The medical device hasn’t scared savvy investors away from medical device companies yet, but determining effect of the levy may have slowed down the funding process, according to Kristian Werling, partner at the law firm McDermott Will & Emery.
Werling named medtech funders among groups struggling to get a grip on the impact of the 2.3% excise tax, saying that they are dealing with it "very carefully."
"Smart investors understand the nature of what an excise tax is," Werling told us. "They hire smart accountants to look at it and calculate it so they can build it into their model, and they hire smart lawyers to make sure the company’s applying it correctly."
Unfortunately that means that the investment process may take longer than usual, and that’s a trend that could stick around for a while.
In this early installment from a larger conversation with Werling, he tells MassDevice.com why investors are taking their time assessing the impact of the medical device tax and what that means for companies seeking funds.
MassDevice: How are investors dealing with the medical device tax now that we’re nearly 2 quarters in?
Kristian Werling: Very carefully. (laughs)
I don’t think it’s scaring them away from the industry yet. It certainly does increase the drag on profits, it cuts 2.3% that wasn’t going to be paid last year, but the smart investors understand the nature of what an excise tax is. They hire smart accountants to look at it and calculate it so they can build it into their model, and they hire smart lawyers to make sure the company’s applying it correctly.
MassDevice: So what’s the net effect? Is it slowing down the investment cycle?
KW: Yeah, that’s a good observation. It’ll just take a little bit more due diligence and a little longer to get a deal done in this space. Investors in medical device companies have always been really concerned about ‘does a company have any FDA issues, does the company have issues with importing and exporting their devices to other countries, does a company have regulatory issues with other countries’ FDAs,’ and now you just have to add the IRS and the medical device tax as 1 more thing you’ve got to do due diligence on.
I think it’s going to be a new thing that is always on investors’ due diligence checklists.
MassDevice: Can we expect the drag on timing to last?
KW: Eventually people will get good at it, I guess, but for the next couple of years it’s definitely going to continue to drag on timing – at least for the foreseeable future.
