By Michael D. White, author and freelance writer
It’s virtually impossible to take an analytical look at the medical device manufacturing sector without first looking at the 500-pound gorilla in the room the federal government’s medical device tax.
Originally included in the Affordable Care Act (ACA), the tax imposed a 2.3 percent sales tax on medical devices and supplies including pacemakers, optical diagnostic equipment, syringes, artificial joints, surgical gloves, ultrasound devices, and dental instruments that has proven to be “a severe drag on companies’ ability to invest in and grow their businesses, whether in new facilities, infrastructure improvements, R&D or new hires,” says Mark Brager, vice president of communications at the Advanced Medical Technology Association in Washington, D.C.
According to industry analysts, the industry’s federal income tax liability would be approximately $8.7 billion for 2013, the first year the tax was in effect a 30 percent increase in the industry’s total tax burden, solely due to the device tax.
After the tax was imposed, The Brookings Institute published the results of a report compiled by Ernst & Young which found that venture capital investment in medical devices in 2013 fell a full 17 percent from the previous year.
In addition, the report said, “investment funding is also shifting towards less risky later-stage medical device companies instead of smaller earlier stage ventures. These trends are worrisome since early-stage investment companies can promote innovative and disruptive medical device technologies that introduce new therapeutic benefits or quantum improvements in patient care.”
The tax was suspended in 2016 and, since then, says Brager, “Medical device manufacturers have been able to reinvest those funds to expand their businesses. But that progress is threatened unless Congress acts to permanently repeal the medical device tax before the end of 2017.”
That reinvestment, he says, has spurred growth in the industry with 7,000 U.S.-headquartered companies generating estimated annual sales of $106 to $116 billion annually, and proving to be a boon to the economic development of the regions that serve as their bases of operations.
Based on a Geneva Analytics survey of 17 medical manufacturing firms, several key site selection criteria emerged as benchmarks by medical device manufacturing firms analyzing potential locations for facilities. Those factors included energy costs; supplier network infrastructure; transportation costs; available ‘development-ready’ real estate; property tax rates; the proximity of research universities and hospitals; a skilled labor force; community amenities; and economic development incentives.
Over the past several years, a growing number of states and localities have proven that the right combination of ‘percs’ can go a long way in serving as a magnet to attract new and develop already established companies in the industry.
Alabama is developing a reputation as an epicenter for the medical device manufacturing industry.
Home to such up and coming firm as BioHorizons, the Steris Corp., Orchid Orthopedic Solutions, and Turner Medical, the state boasts seven research universities, a highly accomplished contract research organization, a biotechnology research institute, and dozens of life sciences companies, and, according to its website, “access to talent, partnerships with higher education and industry, a low cost of living and doing business creates a rich ecosystem for the medical device industry.”
Birmingham-based Southern Research, a not-for-profit 501 research organization that conducts basic and applied research for commercial and non-commercial organizations, has partnered with the University of Alabama to develop advanced medical devices, while more than 600 bioscience companies, including 54 medical device and equipment companies, employ approximately 1,600, according to the latest data available from the U.S. Bureau of Labor Statistics.
The state also serves as home of the Cummings Research Park, the second largest research and technology park in the U.S. and attracted $274 million in funding from the National Institutes of Health, according to the Federation of American Societies for Experimental Biology.
The medical device industry is “an extraordinarily important pillar of Minnesota’s economy, employing nearly 30,000 people in the state alone and generating billions in revenue,” according to the Minnesota Department of Employment and Economic Development.
The industry, the agency says, is one of the strongest and most diverse medical device clusters in the world” with such industry powerhouses as 3M Health Care, Boston Scientific, Medtronic, St. Jude Medical, and Smiths Medical located in Minnesota or having a significant presence there.
In 2014, Minnesota received $368 million in venture capital investment. Of that total, investors pumped more than $245 million into the state’s medical device industries, while, for example, the partnership between a number of innovative companies, the University of Minnesota’s University’s Institute for Engineering in Medicine, Medical Devices Center and Visible Heart Lab, and Mayo Clinic “creates an ideal environment for turning new ideas into commercial success.”
Spotlighting Indiana’s surging reputation as a hub for medical equipment development on a more local level was the November announcement that Fort Wayne Metals will invest $51.1 million to expand and enhance its northeast Indiana operations with the construction of a two-story, 40,000-square-foot addition to their corporate office building, and the revitalization and expansion of a recently-acquired 60,000-square-foot manufacturing facility.
Fort Wayne Metals’ products are distributed globally and used in various medical device markets, including vascular therapy, cardiac rhythm management, endoscopy, orthopedics, dental, neuromodulation and neuro-stimulation.
The company is one of 1,687 life sciences firms in Indiana that employ more than 56,000 workers. According to Indianapolis-based business facilitator Bio Crossroads, these firms help Indiana export $9.6 billion of life sciences products annually, ranking second in the entire nation.
“As we continue to be innovative leaders of life-saving, high-quality material solutions, we are experiencing a global increase in demand,” said Troy Linder, chief financial officer of Fort Wayne Metals. “Our investment in facilities and people will help build the infrastructure necessary to meet this demand, and we are excited to be able to partner with the IEDC [Indiana Economic Development Corporation] and Greater Fort Wayne Inc. to continue to expand our footprint in Fort Wayne.”
Naples, Florida-based Arthrex Inc. has unveiled plans to build a state-of-the-art surgical device and implant manufacturing facility in Anderson County, South Carolina. Construction of the $30-million, 200,000-square-foot facility is scheduled to begin in the first quarter of 2018 with completion by early 2019.
