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It was an honor to welcome Senator Amy Klobuchar (D-MN) and Representative Erik Paulsen (R-MN03) along with John Eckberg (Director of Media Relations, Cook Group) and Stephan Ogilvie (VP of Corporate Development, NuVasive) to the first annual 10x Medical Device Conference on April 29, 2013.
We captured the session for you here.
Joe Hage: After your success with the 79 to 20 senate vote, the Wall Street Journal characterized the vote as largely symbolic. What do you say to that?
Senator Klobuchar: Well I think you first have to look at where we came from when we first started raising this issue in the senate during the healthcare reform debate. Literally there would just be – these people would look at us with blank stares because they thought they didn’t have any medical device companies in their state or in congress in their district.
And this was back as you know a number of years ago and Evan Bayh and I then were some of the only ones, the senator from Indiana, are standing up on the Democratic side saying you don’t tax manufacturing like this, you shouldn’t be putting this on a revenue as opposed to profit it will especially hurt the small startup companies.
And being from Indiana, Minnesota we have a sense of just not the big players in the industry in our case St. Jude, Medtronic, Boston Scientific, but also how this would hurt all these small innovative companies. Like we have in Minnesota 400 of them.
So we were able to get the tax reduced from 40 to 20 billion in half but it still didn’t solve, obviously, the competitive issues as well as the startup issues. And so we pledge to keep working on it. Erik has been a stalwart supporter of repealing this tax from the very beginning. And so we kept pushing and then at the end of last year as you know we got 18 Democratic senators on a letter saying it should be delayed for a year.
That was a major step and a surprise to the administration and to a number of other people that we were able to get that many people saying delay. So remember this is more than just the “No” vote with the 79 people, we already had nearly half the democrats – nearly half it’s a little lose – saying that we should delay it and try to find some other way to repeal or reduce.
So then we had the vote on the budget and while you could say it’s symbolic it actually was meaningful that we had that many senators which means that it’s over the number for a filibuster voting to repeal it.
A similar vote that we had it’s either the three votes out of that budget night that went till 4:00 in the morning in the senate which were significant was the keystone vote, the marketplace fairness and this medical device.
What happened with the marketplace fairness I’m not going to go into the numbers and what that is about, but that is actually now on the senate floor, because they showed that there was overwhelming support to make it change to tax policy. In the case of this, I still think it would probably be difficult to call it by itself in the senate not in the house.
We’ve tried, Orrin Hatch and I have tried but I think more likely would be part of tax reform and that we would have to stand up a number of us and say this has to be included. One of the challenges with this is to make sure we have a Pay For. I support the Pay For [that] Erik put forward in the house but the administration has been clear that they would veto that. And also the number of Democrats won’t support it in the senate.
So we have find some compromise for what the Pay For would be because as you all know we’re in a budget time where we have to make sure that we’re paying for stuff that we change just because of the fact that we have such a difficult budget situation right now in the government.
So that’s what’s happening. I’m still very bolstered by that vote I think it’s very, very positive. I think we should increase our efforts and not back down now. That we have to keep pushing state by state and district by district in terms of getting more and more commitments on this and being smart about how we do this and where we put it so that we can make a change.
But I saw this vote as a very positive thing something we didn’t think was possible only a year ago. So I want to thank you for all your efforts, they’ve made a huge difference talking to people and making clear this effect it has on businesses in people’s districts.
So that’s my guess of where we move forward. We will look for any bill to include it on we’re a little different than the house. When the bill’s on the senate floor it’s only that bill so that’s why you see big bills coming up. And right now, marketplace fairness and then the next thing is going to probably be the Water Resources Development Act and then after that will be Immigration.
So we always have to look at things in the senate because of the way our rules work. It has nothing to do with who is in control; it just has to do with how the rules work. We have to try to find a vehicle to include this bill and the smartest vehicles I see are the budget bill if we do some kind of a grand bargain or the tax reform.
And that’s what we see more hope with that now. Baucus is retiring and there’s a lot of thought that we’re going to get some kind of tax reform in the next year.
Joe Hage: Thank you. Congressman, would you care to add your thoughts about introducing not once but twice in the house and what that journey has been for you?
