Repealing the medical device tax would power new product research

Venture capitalists put just 5.5 percent of their money into medical technology firms in 2014. That’s the lowest figure in more than a decade.

Early-stage companies, which tend to develop the most innovative technologies, are getting less than half the funding they did five years ago. Established medical technology firms, meanwhile, have grown more reluctant to partner with start-ups to bring promising but risky technologies to the market.

The tax on medical technology is adding significantly to the burdens facing companies that are trying to innovate and survive. By repealing this tax, Congress would free up huge volumes of capital that could be invested in the creation of new, life-saving products.

{mosads}The 2.3 percent tax, which went into effect last year, hits a broad array of medical technology — from tongue depressors to pacemakers. And it’s levied on revenues, not profits. So even companies that are losing money have to pay it.

Start-ups are having a particularly hard time shouldering the burden. Consider Indiana-based Iconacy Orthopedic Patients, a 13-person company that manufactures orthopedic devices. Its chief executive Tom Allen recently said, “We’re actually borrowing money to pay the excise tax.”

Other firms have been forced to scale back investments in new products. According to a survey by AdvaMed (Advanced Medical Technology Association) more than half of device-makers have cut their research budgets to free up money to pay the tax.

Translating device breakthroughs into commercial products often requires the help of a larger firm. But thanks to the tax, larger firms have less money with which to acquire promising companies. According to Ernst & Young, medical technology firms have become far more likely to return money to shareholders than to use their funds to purchase a start-up.

These struggles are also scaring away venture capital.

Even before the device tax went into effect, medtech companies had a tough time competing with other start-ups for financing. After all, the regulatory approval process for new devices is expensive and time-consuming. And securing coverage by public insurance programs like Medicare and Medicaid is getting significantly harder making the diffusion and adoption of new technologies that much more difficult.

Why invest in a medical technology company, which may require millions of dollars in research spending and have to overcome regulatory hurdles before its product even reaches the market, when the next dating app or social-media network faces no such impediments?

Investors are asking that very question. It’s no surprise, then, that investment in software is up 53 percent, compared to just 21 percent for medical devices.

When venture dollars dry up, smaller device makers have an even harder time getting off the ground. According to a report from Silicon Valley Bank, the difficulty of raising money has caused many potential device entrepreneurs to stay at established companies instead of going out on their own to found new ones. “Without development of a new crop of risk-takers,” the report concludes, “innovation is stifled.”

By repealing the medical device tax, lawmakers could empower firms to invest their cash in research. Indeed, according to one survey, 85 percent of device firms plan to reinstate forgone research projects if the tax is scrapped.

That new research would preserve existing jobs — and stoke the economic activity that creates new ones.

As is, the device tax has been estimated to negatively impact job creation. That’s a particularly frightening prospect for Minnesota’s med-tech sector, which currently employs nearly 27,000 people — and supports another 56,000 throughout the rest of the state economy.

Fortunately, lawmakers from across the political spectrum — including strong supporters of the Affordable Care Act — appear to recognize the tax’s destructive consequences. Minnesota’s own Sens. Amy Klobuchar (D) and Al Franken (D) are leading the charge to repeal the device tax in the Senate. Rep. Erik Paulsen (R-Minn.) is leading the charge to do so in the House — with the support of more than 275 of his colleagues, including all eight from Minnesota.

To ensure that entrepreneurs can invent the next generation of life-saving and life-enhancing medical technology, Congress must repeal the medical device tax.

Yared, is president and CEO of CVRx, a Minnesota-based medical technology company. He is chairman of AdvaMed Accel, a division within the Advanced Medical Technology Association focused on the needs of small and emerging growth medical technology companies.