The Anderson facility will be Arthrex’s fourth U.S.-based plant. The others are located in Ave Maria, Florida; Santa Barbara, California; and the City of Industry, California.
Specializing in orthopedic product development and medical education for orthopedic surgeons, Arthrex plans to partner with near-by Tri-County Technical College “to develop a strong pipeline of qualified manufacturing personnel, using their in-depth programs and longstanding relationships with institutions like the Clemson University that are dedicated to supporting the manufacturing industry,” the company said.
Memphis is home to more than just the Blues.
Some 50 medical device companies that employ more than 16,800 employees according to the Greater Memphis Medical Device Council with employment at their facilities ranging from basic assembly work to sophisticated industrial engineering, according to The Memphis Economy website. Collectively, it says, those companies provide a $2.6 billion boost to the economies of both Memphis and adjacent Shelby Counties.
Adding to the medical device manufacturing community in Memphis and Shelby County is a cross-country partnership with San Diego, California-based NuVasive Inc.
Working with Memphis’ Economic Development Growth Engine (EDGE), the company—a global leader in the development of more than 90 products with lumbar, thoracic, cervical, and neuro-monitoring applications—will invest an additional $116 million and add 15 new employees to its existing 180-person staff at its Memphis regional office and distribution facility.
In 2015, NuVasive had revenues of $811 million, including sales in more than 30 countries, and employs more than 1,600 people globally.
The medical device industry is considered a critical component of San Diego’s burgeoning life sciences cluster. More than 30 years ago, scientists out of UC San Diego founded Hybritech, a company that produced one of the first diagnostic tests for prostate cancer. The company’s acquisition by Eli Lilly in 1986 for $400 million made it one of the region’s early success stories, and catalyst for a subsequent influx of startup investors.
Since that time, San Diego’s medical device ecosystem has rapidly expanded, with products and technologies spanning a wide range of applications including diagnostics, sleep aids, glucose monitors and spinal implants, to name a few. Noteworthy tradeshows in the industry have started to call San Diego home, including the 2016 MeDevice Forum, 2017 10X Medical Device Conference and the 2017 BIO International Convention.
Local company Aethlon Medical produces a device known as the Hemopurifier, a disposable filter cartridge used in the treatment of the ebola virus, while another, Obalon produces the components used in surgical weight loss programs.
In 2011, in response to local demand, the University of California-San Diego’s Jacobs School of Engineering launched the Masters in Medical Device Engineering, one of the few academic programs of its kind in the entire country.
A medical device manufacturer that relocated its corporate headquarters and manufacturing operation to the Lehigh Valley in 2016 is now reportedly looking to grow even more thanks to a loan from the state.
Tyber Medical, a manufacturer of orthopedic and spinal implants based in Hanover Township, Northampton County, has been awarded a $362,500, 10-year loan at a 3.25 percent fixed rate, according to the Pennsylvania Department of Community and Economic Development (DCED) and the Pennsylvania Industrial Development Authority (PIDA). The loan will be used to purchase manufacturing equipment for in-house fabrication.
In August, the company announced that it would relocate its corporate headquarters and manufacturing operation to the Lehigh Valley from Morristown, New Jersey.
Tyber Medical produces and markets a variety of orthopedic and spinal implants including cervical, anterior and posterior, lumbar, and direct lateral interbody spacers.
According to KPMG’s recent analysis of the medical device manufacturing industry, the major hurdles facing the sector balance on two major variables—continuous regulatory change and a slowdown in global economic growth.
To improve both their top and their bottom lines, in such an environment, “innovation will be key to success,” the business consultancy says. “To improve the top line, medical device manufacturers will need to quickly become more agile, responsive and innovative, particularly given the continuously shifting regulatory environment and increasingly fierce competition from non-traditional players such as Google. This will require a closer focus and better understanding of the consumer.”
A notable attribute of the medical device sector “is its make-up,” says Dr. Frank Gindele, a product development manager with Southbridge, Massachusetts-based Schott Electronic Packaging.
In a recent column appearing on the MedDevice Online website, Dr. Gindele stated that, “Of the approximately 7,000 medical device companies in the U.S., most are SMEs, employing only 400,000 people directly and two million indirectly. SMEs benefit tremendously from a more agile business structure with fewer layers of decision-making and red tape. It’s no surprise the sector has grown so quickly and innovates at a rapid clip compared to other industries.”
To overcome the many challenges they currently face, “Medical device manufacturers and designers must continue to expand their networks of experts and lean more heavily on suppliers who can help them streamline R&D processes, understand and anticipate regulatory changes, and uncover opportunities to compete on innovation – no matter how small.”
Only by improving collaboration, he concludes, “These companies stand to streamline time to market while enhancing — not sacrificing — performance and quality.”
Bio: Michael D. White is a published author with four non-fiction books and well more than 1,700 by-lined articles on international transportation and trade to his credit.
During his 35 year career as a journalist, White has served in positions from contributor and reporter to managing editor for a number of publications including Global Trade Magazine, the Los Angeles Daily Commercial News, Pacific Shipper, the Los Angeles Business Journal, International Business Magazine, the Long Beach Press-Telegram, Los Angeles Daily News, Pacific Traffic Magazine, and World Trade Magazine.
He has also served as editor of the CalTrade Report and Pacific Coast Trade websites, North America Public and Media Relations Manager for Mitsui O.S.K. Lines, and as a consultant to Pace University’s World Trade Institute and the Austrian Trade Commission.
A veteran of the United States Coast Guard, White has traveled in both Japan and China, and earned a degree in journalism from California State University and a Certificate in International Business from the Japanese Ministry of Trade & Industry’s International Institute for Studies & Training in Tokyo.