Orange County medical device executives are fighting to scrap or scale back a proposed tax on their sales that’s part of a key healthcare reform bill.
Legislation passed last week by the Senate Finance Committee includes a $4 billion annual fee on medical device makers that would help pay for healthcare reform.
Device makers and their industry trade groups are angling to cut or kill the fee as the bill works its way through the Capitol.
“This is the kind of thing where we think ultimately good sense will prevail,” said Michael Mussallem, chief executive of Irvine heart valve maker Edwards Lifesciences Corp. and chairman of AdvaMed, a Washington, D.C., trade group, in published reports last week.
Executives and trade group lobbyists now are making their case that a tax will cut profits, leading to reduced research spending, fewer jobs in a high-paying industry and less funding for startups.
Device executives were in Washington last week for a convention and met with Senate and House members, “with a special emphasis on the Senate,” said Wanda Moebius, a spokeswoman for AdvaMed.
The group’s lobbyists and members are talking to “anybody we can” from the Democratic and Republican parties, Moebius said.
Profits
The tax stands to cut medical device profits by 10% to 100% depending on the company, said Joe Kiani, chief executive of Irvine device maker Masimo Corp. and chair of the Medical Device Manufacturers Association, a Washington trade group.
It could “even force some companies into negative profitability,” he said.
Some device makers may be able to pass along the higher costs, according to Kiani. But that’s likely to increase prices at hospitals, defeating one of the goals of healthcare reform, he said.
The tax that passed would require device makers with yearly sales of $5 million to $25 million to pay 1.5% of their revenue to the government. Device makers with $25 million or more in revenue would pay 3% to 4% of sales.
Companies with $5 million or less in revenue would be exempt.
For companies with slim profits—equaling 3% to 4% of sales—the tax potentially could eat up earnings. For others, they could see lower profits.
Edwards had a second-quarter net profit equal to 14% of its $335 million in sales. Masimo had a net profit margin of 15% on $83.6 million in sales.
JP Morgan Chase & Co. analyst Michael Weinstein recently predicted that device maker profits would drop significantly if the tax isn’t cut or eliminated.
Weinstein predicted Edwards’ profits could decline by $11.2 million in 2010.
Wall Street expects Edwards to make $197 million in 2010.
Weinstein said he expects senators to listen to industry groups and ultimately cut the proposed tax in half. But even if the industry gets the tax lowered to 1.75%, profits still would be hit, he said.
The impact could be hardest on startups, according to device executives. A tax on sales could push back profitability for them and scare off venture capitalists, they say.
“I’ve spoken with venture capitalists who fund these startups, and they’ve stated that many of these companies don’t generate their first dollar of profit until the company generates $100 million in revenue,” Kiani said.
If the tax stays at $4 billion, “it exceeds the $3.7 billion in total venture capital funding that the industry received in 2007,” said Caroll Neubauer, chief executive of Bethlehem, Pa.-based B. Braun Medical Inc., a unit of Germany’s B. Braun Melsungen AG that employs more than 1,300 people in Orange County.
Neubauer, who serves on AdvaMed’s board, said “policymakers must also consider if it makes sense to harm an industry” that provides high-wage jobs.
The average medical technology industry salary in California is $50,000, compared with a $39,700 statewide average for other industries, Neubauer said.
R&D Worries
Executive also are worried about the tax putting a chill on research and development funding, which is considered the lifeblood of the industry.
“Every medical device company CEO that I have talked with has told me they will cut back R&D expenses,” Kiani said.
Research and development “is, theoretically, the biggest pot of disposable income, so you end up triaging your R&D projects,” said Matthew Jenusaitis, chief executive of Octane, an Aliso Viejo-based group that supports medical device startups in the county.
“Historically, if you look at all of the economic downturns, the recovery is always stimulated by innovation. Something new comes out, people rally behind it,” said Jenusaitis, a former president of Ev3 Inc., a Minnesota-based maker of devices to treat blood vessel diseases that has 350 workers in Irvine.
Politicians who represent states with big device industries are joining in the effort to reduce or drop the proposed tax, including Gov. Arnold Schwarzenegger, who expressed his concerns in a letter to Senate Finance Committee Chairman Max Baucus, a Montana Democrat.
Fourteen Democratic senators, including California’s Dianne Feinstein and Barbara Boxer, wrote Baucus and asked him and other Senate leaders to “moderate” the proposed tax.
Rep. John Campbell, a Republican who represents Irvine, Newport Beach and other areas, also has come out against the tax.
Device makers are proposing alternatives.
Instead of taxing, Kiani said his group is hopeful that Congress would look at targeting fraud, waste and abuse for savings.
Device makers say they favor overhauling healthcare. AdvaMed met with the Obama administration early in the process on healthcare reform.
“We agreed on the principles that should drive healthcare cost reform: improved health and quality, continued innovation, streamlined administration and efficient care,” Mussallem said in an earlier interview.
But during early talks the medical device industry, unlike drug makers and other players, didn’t propose a specific amount that they were willing to contribute to the effort to raise money to help pay for the bill, according to a Bloomberg story.
Drug makers agreed to pay $8 billion a year to fund healthcare reform, or about 3% of industry sales in 2008.