Rep. Eric Paulsen: And Joe thank you for organizing the event this morning for having both of us here I think both Senator Klobuchar and I we don’t go to Washington to escape the Minnesota winters or the Minnesota springs right now (laughter) unfortunately but…
Senator Klobuchar: I wore white today to show that the weather is going to continue but it’s supposed to snow again by the end of the week.
Rep. Eric Paulsen: But we are there to make a difference you know in our respective bodies in a bipartisan bicameral effort on behalf of what is a strong ecosystem in Minnesota in particular. So I’ll just comment from the perspective follow up what Senator Klobuchar had said because I don’t think anyone expected there would be 79 votes to repeal on the senate.
I think that was a strong show of support for Senator Klobuchar’s efforts for the last year trying to build momentum. It’s all about momentum in repealing this tax. And I think it really comes forward from a bipartisan perspective and a realization that there has been an impact on jobs, there has been an impact on research and development cutbacks and making sure that these technologies are available for American patients. I think in particular is one factor.
When the bill had to be reintroduced in the house, now, in the house we passed the repeal last year and we were disappointed the senate never took it up because the rules are different there but we introduced it right away again in the new congress.
And I’ll tell you one thing that really stood out was that 180 members of the house bipartisan basis signed up to coauthor the bill right away on day one.
And that was a surprise because over the last year-and-a-half I tended to work a little bit spent time on the floor not twisting arms but just sharing the story and getting and convincing members that it was in their interest and on behalf of protecting this American success story to actually sign on the bill.
This year everyone signed on right away we’re up by 237 coauthors in the house right now. So it’s really about momentum and how do we keep the momentum moving forward. And I think the momentum has the best opportunity is in the area of tax reforms Senator Klobuchar mentioned because that is something that I think fundamentally on the Ways and Means Committee we are absolutely committed to moving forward in the house.
And Senator Baucus has had weekly conversations with my chairman on a weekly basis for the last two years and so we want to make sure that this issue is absolutely in the mix and included in any conversations about broader tax reform because it does impact domestic manufacturing.
And it is about competitiveness and it is about keeping again these jobs here in Minnesota and protecting a great Minnesota and American success story. Keeping these jobs in America, that’s really critical.
Joe Hage: Thank you. Stephen I’d like to turn to you. I’ll be honest I had never heard of NuVasive a year ago and then with John’s company’s help we created a site called no2point3.com which was created to generate grassroots efforts to repeal the tax and you guys showed up with more than 1,000 signatures thank you.
Can you tell us what inspired your C-Suite to take such a stance on it and what it was like for your employees to respond and what lessons there are not only for this room but for those watching afterward what can they do to take your lead and to help this effort?
Stephen Ogilvie: Absolutely. I mean NuVasive is a successful startup story, your classic American. Ten years ago we have zero revenue and now are over 600 million. And it’s innovation that got us there. It’s changing medical technology. We wake up in the morning and we don’t think patients are treated well enough. We think there’s a lot of improvement for getting them out of the hospital faster, reducing cost, less blood loss, less pain, less trauma and we’re not there yet.
We haven’t maxed out on technology and so for the company we’re passionate about that. That’s what we do, that’s what makes this industry so exciting for us. And so when the excise tax came it really cramped what we consider our core virtue.
And so it didn’t take much I’ll say that for when our executives kind of made everyone aware of what was going on and the no2point3 and the impact it was having on us, in our growth trajectory, in the projects, the innovation, the R&D that we wanted to do.
He didn’t have to ask twice, because we see that as our future. We’re not anything more than making surgery better. It’s as simple as that and the way that the US is set up historically enabled that. We’re here because we grew up in a great environment and to see that environment change for the worse, it’s depressing for us.
As was mentioned, this is a great American industry and we take great pride in that so for us it was wanting others to be able to participate in the success that we’ve seen and as we look forward innovation is what’s going to keep us going.
Joe Hage: Thank you. John. Cook Group as you may know is the single largest privately held medical device company in the world. And I understand that there were plans to create up to five new facilities which have since been tabled. Could you talk about that?
John Eckberg: Well first off I’d like to thank the representatives for their efforts on behalf of the industry. It’s not an easy thing to do what they’ve done which is kind of break the grid lock of Washington with some bipartisan leadership. I think the people of Minnesota are fortunate to have that.
