, Illinois. Wages from new jobs ripple through and strengthen the local community, so support the argument that the tax is counterproductive. It argues that a sensible taxation regime would incentivise investment rather than the new levy which will penalise companies at source and so reduce the likelihood of investment.

Stifling innovation

Finally, and one of the most powerful arguments, Cook strongly believes that increasing the tax burden will stifle innovation in USA as companies strive to protect their bottom line against the instant and sustained hit that will occur on its introduction next year.  They believe the new tax will force companies to limit research budgets to test new products and ideas – the lifeblood of growing device companies.  When these resources are curtailed, patients pay the price with more limited medical treatment and a reduced chance of survival.

We say

It’s a complex discussion and one which will rumble on. What’s pretty clear to us, looking in from overseas, is that without a repeal, US medtech industry’s terrain is going to get tougher, and in ways that are not even-handed. There may be winners from the windfall, but it’s certainly going to be hardest on companies like Cook. Of course the argument that US tax burden is already among the highest in the world is entirely sound.

The counter-argument that the medtech industry has survived quite nicely in a high tax environment thus far is of course valid. Presumably the legislators have done their homework and established that whatever exodus to lower tax territories will occur (which it will), this is deemed all worthwhile when the tax income dollars are being counted. That’s a high risk strategy, because while the arguments from companies like Cook might well look a little self-interested (with good reason), the bottom line is that the incredible success story that is the US medtech sector is about to take a hell of a beating.

To close then, one might imagine that as Europeans we’re applauding the tax initiative all the way to the new technology park in County Cork, or wherever. But what has to be taken into account is that there is a chain of events that takes place in order for patients pretty much anywhere in the world to benefit from new medical technologies, a chain that starts with incentive to innovate. That culture and that seed invariably originates in USA, a culture so investor-friendly and university-heavy that those magic beans can’t simply be transplanted somewhere else in the world. Interesting times.