As 2014 came to a wrap, President Barack Obama signed into law the Tax Increase Preventions Act (TIPA), which is a House-sponsored and Senate-approved extension on a variety of tax breaks – H.R. 5771 – retroactive for the year and good until Dec. 31, 2014. Included, and specifically beneficial to manufacturers, was the bonus depreciation and Section 179. Bonus depreciation of 50% means that a company can deduct half the cost of new capital purchases in the first year, effectively lowering taxable income, while Section 179 allows small businesses to deduct the entire cost of a small capital purchase immediately.
That’s good news for manufacturers and follows nicely the continued growth in jobs. December saw employers add 252,000 jobs, pushing unemployment down to 5.6%, adding in 2.952 million jobs for 2014 with 17,000 of those hires being in the manufacturing sector.
“Manufacturing is growing faster than the economy in general,” says Pat McGibbon, vice president - strategic analytics with AMT – The Association For Manufacturing Technology.
During the AMT’s IMTSedu Winter Economic Update, McGibbon noted that inventories are up by 15% during the last 40 months, but despite efforts to grow inventory, the backlog continues to grow and is getting to the point where it’s a bit challenging to keep up. That’s actually a good omen because when it takes a little longer to get components, it means there’s more room to expand manufacturing capacity.
“In the midst of this inventory buildup to answer manufacturing needs, we are seeing more foreign direct investment, additional on-shoring in the U.S., Canada, and Mexico, and significant increase in the use of our contract machining base across the country,” McGibbon states.
McGibbon also says that the most recent release of the Institute for Supply Management (ISM) Purchasing Manager’s Index (PMI) shows the number still near 60, as it has been for the past few months, which is another positive indicator for manufacturing. However, he and Eli Lustgarten, senior V.P. at Longbow Securities and a frequent speaker at AMT forecast meetings, feel the area of the PMI composite to watch is the supply chain sector, because that is considered the number which is better able to project growth or contraction down the road. www.amtonline.org
Med-tech in New York: One state’s take New York ranks eighth in the country with more than 81,000 jobs in the med-tech industry, which includes more than 25,000 working directly for med-tech companies and more than 55,000 providing supplies, support, and other functions, according to Jessica Crawford, president, MedTech, an organization connecting New York State’s bioscience and med-tech industry through advocacy, education, and collaboration. Crawford took the time to provide additional insight into New York’s med-tech manufacturing industry after release of “Bio/med breakthroughs: Advancing New York’s innovation economy.” The med-tech industry plays a critical role in the state’s economic vitality, with upstate New York having specialized concentration in medical devices and equipment – 26% more concentrated relative to the national average, Crawford states, and contributing $20 billion in total economic output. Crawford cites a recent report showing current and emerging strengths within the New York med-tech manufacturing sector include electromedical and electrotherapeutic apparatus, dental equipment, irradiation apparatus, and surgical and medical instrument manufacturing. While the state is strong and representative of the robust med-tech sector throughout the U.S., the medical device excise tax still looms large. “The medical device tax threatens more than 1,500 jobs and $357 million in economic impact to New York alone,” Crawford says. “A recent survey by the Medical Device Manufacturers Association (MDMA) found that two-thirds or respondents will soon begin reducing or halting job creation or relocating outside of the U.S. as a direct result of the tax.” Additional responses showed 47% are already reducing R&D to pay for the tax, and on average, companies plan to cut 18% of their R&D budgets. While the sector is well poised for growth due to the aging population, Crawford notes that because of continued concerns with the excise tax, policy leaders need to rally around this growing industry so it remains on track. “A solid workforce, aggressive companies, the need to innovate and create cost-effective solutions for health care, as well as public/private partnerships possibilities create a ‘perfect storm’ for enabling growth, and industry groups, such as MedTech, are critical for facilitating this collaboration.” www.medtech.org |
Another view
Daniel J. Meckstroth, Ph.D., vice president and chief economist, council director, Manufacturers Alliance for Productivity and Innovation (MAPI), forecasts that manufacturing will continue to grow 3.5% in 2015, 3.9% in 2016, and 3.1% in 2017, noting that job gains are the core driver of this economic growth, driving GDP up 2.8% in 2015.
“Business investment responds to the ability to borrow and the need for capacity. Firms have cash and are profitable, utilization rates are rising, and interest rates are extremely low,” Meckstroth says. “Growth themes create an incentive for investment… an aging population has increased the demand for medical care, including medical supplies and equipment. In addition, manufacturing plants are receiving significant investment in machinery and structures. The pickup in manufacturing production will underpin an acceleration in materials production.”
Meckstroth adds that the Affordable Care Act that is insuring more individuals – combined with aging trends – means that medical equipment production will continue to post solid growth.
