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VOL. 6 | NO. 14 | Saturday, March 30, 2013

Taxing Decision

Local biomedical firms hopeful for repeal of device tax

Michael Waddell | Special to The Daily News

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Local medical device manufacturers like Smith & Nephew, Medtronic Inc. and Wright Medical Group Inc. are crossing their fingers that Congress will follow through on a repeal of the 2.3 percent medical device excise tax enacted in January.

Medtronic Inc., whose Spinal and Biologics business is based in Memphis, is one of the local biomedical companies hoping to see the medical device tax repealed. (Daily News File Photo/Lance Murphey)

On March 21, the U.S. Senate voted 79-20 to repeal the tax, with many states proposing ways to make up for the lost tax revenue. Now lawmakers will have to find a way to introduce the measure as a standalone bill or include it in a more sweeping overhaul of the tax code.

The device tax, which is expected to raise an estimated $30 billion over the next decade, has been cited by medical device manufacturers as a reason for recent layoffs, cuts in research and development (R&D) expenditures and delayed expansion plans.

“The reality is that the medical device tax will take funding away from other areas where we could have invested,” said Cindy Resman, spokesperson for Medtronic. “We applaud efforts to repeal the medical device excise tax through a variety of options, though we recognize it is an uphill battle. The tax added a significant challenge to the medical device industry in its ability to continue to deliver innovative research and development.”

Minneapolis-based Medtronic, whose Spinal and Biologics business is based in Memphis, planned for the impact of the medical device tax, which is estimated at $125 million to $175 million annually. The company anticipates a pre-tax impact of up to $25 million in fiscal year 2013 (tax impact is for four months, January to April). Medtronic’s fiscal year runs May to April.

Since the tax took effect Jan. 1, device manufacturers are now required to pay an estimated average of $194 million per month in medical device tax payments, according to AdvaMed.

Late last year executives at more than 800 companies and medical groups drafted a letter to the Senate demanding the tax be repealed as part of the fiscal cliff deal.

“The medical device tax is particularly burdensome on smaller innovative companies, such as Wright Medical,” said Lance Berry, Wright Medical chief financial officer. “It limits the amount of capacity we have to invest in the growth of our business. Despite the burden of the tax, we are continuing to make key investments in the business and are excited about the company’s future prospects.”

Olivier Bohuon, CEO of London-based Smith & Nephew – which has a large operation in Memphis – recently estimated the tax will cost the company about $25 million in 2013. 

(Photo: Lance Murphey)

The company does not plan to make any changes to its business strategy.

U.S. Sen. Lamar Alexander, R-Tenn., proposed the device tax repeal, and he plans to make up the state’s lost tax revenue by cutting a $12.1 billion tax credit that subsidizes wind turbine production, with the goal of repealing both provisions without increasing the federal debt.

“This amendment is about ending two damaging tax policies that are costing Americans billions of dollars, and costing Tennesseans good jobs,” Alexander said in a recent statement. “It gets rid of a 20-year-old, multibillion-dollar subsidy for unreliable, expensive wind energy that stands no chance of powering our nation’s 21st century economy, and it repeals the Obamacare (Affordable Care Act) tax on life-saving medical devices – Tennessee’s top export and an important source of good jobs.”

Tennessee’s medical device exports accounted for $2.1 billion in revenue for 2012, or 10 percent of the state’s total exports. Tennessee ranks second to California in value of medical device exports, with medical manufacturers generating more than $15 billion in export revenue between 2007 and 2012.

Earlier this year, London-based Smith & Nephew, which employs approximately 1,800 people in Memphis, cited the tax as one of several reasons for eliminating nearly 100 jobs in Memphis and Andover, Mass.

“As we’ve said before the medical device excise tax is one of the headwinds facing the business, alongside such items as the market challenges in Europe and increased regulatory and clinical costs,” said Charles Reynolds, Smith & Nephew director of corporate communications, who declined to comment specifically on the tax or speculate on its possible effect on the company over the long run.

Smith & Nephew CEO Olivier Bohuon recently estimated the tax will cost the company about $25 million in 2013.

Some device manufacturers are being accused by The Healthcare Supply Chain Association, which represents the biggest group purchasing organizations used by hospitals, of cost-shifting and passing the tax expense along to hospitals and health care providers on it new website www.devicetaxwatch.com.

Medtronic and Smith & Nephew have announced publicly that they do not plan to increase prices on products to make up for the current tax burden.

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