Analyst: Medical-device industry still faces challenges

BROOMFIELD – The medical-device industry over the past couple of years has enjoyed increased revenues, net income, research and development spending, and employee counts. Cash on medical-device companies’ balance sheets increased 24 percent from 2012 to 2013. Initial public offerings and venture capital investment also are up.

But Eric Reynolds, a senior manager for Ernst and Young who presented the figures Thursday, said the industry still faces a few challenges, not only on regulatory issues but also particularly in commoditization.

Speaking at The Colorado BioScience Association’s Medical Device Symposium at the Omni Interlocken Hotel, Reynolds told the crowd that many in the medical-device industry could face full-on price competitions because of commoditization, or the situation that arises when buyers are unable to differentiate between one product and an alternative, or at least when the differences between the two aren’t enough to pay a premium for. Rather than competing on brand and design, the sole issue becomes price.

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He said the issue can be made worse in an industry such as medical technology, where products are engineered with short life cycles, leading to relatively low barriers to entry.

One way for companies to win in the face of commoditization, he said, is to reduce costs of production by changing manufacturing facilities or by engineering simpler, lower-tech devices to begin with.

In the new realm of competition in the industry, he noted that there are few areas where technological improvement can be made on devices currently on the market, although there are what he termed a few “greenfield” opportunities.

On the regulatory side, the potential repeal of the medical-device tax was top of mind for panelists at the symposium. Bills have been proposed in the U.S. Senate and House of Representatives that would eliminate the tax implemented as part of the Affordable Care Act. The 2.3-percent tax on revenue is paid by medical-device manufacturers on all kinds of products, including surgical tools and other devices.

“If there was any element of the Affordable Care Act that we would see (broad) support to repeal, it is this medical device tax,” said Elizabeth Malo, director of regulatory affairs for Boulder-based Biodesix.

The Senate bill has nearly 30 cosponsors, while the House bill already has more than 260 – and the support is fairly bipartisan. The question, panelists said, is whether President Obama would be on board with repealing the tax.

Similar bills were passed by the House in 2012 and 2013 but never came up for votes in the Senate, leaving many in the industry skeptical about whether such a bill could be passed this time around. But Clayton Hall, vice president for government affairs for the Medical Device Manufacturers Association in Washington, said there are signals that the White House might be open to a repeal.

“There are some challenges obviously, but I’d say we’re in the best position we’ve been in since the tax was conceived,” Hall said. “We’re pretty bullish about our prospects (in Congress).”