Overview According to PMCF research, the 25 largest companies
with medical device operations generated approximately $216.8 billion of revenues in 2012, up from 2011 revenue of $213.9 billion. Similarly, the top 25 publicly traded pure-play medical device companies generated $143.6 billion of revenue in 2013, as compared to $139.2 billion of revenue in 2012. At the same time, the gross margin percentage of sales for
the 25 public, pure-play device companies averaged 40.0% in 2013, slightly higher than the average of 39.7% in 2012. Tis indicates that, as revenues increased year-over-year, the cost of goods sold increased at a slightly lower rate. However, manufacturers are likely to experience persistent margin pressure as a result of the 2.3% medical device tax. As a re- sult, contract manufacturing and contract research organiza- tions may be increasingly used to drive down product costs and regulatory burdens. Te days sales of inventory metric is also important to
consider when evaluating operational performance, as it provides insight into how quickly inventory is turned over. For the top 25 public pure-play device companies, average days in inventory in 2013 was 144, remaining at the high end of the 10-year average of 129 days. In order to combat inventory un-
necessarily sitting on the shelves, companies may seek to move as much finished goods inventory as possible before placing large raw material orders. Spending trends on Research & Development are oſten
predictive of longer-term revenue growth for major market participants. $9.8 billion, or 6.9% of revenue, was spent on R&D by the 25 largest pure-play medical device companies in 2013. Tis is similar to 2012, when R&D expenditures accounted for $9.5 billion, or 6.9% of revenue. Further, the 10-year historical average of R&D expenditures is 7.0%, indicating that companies have not significantly altered their R&D spending activity. Curiously, this is contrary to state- ments made by large corporations and lobbying groups that the medical device excise tax will ultimately result in reduced R&D. However, it is still possible that companies plan on scaling back research efforts in the next decade, although no public evidence has yet been revealed.
Medical Device Tax Te medical device excise tax, a highly debated component
of the Patient Protection and Affordable Care Act, went into effect on January 1, 2013. Te excise tax is 2.3% of total sales of eligible medical devices, substantially subjecting all medical device manufac- turers to it. Tis includes start-up device companies and those in financial distress, a fact unpopular with many companies. According to a 2013 survey con-
ducted by AdvaMed, the medical device tax has cost the industry roughly 33,000 jobs in the 13 months following the tax’s enactment. Survey participants estimate that the tax could ultimately eliminate as many as 165,000 jobs. Further, many companies have
either reduced medical device research and development, or have transferred research or manufacturing resources to locations outside the United States. Half of the survey’s respondents claimed they would continue to offset the tax burden by reducing headcount or reducing R&D initiatives if the tax is not repealed. In its 2013 annual report, Medtronic stated that it expects its annual excise tax expense to be between $100.0 and $150.0 million. Te company further stated that it expects the tax to cost the overall industry approximately $20.0 billion in the next decade. Cardica, a manufacturer of tools used in heart surgery, has announced that
14 Medical Manufacturing 2014
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