Cook Medical was started in the back bedroom of a Bloomington apartment building because…
Senator Klobuchar: We have all our companies start in garages.
John Eckberg: We were in a back bedroom, we got you on that one, it’s a back bedroom. Bill would go in put his jacket off, take his jacket go in there and make a catheter and pull the Teflon. His wife Gayle managed marketing, which is a euphemism because she hand painted the signs that he put up behind the card table at conventions in Chicago.
She’d tell the story of how she was also quality control. Quality control meant she would take a look at the catheters, the Teflon catheters that Bill pulled and some would make the cut and some wouldn’t. The ones that didn’t make the cut, to be honest with you, she found out Bill was selling them anyhow. So she had to hide them for a while.
We grew from the Bill and Gayle Cook in the back bedroom to about 10,000 employees worldwide. We have revenues of about a billion a year in the US and another billion overseas.
This tax has hit our company to the tune of about $14 million a year. That’s in addition to the highest tax rate there is in the world. The way to frame it though isn’t to think of it as a $14 million grab off the income statement or balance sheet, it’s a $100,000-a-year job disappearing from our balance sheet every three days.
If you take a look at the 180, 190 million that this grabs from the industry, it’s essentially $100,000-a-year job disappearing every 20 minutes. And we’re not making MP3 players, we’re not making Cashmere sweaters, we’re making products that will improve the lives, relieve the suffering, prevent the mortality of generations of Americans, generations of patients worldwide. It’s almost a holy mission what we do for a living.
And when this tax came down the pike and we took a look at our tax rate, the one thing that struck me was that it’s easy to focus on the money, it’s easy for me to tell you it’s a $100,000-a-year job disappearing every three days.
What is not so easy to talk about is the patients and the patient hope that’s lost when breakthrough products are not developed and that’s what happens with this tax.
What was your question?
Joe Hage: I wondered when you might come around.
John Eckberg: Yeah, what was your question?
Senator Klobuchar: This is usually the kind of thing we do.
John Eckberg: I like your job is that’s the case.
Joe Hage: I believe that you were going to create five new facilities which…
John Eckberg: Five new facilities. Companies have really a choice to make when something like this comes down the pike. You can reduce payroll – we’re not going to do that. You can reduce capital investment in new plants and factories or you can reduce research and development. There’s really no magic pot of money at a medical device company waiting to be redirected into a tax.
Bill Cook had the theory that he wanted to – and it wasn’t a theory he put it in practice – Canton, Illinois received about a $20 million plant followed by another $15 million in investment. These are angioplasty catheters we’re making there.
Bill’s economic development strategy was we’re going to build one of these factories once a year for the next five years. This tax came down the pike, he’s going to build them in disinvested communities and we have no choice but to curtail that.
By the way an economic development approach that Bill Cook would have was he’d ask people, “Where is your hometown?” and you would say, “Akron, Ohio.” And he’s say, “You want a factory in Akron?”
That was kind of how he did it. And it was very effective for him. It was kind of from the gut. But yes we’re curtailed plans for these factories. We call them factories in a box but it’s much, much more.
Today in Cook Canton has about 120 people working there who did not have jobs, international harbors were pulled out a few years back left about 1,500 jobs I think. And today at least 120 families know that they have a tomorrow.
Joe Hage: Thank you. I’ve never been into politics much myself – no offence to present company – but just never really followed it. But I will say that it caught my attention, Congressman, after your first effort passed the house.
That well before there seemed to be anywhere near enough support in the senate. The President came out and said, “If this repeal crosses my desk, I will veto it.”
Now I’m not too smart about politics but I thought, “That’s pretty much game over.” I mean personally, not as a representative of the group, just me. You were tenacious and you brought it back. What was that like when the President came out and made that claim soon after your earlier success?
Rep. Eric Paulsen: I do remember when we were having the debate in the house last June. In June we actually, in the house passed the repeal bill. And we had a good number of Democrats sign on for support.
I had heard at that time that Senator Baucus on the senate side was telling his finance committee members, “Make no mistake this bill is coming our way.”
And so I think from the perspective of there are certainly some Democratic members that were strong supporters of the new healthcare law and they didn’t want to see any more of that chiseled away at and so I think the president wanted to draw a line in the sand and, you know, protect kind of the Obamacare model. It was his chief initiative.
