US Medical Device Tax Suspension Will Initially Benefit Small Firms

The two-year suspension of the 2.3% medical device excise tax should allay medical device industry concerns, with the greatest effect being on smaller companies. These are the latest findings of Kalorama Information (New York, NY, USA), an independent medical market research firm.

According to the report, thousands of companies were broadly impacted by the medical device excise tax, and it was especially felt by companies with just one or two products and less than 50 employees. As the tax was on sales and was paid out whether a device earned a profit or not, concerns were raised that the tax would squeeze out research and development (R&D) funds, since an estimated 7% of revenue goes to R&D, and large firms did not change their allocations greatly since the enactment of the tax.

“We didn't see the effect on research on development broadly in the industry, but venture capital money did go away at the same time the tax was enacted,” said Bruce Carlson, publisher of Kalorama Information. “R&D spending in major firms continued to be a similar percentage of revenue as in the past, with top firms spending hundreds of millions of dollars.”

The report found that in 2014, Johnson & Johnson (J&J, New Brunswick, NJ, USA) was the largest single medical device taxpayer with USD 180 million in payments, followed by Medtronic at USD 112 million. Covidien (Dublin, Ireland) paid USD 60 million, Smith and Nephew USD 25 million, and of C.R. Bard (Murray Hill, NJ, USA) USD 3.5 million.

“It's welcome news, especially for the multitude of smaller companies in this industry. A top 20 device company can pay tens of millions and post a note in their annual report,” added Mr. Carlson. “A small company with one device needs all monies from their sales. Small device companies are often funded by venture capital, least able to raise price or find a partner to merge with, and companies where the two point three was critical operating funds.”

Alongside devices that did incur tax, audiology devices and wheelchairs were exempt from taxes under the original statute. Oxygen concentrators, glucose monitors and other point of care (POC) tests, ileostomy bags, walkers, home medical beds, and bandages, which were not specifically named in the original statute, were also granted favorable US internal revenue service (IRS; Washington DC, USA) rulings later on. As a result, the actual tax burden was slightly less than predicted.

Related Links:
Kalorama Information
Johnson & Johnson
Covidien