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Medtech Cos. Look to Derail Device Tax

Carlsbad’s Ra Medical Systems is among the medtech companies that say the return of a 2.3 percent excise tax on medical devices sold in the U.S. threatens expansion and hiring plans.

Congress failed to deliver on promises to kill the tax, which resumed Jan. 1 after a two-year moratorium. San Diego, home to a robust medtech sector that includes giants like NuVasive, will be particularly hard hit if continued repeal efforts fall short.

Ra Medical CEO Dean Irwin said company tax payments may amount to millions, and it could have to reduce or delay planned hires, mainly in sales and research and development. The company makes excimer lasers and catheters to treat people with cardiovascular and dermatological diseases.

“The tax is very short-sighted. Long term, we need to invest in new technologies that are less expensive and more effective, as opposed to taxing the innovation that makes the United States a source of all this fantastic technology,” Irwin said.

Corporate Tax Cut Could Help

For medtech giants, the recent reduction of the corporate rate tax to 21 percent could cushion the impact. But not so much for smaller but fast-growing companies like Ra Medical, as it’s a tax on sales, not income.

Ra Medical relies on sales revenue to build out the company.

“So it goes right off the top, and we expect that to have an impact of millions of dollars this year,” said Irwin. He later added: “When you’re in high-growth mode you’re not as concerned about profits as much as you are about sales.”

The tax comes as Ra Medical ramps up sales on its recently released Dabra system, a laser catheter to treat a disease known to lead to amputations. Last year Irwin anticipated the laser sparking a huge jump in annual revenue, from $10 million in 2016 to potentially $100 million.

“If this were an income tax that would be better, because it would reward us for reinvesting the capital. Instead, we’re being punished by increasing sales,” Irwin said.

Supporting Affordable Care Act

The tax was first imposed in 2013 on makers of devices like catheters and artificial joints to help pay for the Affordable Care Act, also known as “Obamacare.” Trade groups felt confident it would be done away with in 2017, citing bipartisan support.

But efforts to scrap the tax were tied to failed legislation to repeal and replace Obamacare. Now the industry is looking at additional vehicles, including a Jan. 19 spending bill to prevent a government shutdown, according to industry groups.

Complicating the goal is that some Democrats, including Massachusetts Sen. Elizabeth Warren, say the loss of tax revenue from a repeal should be replaced elsewhere to fund Obamacare. The Congressional Budget Office in 2015 estimated scrapping the device tax would cost $24 billion in lost revenue over a decade.

Likewise, proponents of the tax have stated insurers and hospitals saw higher taxes and fees under the Affordable Care Act, and the medical device industry shouldn’t get off the hook.

Conversely, when the tax was in effect from 2013 to 2015, the medtech industry lost nearly 29,000 jobs, or 7.2 percent of its workforce, according to an analysis last year from the advocacy group Advanced Medical Technology Association, or AdvaMed.

“What’s lost is money that you could put toward a next-gen device or medical technology now has to be on the sideline to pay a tax that many communicated wasn’t coming back. So it’s almost a little insult to injury,” said J.C. Scott, head of government affairs at AdvaMed.

Cost of Compliance

In addition to being hit with a tax, companies must upgrade their accounting and reporting systems to make bi-monthly payments, starting later this month. That’s particularly costly for companies that formed after 2015 and haven’t set up systems to pay the tax.

“It’s an expenditure for larger companies that can (run) into the tens of millions of dollars, and those are resources that they’re not going to recapture even if Congress were to fix this retroactively,” Scott said.

If the tax remains, NuVasive stated it will need to work with third party advisors, as well as quickly reconfigure customer invoicing, among other accounting and reporting systems. Departments and back-office personnel would also have to coordinate more closely.

The cost of these changes hasn’t been determined.

Confident in Stopping Tax

“We remain confident the tax will be suspended or fully repealed, but the longer this takes, the more disruptive it is,” Carol Cox, NuVasive’s executive vice president of external affairs and corporate marketing, wrote in a statement.

NuVasive, which makes spinal surgery products and pioneered surgery techniques, has committed to increasing R&D spending as a percent of revenue from 5 percent to 7 percent over time. But if the tax is in place long term, the company will need to “balance the timing and magnitude of our investments,” Cox said.

“When the tax was suspended for two years, NuVasive took that savings and accelerated further growth here in San Diego and also in Ohio where we built a new manufacturing facility and hired over 200 new employees,” she wrote.

NuVasive anticipates hitting $1.03 billion in revenue by the end of its fiscal year in February. Given the recently adopted tax bill, could the medical device tax be something of a wash?

“The medical device tax has no impact on our effective tax rate. It is an above the line tax only. Both are extremely important to NuVasive growth, but have no relation to one another,” Cox stated.

Asked which tax is more important for the company, she said: “They are both important to NuVasive as we continue to grow the company, invest in R&D and continue to invest in delivering life-saving and life improving innovations for patients suffering from debilitating back pain.”

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