And so I think that was a lot of what that veto message was about but it did not deter, if you noticed, just this last month when the vote in the senate took place against 79 members with a big bipartisan vote.
And so I think really in politics and legislative negotiations it’s always going to be fluid. And so I don’t think the administration is going to come forward and hold up tax reform because of the device tax repeal initiative for instance, because there is bipartisan support legislatively.
And it’s really, again, bicameral bipartisan opportunity to get this done. And that’s where I think folks like you in this room have really contributed the effort in sharing the stories of what your companies do from a patient perspective in particular.
I always tell companies that one of the best things you can do is not only just share your story but have your elected officials see what you do, show the device, show what it actually does.
If it’s a hands-on device, hand it to the member of Congress let them feel what it’s like because they’ll remember that experience. And the staff member will remember that more than just numbers and statistics for instance. And I think that’s the best way to move it forward.
So I think there is momentum, it’s just a matter now of getting it across the finish line. And keep in mind too you think of excise taxes, these companies unfortunately you have to pay this tax every two weeks that’s when your payroll is every two weeks.
And excise tax you normally think of an excise tax being cigarettes or alcohol or something you want to discourage. And we don’t want to certainly be discouraging medical innovation.
And It was just sort of wrong how the whole approach was taken on this revenue raise in the first place. But I think there is opportunity for momentum it’s just trying to get across the finish line from a legislative perspective and then moving it forward after that.
Joe Hage: Senator, you talked a little bit about Pay For. So if we are successful the next question is going to be, “So what about all that forsaken revenue?” What can you advise us?
Senator Klobuchar: Well, again I support Congressman Paulsen’s work and I think that there are Pay For’s. I do want to remind people that we have made some changes to the Healthcare Reform Bill, the Affordable Care Act of the 1099 issue some of you may be aware of that for small businesses.
That was a change that the administration supported. There was something called The Class Act which was about long-term care that got changed because of some issues there.
And I think you can expect as this healthcare bill is implemented that there will be changes in the future. You can’t do a big piece of legislation without issues and for me this is of course the primary issue.
And I think we have to look at it that way. One of the problems especially leading up to the election it was such a radioactive time if you didn’t notice on TV.
And so the hope is that people can step back a little now as that’s implemented and see what other changes. So that’s another potential where it could be part of that.
I still agree with Eric as I said before I think our best bet is tax reform because that Tax Reform Bill will be viewed as, in addition, to I hope bringing down the overall business tax rate and paying for it by closing some of the loopholes.
That Tax Reform Bill is going to be looked at how do we put in incentives for jobs in America, right? How do we do things to make sure that businesses can compete internationally?
Now we will have a very good case to make with what we’re already seeing because of some of the FDA delays with the decline in investment in the medical device industry fell 13 percent while the number of deals dropped 15 percent.
I mean we’re already starting to see that not entirely because of the tax but as you know also the regulatory environment. I was part of the industry for working with us to get that MDUFMA passed.
Obviously we haven’t seen all the effects of it yet but we got rid of the conflict of interest ban, we got the least burdensome requirement which was a bill I did with Senator Bayh and Bennet and others.
And we also got some commitment from the FDA that they were going to speed up approvals. So that has to go hand-in-hand with the efforts to repeal this tax because those are two things that have been a drag on the industry at a time where the industry should be just taking off because of the potential for exports with China and India and the growing middle class there that’s finally starting to use healthcare and get medical devices.
I just see so much potential for our country for jobs and that’s what we have to continue to argue in congress that this is a jobs issue because it truly is. And then when you argue it that way, suddenly you find all kinds of ways that you could potentially pay for this including what Congressman Paulsen has suggested.
Joe Hage: You’ve also been a champion for us about facilitating the FDA clearance process. Could you tell us a little bit about what that’s like, what are the obstacles and how might we overcome them?
Senator Klobuchar: Well, I think that we’ve seen a sea change. I hope you’ve noticed it in congress because it used to be always oh how can we cut more requirements in there?
Because things, as you know, when a high profile thing happens then Congress gets involved and then a new change is made usually on the side that isn’t necessarily favorably to the industry.
What I’ve seen change is that people put safety first that’s always important but we have to look at some of the other models like in Europe, over there basically the same safety standards but they’re able to make things go faster.
