The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

Referencing S. O’Shea, R. Ricchio's Law360 article “Mixing Agency Rules May Mean More Taxable Medical Devices" , our McGuireWoods colleagues Melissa Gilmore and Mary DeBartolo recently queried which medical devices are taxable and noted conflicting agency interpretations.

As our colleagues note, amid conflicting agency regulations, contract manufacturers of device components and finished devices may be subject to the new medical device excise tax. The Health Care and Education Reconciliation Act (Act), part of the March 2010 healthcare reform legislation, imposed a 2.3 percent excise tax on the sale of any “taxable medical device.” However, the definition of “taxable medical device” remains unclear. Under the Act, a “taxable medical device” is defined according to Section 201(h) of the Federal Food, Drug and Cosmetic Act (FFDCA), but specifically excludes products generally purchased by the public at retail outlets for individual use. The general understanding was that the tax applied to manufacturers, producers and importing manufacturers, but would not apply to contract manufacturers of device components and finished products.

The IRS attempted to clarify the definition of a “taxable medical device” in its proposed regulations by narrowing Section 201(h)’s applicability to Section 510(j) of the FFDCA and specific FDA regulations (21 CFR 807 et seq.). However, a recent amendment to the relevant FDA regulations may broaden the definition of “taxable medical device” to apply to contract manufacturers of device components and finished devices. Beginning Oct. 1, 2012, contract manufacturers of device components and finished devices must list with the FDA the devices they manufacture. This amendment broadens the range of manufacturers needing to list their products with the FDA. Crucially, this amendment would include contract manufactures and device components under the IRS’s proposed definition of a “taxable medical device.”

Until the release of the IRS’s final regulations, expected at the end of 2012, contract manufacturers of device components and finalized devices should consult with professionals on tax and FDA regulatory matters to discuss specifically how they are impacted by the medical device tax.

As investors consider opportunities in the medical device space, understanding the impact of the various applicable taxes, and proposed taxes, is critical to both understanding the future earning potential and also assessing historical compliance of the target.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Join us on November 2 in Deerfield, Illinois for an interactive conference designed for all stakeholders from medical device, durable medical equipment and diagnostic manufacturers and distributors.  Speakers will be joining us from Baxter, Sg2, Medtronic, Stryker and more. 

Topics Covered Will Include:

• Structuring successful MedTech partnerships
• Physician payment sunshine laws
• Underlying changes in healthcare reimbursement and their effects on medical device companies
• Preparing for venture funding and use of incubators to fuel start-up growth
• New developments in regulation of mobile health devices
• Many more topics for growth stage and established device, DME and diagnostics companies!

Please watch the blog for more agenda information and registration details.  Please contact lsams@mcguirewoods.com with any questions. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In our January 4th blog post we discussed the results of two studies indicating venture capitalists were regaining confidence in various industries and are expected to invest more in 2011 but with some hesitation surrounding medical device companies.   Data released on Friday by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) in their quarterly MoneyTree Report does not contradict those findings, indicating that venture capitalists invested $21.8 billion in 3,277 deals in 2010, an increase of 19% in dollars and 12%  in deals over 2009.  According to the NVCA press release, this rise in venture capital investments is the first time since 2007 that the annual investment level has increased over the prior year's level.  

However, investments in the medical device industry fell 9% in 2010 (with the largest single quarter drop of 31% in Q4 versus Q4 2009).  The medical device industry ended the year as the fourth largest investment sector with $2.3 billion into 324 deals.  According to the report, that's slightly more deals than in 2009, when medical devices ranked third among all industries. 

Prior posts have discussed diligence issues for medical device companies as well as the uncertainty inherent in the revamped FDA section 510(k) approvals process, which may be impacting current investor confidence.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

According to at least two recently published surveys, the answer is yes.

National Venture Capital Association/Dow Jones Venture Source Survey

In a recent survey by the National Venture Capital Association and Dow Jones VentureSource, a majority of U.S. venture capitalists stated they are optimistic for 2011 and plan to expand investments generally. The survey involved 330 venture capital respondents polled from late November through early December.   Fifty-one percent of VCs and fifty-eight percent of company CEOs polled said they expect more venture capital investment in 2011. A n additional quarter of each group expects investment to at least remain level with 2010, while 24 percent of VCs and 14 percent of CEOs predicted a decline.

”The market was so troubled in 2009, the sentiment was that things had to get better in 2010,” says NVCA President Mark Heesen.  “It turns out our predictions were correct, and in the past year we have moved beyond the financial crisis and returned to doing what we do best — building great companies. The improving exit market and a renewed excitement in the IT sector have engendered a confidence among VCs and the CEOs of the companies in which we invest that promises to propel the startup community forward in 2011.”

The top three areas of growth identified by the NVCA/Dow Jones VentureSource survey were consumer Internet and digital media, cloud computing, and healthcare information technology.  Survey respondents expect investments in health IT to rise by 77%.  By contrast, comfort with investments in medical devices and pharmaceuticals appeared split, with even percentages of VCs expecting financing to rise, fall and stay the same. This discomfort is likely in part due to the uncertainty now surrounding the timeline for devices to reach market.

Pepperdine University Center for Applied Research Survey

The optimistic outlook from the NVCA/Dow Jones VentureSource survey is similar to that provided by blogger Dave Lavinsky.  Citing results from a Pepperdine University's Center for Applied Research survey from mid-December polling 213 venture capitalists, Lavinsky reported the following:

* Venture capitalists expect to offer their investors an average return of 15% over the next 12 months, compared with only 5% for the past 12 months, likely due to an expected increase in acquisitions of VCs' portfolio companies.

* Over 40% of VCs are currently raising more money or expect to raise more money to fund entrepreneurs within the next 1-2 years.

* 43% of venture capitalists expect general business confidence to improve in the next 12 months.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

• Email This
• Print
• Comments
• Trackbacks
• Share Link