ANAHEIM, CALIF. (March 27, 1:45 p.m. ET) — A 2.3 percent excise tax on medical devices is scheduled to be implemented less than nine months from now, and there are still divided views on how, or even how much, the estimated $20 billion tax will affect the industry.
In addition, medical companies continue to be concerned about cost pressures, rising transportation costs and increasing prices of plastic resins.
“With the continued spiraling resin costs, our customers are demanding we come up with cost savings,” said Joseph Pregont, president and CEO of medical packaging thermoformer Prent Corp. of Janesville, Wis.
“So we continue to take costs outs out of both our products and our processes through [use of] more labor-efficient equipment, better designs and lighter products,” he said in an interview at the Medical Design & Manufacturing West show, held Feb. 14-16 in Anaheim.
Similarly, Jeff Somple, president of Mack Molding's Northern Operations in Arlington, Vt., said its customers are getting pressure from the Food and Drug Administration to audit and manage suppliers.
“We are starting to see increasing cost pressures,” he said. “We have streamlined our processes and know the bottlenecks we can address to improve efficiency and reduce costs.”
For example, Mack has added a Class 100,000 clean room in its headquarters plant in Arlington with six 110-ton, all-electric Toshiba injection molding machines that will use 60 percent less energy than equivalent hydraulic presses.
That clean room will support a new business unit Mack created last month for the orthopedics and disposable medical devices markets to give customers a single group dedicated to that market segment. “With many orthopedic products moving to disposables, this is a great opportunity for us,” Somple said.
A similar but somewhat different approach is being used by contract manufacturer MedPlast Inc.
The $100 million company in Tempe, Ariz., is addressing cost issues facing the industry by continuing to invest in new equipment for its four plants, all in the U.S., and by looking for acquisitions, said Mike Farrell, executive vice president of sales and marketing.
“We have a budget at all of our facilities to improve equipment and for machinery upgrades,” he said. “Technology is also a big focus right now.”
In addition, Farrell said in June that MedPlast had a target of “making an acquisition in the next 12 months [in an] area where we can expand in support of our customers, either domestically or offshore.”
The cost uncertainty and the pending medical-device tax also has companies looking at their business models, said Matt Langton, vice president of sales and marketing at contract manufacturer UPG Inc. of Oak Brook, Ill.
“Our customers are still trying to look at how they are going to deal with the device tax,” Langton said, adding that they are trying to become more efficient in their supply chains and purchasing.
“Everyone is working with their suppliers up and down the chain to make sure they have reliable partners,” Langton said. “Everyone is trying to figure out how to make sure their company is positioned to weather the next storm and grow for the future” — which he suggested could lead to acquisitions to give companies more purchasing power on the supply-chain side.
Officials of Minneapolis-based Medtronic Inc. have estimated that the impending device tax will cost the company between $125 million and $175 million annually when it goes into effect in 2013. Medtronic had 2011 sales of $12 billion and net earnings of $3 billion.
Still, such estimates have the industry lobbying for repeal, and bills in the House and Senate are designed to do just that. The House version currently has 228 co-sponsors.
“The tax is going to have bigger effect in some areas, particularly in areas where margins might be a little smaller or for products that have become commoditized such as syringes, IV-type products and urology and [feeding tubes],” said Mark Bonifacio, president of Bonifacio Consulting Services LLC, based in Natick, Mass.
“But despite the talk of gloom and doom, I don't think it is going to take the industry down” in the U.S., he said.
That is also the sentiment of others, though they acknowledge the medical-device tax will create yet another reason to manage costs, as only so many costs can be passed up and down the supply chain.
“You have to manage your costs and focus on making the capital investments that add to your capabilities,” said Tim Reis, vice president of business development for health care for precision molder and contract manufacturer GW Plastics Inc., which is headquartered in Bethel, Vt.
“But the health-care market continues to drive forward,” he said. “I don't see that going offshore” because of the pending device tax.”
It remains to be seen whether the medical-device tax can be repealed or postponed, particularly in a presidential election year.
But anxiety over the slow pace of getting federal government approval for new products and devices — a pace that costs the industry money and increases the time it takes to get products to the market — could be less of an issue going forward.
The reason? An agreement reached earlier this month between Washington trade group Advanced Medical Technology Association (AdvaMed) and the FDA on higher user fees should help speed up processing of both premarket approval (PMA) applications and the 501(k) approval process for medical devices.
“There is no doubt that the FDA needs to do a better job of handling PMAs and 510(k)s,” said Bonifacio. “The time to process those has been increasing, instead of shrinking.”
The AdvaMed-FDA agreement more than doubles user fees paid by the industry; that additional money will increase the financial resources the FDA has to manage that workload. Under the deal, industry will pay $595 million in user fees over the next five years, compared with $287 million the previous five years.
As a result, the FDA has put together a five-year plan to have 90 percent of PMAs approved in 385 days, which would be a dramatic improvement from the current 38 percent rate. Typically, 40 PMAs are submitted annually.
Similarly, the FDA is aiming to process 95 percent of the 4,000 501(k) applications it typically receives in a given year within 124 days, which would be an increase of five percentage points from its current rate.