So I think there’s been a sea change and that Congress gets that and that’s why you saw the MDUFMA PDUFA go through &ndash my favorite names of any bills.
While you were able to see the industry agree to some fee increase as long as we see results and I think we will see that in the next year, we better see it. And then also the idea that we shouldn’t have these special rules apply that made it even harder to get approval.
So basically you have definitely seen a sea change in the kind of legislation that’s coming out in the areas of approvals. Now we have to get the culture to change in the FDA. And that’s just as important of anything with the regulatory reform that we do in congress.
Commissioner Hamburg has pledged to make that change to look at this as an innovation issue as well as a safety issue. And so we’re hopeful that we will see some positive effects coming out of that with some speeding up of these approvals and especially approvals of things that are just variations of things that have already been approved.
Joe Hage: Thank you. Congressman, another question for you please. Moderating this worldwide group I have the luxury of getting comments in everyday; people want to talk about this and that.
And one of the topics that comes up an awful lot and we will have a panel tomorrow on outsourcing. Taking a lot of jobs offshore because it’s simply less expensive to do business there or so the argument goes.
What can we do perhaps from your vantage point to keep those jobs onshore and, I don’t know, what counsel can you advise? Is going offshore necessarily a bad thing?
Rep. Eric Paulsen: Well, the trends have certainly, from what I understand, been to start moving medical device innovation and research offshore. And that’s something that is a competitive issue in the context of tax reform.
And that’s one of the probably the one word that stands out the most when we talk about tax reform, we also talk about simplicity and fairness, but the one word that really does stand out now based on two years of testimony on my committee from small, medium and large companies is competitiveness and making sure that we are competitive globally.
And there are a lot of medical device companies. I was talking to Stephen just a little bit in the back room before we came here but the reality is that a lot more companies have been looking overseas. And it’s because the regulatory process has become more streamlined, more predictable, more consistent.
And the MDUFMA legislation that Senator Klobuchar sure helped shepherd through the senate with some reforms and then we were able to move through the house with, I think if you look back a year-and-a-half ago you wouldn’t have thought it would have gone through so smoothly actually, almost unanimously essentially as a way to streamline through.
So we’ve made tremendous progress and I think have really come a long way. That doesn’t mean our work is done actually now and I don’t think the reform of the agency is done because a lot of it is a cultural issue internally.
We’ve been trying to have quarterly meeting with Dr. [Sherrin] [24:46] at CRH just to make sure we’re meeting benchmarks and deadlines. We’re not going to miss any of the obligations of the law for instance and making sure they’re going to live up to their commitments.
And so I think if we had a streamlined regulatory process we actually can make sure that we keep these innovations here onshore in the United States. And also I think the other opportunity comes in the context of our trade negotiations because with the EU Transatlantic discussions happening now that the president just kicked off, that’s something else.
We have an opportunity now just to have more 21st Century trade discussions that don’t just focus on terrorists but also focus on the regulatory process so then essentially if you’ve got economies with equivalent regulatory outcomes and our oversight committees agree on each side, it would be a lot easier to introduce products into the marketplace in either economy for instance. Again having the safety seal of approval but that would actually have an opportunity for streamlined domestic opportunity as well.
Senator Klobuchar: Yeah, that’s the standardization issues have come up in so many contexts as you know with trying to work with our partners that have the same safety requirements and to try to make it easier to do business overseas.
And I would add I want to have these jobs here that’s my whole focus. That’s why I love my job and that’s what we’re supposed to do and that’s what we need to do. So we’re going to make it easier.
I want to add a few positive things here of why people should be doing business in the US. For one as you know our energy costs have been going down, transportation cost.
Cost of energy it’s one of the reasons that businesses are deciding to do manufacturing in the US. You’re looking at Minnesota with our educated workforce and making sure that we are doing even more with that.
With getting not just students to go into engineering, science and math at the graduate school level but also getting the right two-year degrees. There’s a movement on that.
And the third thing I’d add is the immigration reform which is incredibly positive in the senate. Senator Rubio and Senator McCain and Senator Schumer are leading the way.
But I serve on the Judiciary Committee and my friend Senator Hatch as you can see we do a lot together. We were actually voted by the Washingtonian magazine as the two senators least likely to get in a scandal.
