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2013 Medical Device Tax Effect on Two Leading Hubs

10/25/2012 3:05:44 PM

2013 Medical Device Tax Effect on Two 

Leading Hubs By Michelle Wong,

The 2.3 pct medical device excise tax, set to become effective January 1, 2013 has become a major issue and will affect many of the nation’s top medical device hubs. The $20 billion tax, which was included in Obama’s 2010 Health Reform Plan is based on a company’s total revenue regardless of its generation of profit and will only apply to medical devices which are imported. Being that the act was signed; some felt the tax would spur more innovation, provide cost-effective ways of delivering care, and would help pay for universal healthcare. Others, however, specifically in the medical device industry, opposed the tax and felt that it would cost the country thousands of jobs, hinder innovation, and prevent companies from expanding in the U.S.

Since 2010, the Senate has reconsidered repealing the legislation and is now in the process of making its decision. Whether or not the act will be repealed or not is up to the Senate. If the tax does get enforced, it will have a direct economic impact on several medical device hubs in the U.S. Of these hubs, the Midwest will be one region which will be hit the most while other regions such as Southern California will face a lesser impact. How well these regions do will depend on factors such as the region’s strengths, resources, and the amount of funding they are currently receiving.

Midwest: Indiana

The Midwest, one of the nation’s strongest medical device hubs will face a considerable impact if the tax is implemented. The hub currently contains several of the largest medical device corporations such as Cook Medical, Medtronic, St. Jude Medical, and Stryker. Indiana, in particular may face the greatest change as the state’s economy is heavily driven by manufacturing and is considered to be the most manufacturing-intensive in the country.

According to a 2012 BioCrossroads report, “Indiana’s medical device industry is one of the state’s most valuable economic assets” and is recognized highly for its labor force and high wages. Currently Bloomington, IN has the most medical device workers in a concentrated area and Warsaw continues to be the global hub in the orthopedic industry.

If the medical device tax does go into effect, Indiana will be faced with several challenges. The state, similar to most states in the Midwest is struggling to secure private venture capital which is crucial in supporting start-up companies in their first few years of operation. Moreover, the tax will hinder Indiana among other states in the U.S. from investing in research and innovation. Elizabeth Warren, a former Obama official, who repeals the tax, has said that the tax “pushes companies of all sizes to cut back on research and development for life-saving products.” Christine Cook of Catheter Research, Inc. has commented that their company “will not be able to invest as many resources in areas such as new product development, technology, and training as the new device tax will decrease [their] profitability.”

As the end of the year approaches, large companies in Indiana and other Midwest states have taken action to prepare for the change. Some companies have announced job cuts, stopped facility plans, and are in the process of restructuring their companies. Steve Ferguson, who is the chairman of the Cook Group, Bloomington’s top medical device company, noted that the tax will cost the company more than 50 pct in taxes and result in pushing innovation overseas. The Cook Group has stopped its plans to build a $15 million factory including four subsequent factories and is focusing its efforts on its growth overseas. Boston Scientific, based in Minnesota, announced that it will be restructuring their company resulting in job cuts. St. Jude Medical has estimated in a press release that if the 2.3 pct tax does take place and job cuts occur it will reduce its pre-tax costs by approximately $50-$60 million annually. Medtronics has also announced 1,000 layoffs and has stated that the tax would cost the company $125 to $175 million a year.

Despite the fear that the medical device tax has brought to the Midwest, some companies are very optimistic of its future. Since the tax hasn’t been enforced yet, the Midwest is still considered one of the nation’s top medical device hubs.

Iconacy Orthopedic Implants, LLC, an orthopedic developer and manufacturer in August 2012 expanded and opened a 50,000 square-foot facility in Warsaw, IN. The company expects to open up 50 new jobs by 2015. Tom Allen, president and chief executive officer of Iconacy has said that, “The Iconacy family is honored to call the orthopedic capital of the world, in the heartland of America, its home.” Dan Hasler, chief executive officer and Secretary of Commerce of the Indiana Economic Development Corporation also noted that "Whether it is scientific research or medical device manufacturing, Indiana continues to provide a vibrant life science sector for innovative companies like Iconacy to not only grow, but create a foundation for its future success.”

Southern California: Orange County

Southern California, focused on innovation rather than manufacturing, will most likely fare better than the Midwest. The medical tax ironically, according to a CaliforniaHealthline article, may actually be good for San Diego’s long term market. In the article, Schultz explains that large medical device companies are cutting down their workforce and “are all trying to prepare their bottom line for this medical tax.” This may benefit San Diego in that there is an abundance of small companies already seeking to acquire or license rather than selling their products. John Watson, bioengineering professor at University of San Diego, has also commented that that the “medical device industry is loaded with opportunities in part because most of the industry is made up of small, creative companies.”

Based on the 2012 Southern California Economic Impact Report, Southern California is one of the most vibrant, innovative, clusters in the world and its largest life science sector is in medical devices and diagnostics. Orange County specifically, is the largest employer in medical devices in the region bustling with innovation hubs centered in and around Irvine, Mission Viejo, Torrey Pines Mesa, Carlsbad, and UC San Diego. The region is currently the “largest concentration of medical device companies in the nation.”

What fuels Orange County’s success in innovation is that it holds a wealth of resources from the leading academic universities to initiatives which support medical device startups. Academic universities continue to foster new talent through medical device academic programs as well. Currently, the University of San Diego Jacobs’ School of Engineering offers a Master Degree in Medical Device Engineering. This program is currently the number one bioengineering program in the nation. The University of California of Irvine (UCI) with the help of government and industry advisors developed a certificate program in Medical Product Development which provides advanced knowledge to those work in the industry as engineers and manufacturing professionals. University of Southern California (USC)’s Viterbi School of Engineering also offers a Master’s Degree program in Master’s Degree program in Medical Device and Diagnostic Imaging.

The county continues to receive venture funding for startup companies, too despite the upcoming tax. Aviir Diagnostic Laboratories received $8 million in funding from Silicon Valley Bank. Sequent Medical, Inc. located in Aliso Viejo has received $26.0 million in venture financing from Versant Ventures, Domain Associates, and US Venture Partners. Tribogenics, which produces innovative X-ray sources, received $6.2 million Series A financing from the Founders Fund. OCTANe LaunchPad has also raised $25 million to help fund startup companies.

In addition to Orange County’s wide range of academic programs and venture funding, Orange County also provides a Medical Training Initiative that helps businesses grow. The North Orange Community College District’s (NOCCCD) School of Continuing Education was also awarded a grant in effort to develop medical training and curriculum for new and existing workers. This certificate program once completed ensures that workers receive quality specialized and regulatory training.

The medical device tax has certainly riled up a large amount of controversy and is becoming much more intense as the end of the year approaches. Whether or not the medical device tax will be imposed remains to be unseen however, both the Midwest and Southern California remain to be two of the brightest and strongest medical device hubs in the industry today.

About the Author

Michelle Wong researches and writes about job search strategy, career management, hiring trends and workplace issues for

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