Masimo (NSDQ:MASI) founder and CEO Joe Kiani, in an exclusive interview with MassDevice.com, called for the medical device industry to be more pragmatic in its fight against the medical device tax, saying his med-tech colleagues should start thinking about ways to shield smaller companies from the impact of the levy.
The CEO of Irvine, Calif.-based Masimo said the industry should push for a tiered system that would insulate startups and early-stage medical device companies from the the 2.3% top-line tax on U.S. medical device sales. The tax, passed in 2010 as part of the Patient Protection & Affordable Care Act as a way to helped pay for healthcare reform, is slated to go into effect in January 2013.
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"Any tax will harm all companies and cost jobs," Kiani told MassDevice. "However, the very big companies will be impacted less than the small companies – and some smaller companies could go into red because of the tax, or even fail altogether.
"Companies with $100 million in sales or less shouldn’t have to pay the tax," he told us. "It won’t impact revenue, from government’s standpoint, and it would be worth it because [the tax] could devastate young companies. We have to protect the young companies."
Kiani said the average medical device company doesn’t achieve profitability until they reach that $100 million sales mark, making it a natural Maginot line for the tax. It took Masimo some 16 year to reach that point, Kiani said, from its founding in his garage in 1989 until 2005. Today, Masimo employs more than 2,500 workers across the globe and posted 2011 profits of $63.7 million, or $1.05 per share, on sales of $406.5 million.
But had the tax existed in those early years, he said, Masimo might not have been so successful – or even made it at all.
"It could’ve been devastating, even caused us to completely fail," Kiani said. "The market for capital has started to get tougher and if it hit us in the right time, the difference could have been a down round or worse."
"I haven’t forgotten where we came from. I wouldn’t want that to happen [to other small companies]," he said.
Maverick’s stand not so new
Kiani’s stance sets him apart from most medical device CEOs, who have taken a repeal-or-bust position on the tax.
"I think my colleagues are very principled and think it’s wrong to accept the tax at all, and I think that’s a good way to be. But if this is going to happen, which it looks like it’s going to, we need to at least protect the companies that will be hurt the most."
But the idea of a tiered device tax has been around since the legislation came out of the U.S. Senate Finance Committee in September 2009. Efforts by the industry’s lobby to include revenue caps in the bill were unsuccessful, however, even prompting full-throated objections from some of the larger medical device makers.
In December 2009, an amendment to the ACA pushed by senators from medical device-rich states that would have excluded companies with less than $100 million in sales failed to make it into the final measure. That amendment, sponsored by then-Sen. Evan Bayh (D-Ind.) and Sen. Amy Klobuchar (D-Minn.), would also have required companies reporting between $100 million and $150 million in sales to pay an excise tax on 50% of their U.S. revenues; the rate for companies with more than $150 million in annual sales would have been 100%.
AdvaMed, the national trade group for the medical device industry, supported the idea of tiering at the time, but has since shifted its position to focus to more aggressive efforts to repeal the bill outright.
In November 2009, St. Jude Medical publicly pulled out of AdvaMed after a reported spat over the council’s support of a tiered tax system.
In a Nov. 2, 2009 letter to AdvaMed president Steven Ubl, obtained by Dow Jones Newswire, St. Jude CEO Daniel Starks resigned his seat on AdvaMed’s board and canceled his company’s membership in the group over the proposal.
Starks wrote that it was “inappropriate for AdvaMed to advocate for a specific policy that economically advantages a portion of its membership at the expense of other members," according to the news service.
In an interview with MassDevice last month, Ubl told us that the council was pursuing several ways to mitigate the tax in the winter of 2009, including tiering and protection for small companies, after it succeeded in cutting the tax from $40 billion to $20 billion over 10 years (present estimates put the tax at $30.5 billion over that span) and pushing back its implementation to 2013.
"We prioritized those issues and worked the political process to try to secure as many of those as we could," Ubl said.
David Nexon, senior executive vice president of AdvaMed, added that the industry council had to expend a lot of its efforts just to secure the gains it made lobbying Congress.
"We wanted to make sure there wasn’t a slip back, there was always a potential [for that]," Nexon told us.
"There were still moving parts, up to the last minute. We wanted to make sure that in those final negotiations – you remember there was a reconciliation bill passed at the end – that there wasn’t any backtracking, that the $20 billion had been approved by both the House and the Senate and that was probably our biggest effort at that point," he said.