It’s a true fact. I assume that includes with each other.
But we didn’t just do the medical device thing together, we also did H1B Visa Green Card bill called “I Squared” which was focused on raising the caps on the Visas and also making it easier for students that study here to get Green Cards when they’re going into the science, engineering, technology, math field.
This bill was basically included in the “Gang of Eight” proposal and he’s said we’re going to spend the month of May in Judiciary plowing through the spill to get it through.
And it was a very positive week last week for the hearings and how the bill was going and the industry is excited about what we’re doing here.
So that’s something else to keep in mind when you talk about that, we would rather have the jobs here. And that includes making our country what it has always been – open doors – when it comes to inventors and people that want to come in and come up with new things because every one of these Visas creates somewhere between two and five jobs for Americans.
Joe Hage: Thank you. Before I open the floor to questions, I have a question for you senator that’s on everyone’s mind. The national news tells us that you’ve had dinner with the President last week so we want to know what did you have for dinner?
Senator Klobuchar: I don’t think it was on everyone’s mind but…
Joe Hage: And what did you talk about, if you could share?
Senator Klobuchar: It wasn’t really guys since it was the 20 Women Senators, but that’s okay.
I’m kidding; I use guys like that too. But it was the 20 Women Senators which is of course a bipartisan group who were invited by the president. The funny part is that we get together every two months and it’s only the women senators but we decided to make an exception for one guy who decided to have us over to his house.
We had already planned to have dinner at Senator Murkowski’s house the Alaskan senator so that might have been why the president, then she had to cancel and come to the White House. He decided to serve Alaskan halibut.
I would have preferred walleye from Minnesota…
But I really didn’t have a choice in the menu so we had Alaskan halibut and peach pie.
Joe Hage: That was good?
Senator Klobuchar: It was very good but there was a really substantive discussion about everything we did discuss just the general topic of tax reform and the president’s willingness to do a grand bargain to do something along the lines of what he’s proposed.
What he and Speaker Boehner were talking about at the end of last year. Which by the way they were fairly close when you look at some of the numbers and proposals in the negotiations and certainly in the senate the willingness of the senate to want to move forward which you’ve seen time and time again with the Gang of Six, the Gang of Eight, the proposals that have come out of the senate.
So the hope is that the president truly wants to move forward on this. I was asked about his legacy yesterday morning on Meet the Press when we were in the context of talking about the Bush Legacy and I said that I think that the major legacy that he can have over the next few years is this Immigration Bill but also doing something reasonable about the debt and bringing the debt down in a balanced way and focusing on the economy.
So that is my hope as we move forward. And again as Erik and I have said, with the tax reform we have a very good opportunity here to do something on medical device in that context.
Joe Hage: Thank you. Do we have questions from the floor? I’ll come on out. Good morning, Matt.
Matt Brzica: Joe thanks. I appreciate y’all being here. Senator Klobuchar my name is Matt Brzica here from Minnesota. I’m going to beat up on you a little bit, Senator Klobuchar.
Three years ago, and I apologize in advance, but three years ago I was at a LifeScience Alley conference and the audience kind of had a discussion with you about the 2.3 percent tax, the FDA approval process, the venture capital, proposed tax changes on carried interest, that sort of stuff.
And I guess my question is, we had a former speaker, I think she had a well-known comment about how we have to pass this bill to see what’s in it. And now we’re in it and we’re learning more and more…
Senator Klobuchar: You’re not saying I said that?
Matt Brzica: No no no.
Senator Klobuchar: Okay.
Matt Brzica: Former speaker I said. Former speaker of the house, Nancy Pelosi. We’ve got to pass this bill to see what’s in it. We’re learning it more and more everyday about what’s in it.
And I don’t think the 2.3 percent tax which we’re talking about here I think that’s just the beginning. I’ve been to about three conferences in the last six months and ACOs as part of the ACA we’ve established accountable care organizations these hospital systems are trying now to learn the ropes and they’re starting to beat up on the medical device guys.
Maybe Bill can talk to this, maybe Stephen can talk to this but there is a contentious fight brewing there and I think it’s really going to continue hurt the industry and I’d like you to comment about that.