Meckstroth comments on other parts of the sector included:
- Medical equipment production is forecast to increase 6% in 2015, 8% in 2016, and 4% in 2017
- Production increased 6% in the three months ending October 2014 compared with year-ago levels
- Surgical and medical instruments production is advancing at a strong pace and created job growth in the third quarter
- Surgical appliances and supplies production experienced moderate growth in the three months ending October 2014
- The electromedical industry’s output rose rapidly in the third quarter of 2014 –including scopes, defibrillators, EKGs, MRIs, pacemakers, ultrasounds, and other medical testing instruments. Irradiation apparatus includes CT scanners, X-ray machines, and medical radiation therapy machines
- Safety equipment and supplies and the “all other” group that includes lab equipment and hospital furniture, dental equipment and supplies, and vision care goods grew at a moderate rate in the three months ending October 2014. www.mapi.net
Keys to progress in the medical device industry By Joseph DeVivo Proponents of the Affordable Care Act (ACA) championed it in part as a boon for business, arguing the medical device industry would see an increase in sales as more people became insured and underwent procedures. This was the justification for levying the 2.3% tax on our businesses, and with the first year of ACA under our belts, we have learned many lessons. One of the clearest is that this notion was patently false. While the overarching goals of the ACA are admirable, the medical device tax showed at best a naivety about our industry. It is a competitive marketplace. During the last 20 years, prices have increased at less than one-quarter the rate of other medical goods and services, and less than half of the consumer price index (CPI) rate. We have actually seen prices drop in inflation-adjusted and nominal dollars in some categories. In 2012, the industry as a whole saw no revenue growth. To stay relevant under such conditions, we have given significant power to payers and providers as their influence grew. However, the medical device industry began to change in 2014. It was one of the busiest years on record for mergers and acquisition, representing a shift in the market landscape coming from the desire to leverage scale to reconsolidate power into the hands of suppliers. It is hoped that this consolidation will benefit customers by using the breadth of suppliers’ products to improve results. However, the true value of our industry is our ability to drive advancements that result in improved clinical outcomes and reduce overall costs for our customers. Between 2000 and 2013, average life expectancy increased nearly two years, fatalities from heart disease were cut by 30%, and mortality from breast cancer was reduced by 18%. Meaningful innovation is our future. Mid-sized companies, with their nimble structures, have the agility to listen to their customers’ needs, and use that knowledge to provide disruptive innovations that deliver exceptional clinical and economic value to customers. This includes helping them control their bottom line in the near term. AngioDynamics is involved in three spaces – vascular access (VA), peripheral vascular (PV), and oncology/surgery (O/S) – but looking at just one clearly illustrates the concept. In VA in recent years, the placement of peripherally inserted central catheters (PICCs) has shifted to nursing teams, and along with this trend came a desire for tip location technology that would aid the nursing teams in placing these devices. During this same time, we saw an increased focus on thrombus and the impact this can have on facilities. Symptomatic PICC-related upper extremity deep vein thrombosis (UEDVT) rates are estimated at 3% to 7.8%, and each incident carries an estimated cost of nearly $12,000. With more than 2.7 million PICCs placed annually, this costs the U.S. health care system $1 billion to $2.5 billion annually. Our team developed technology designed to be present throughout the entire catheter permanently, decreasing accumulation of catheter-related thrombus without incorporating heparin, antibiotics, antimicrobials, or any other transient materials typically associated with coated or impregnated technologies. https://www.angiodynamics.com/ About the author: Joseph DeVivo is president and CEO of AngioDynamics.
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Changing landscapes
Just as Paul Teitelbaum, manager director, healthcare, Mesirow Financial Investment Banking said in TMD’s forecast in January 2014, merger and acquisitions (M&A) accelerated quickly the past 12 months.
Analysts from Deloitte, in the “Medical technology M&A: Market on the upswing,” echoed what our industry forecast participants stated last January. They report that 2014 saw a significant amount of M&A activity, including several mega-deals tied to corporate inversion. Looking ahead, market and economic conditions are expected to continue to create a favorable climate for M&A.
According to the analysts, the global medical technology segment had a difficult 2013 – particularly U.S. manufacturers that were challenged by fewer reimbursement options, reduced FDA approval rates, and the 2.3% medical device excise tax. Still, most of the segment’s top 10 companies enjoyed moderate year-over-year revenue gains. The FDA awarded 17 first-time Premarket Approvals (PMAs) in the first half of 2014, nearly twice as many as it did during the same period in 2013. The FDA also reduced its average time to grant PMAs from an average of 35.9 months to 18.4 months. For 2015, Deloitte analysts forecast in the “2015 global life sciences outlook: Adapting in an era of transformation,” that the global medical technology market is expected to grow at 5.0% per year to 2020, reaching sales of $513.5 billion. www.deloitte.com
About the author: Elizabeth Engler Modic is the editor of TMD and can be reached at 330.523.5344 or emodic@gie.net.
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