You voted for the act at the time. Three years ago you said it wasn’t a perfect bill but it was a good bill, appreciate maybe some of the things you’re doing with Rep. Paulsen and the other ones.
But I guess when is the ruling class of Washington, as Professor Angelo Codevilla talks about you guys, when are you guys going to let us peasants sort of be alone and work on this industry and take it to the next height?
Senator Klobuchar: Well, thank you.
I think first of all if you look back at that time and at the beginning, no one was working closer with the industry in terms of doing something about the tax then. For sure Representative Paulsen over in the house but myself and as I mentioned Senator Evan Bayh is no longer there on the Democratic side to reduce the tax.
I think we knew at the time when it was put out there the pharmaceutical industry had already negotiated their numbers. The insurance industry well, in the end they opposed it but they were negotiating significantly over a period of time as exactly how that would affect their industry and how it would go.
The medical device tax came out of Senate Finance Committee, which I’m not senior enough to serve on it at this point, and it came out of there just sort of out of the blue which I think had no really reality check in terms of the effect it would have not only on the big companies but most importantly on the small companies.
So what we did is worked with the industry to reduce it in half which we did again working significantly with the industry from 40 to 20 billion. We also tried to carve out more for the smaller companies, and smaller goes pretty far in the medical device industry in terms of size, understanding that the other way this would hurt startups was significant when you look at the revenue-profit margin and those kinds of things.
We were successful in getting it down 20 billion but had a lot more to go and we said that at the time. That is where we are right now. At the time when we got it reduced in half there were a lot of positive comments from the industry.
I think no one even knew in the industry exactly how this would all come down and where the economy would be at the time but clearly it is not a positive thing, it’s been a very negative thing we know that. And that’s why from the beginning we pledged to continue to work to bring it down and are doing that right now.
This is a different tax than some of these other things. This is a tax on innovation, it’s a tax on manufacturing and I believe when you look at it from a patient standpoint, it hurts patients not to get new products on the market whether it’s because of regulatory delay or because there’s not investments that are deterred because of the tax.
So that’s how I look at it. I’ll continue to fight it and I guess the questions of the internal workings with the hospitals and everything I will leave to John and Steve to answer.
Stephen Ogilvie: Yeah, I’ll just second that. It’s in our industry become incredibly difficult to work with the payers. And in the last three years it’s night and day in the US. And as was mentioned it’s not just about what we do with manufacturing, our company is at a point in our cycle where it’s infrastructure, it’s R&D, it’s obviously manufacturing as well.
I mean 90 percent of our revenue is in this country. 90 percent plus of our manufacturing is in this country, all of our R&D is in this country and two to three years from now is that going to be the case?
You know it’s really heartening to hear that we have such strong advocates and so grateful for the work they’re doing, but when we sit down and strategically plan the path of our company out two, five, 10 years it’s a much more hostile environment here on the payer level and on the tax level.
And I think we’re all surprised where we think strategically now as opposed to three years is drastically different because of what’s happening in Washington.
Joe Hage: Thank you. We have time for one more question.
Arundhati Parmar: Hi, I’m actually a reporter Radford Industry Publication I have a couple of questions for the companies and the people from Washington.
I’ve talked to consultants who basically say that it’s kind of a specious argument to blame offshoring on the device tax. The demand is coming from Asia and China, demand is slow down there. That’s the path that we’re on that you have to make products in that country for those people in that country. Stephen if you and John can address that that would be great.
And the other question I had is for the congressman and senator, I’m assuming, I wasn’t here around when the offshoring of the automotive industry happened, but I’m assuming the same argument may have been put forward that it would be very unsafe for cars to be built outside the US. Couldn’t people say the same thing about the device industry?
Stephen Ogilvie: I can jump in real quick. There’s two cost-saving buckets when you’re talking about manufacturing – there’s taxes and labor. The stuff we make it’s bone screws essentially and they’re done by machines. So it’s a very low labor component so for us it’s all about tax structure.
That’s single-handedly where it is. So yeah when we talk about what country we’re going to be in that’s the single largest driver absolutely the labor component is very small for the stuff we make. It’s completely tax-driven.
John Eckberg: Ireland has a tax rate of 12.5 percent. If you make a catheter in Ireland you pay 12.5 percent, you bring it back into the US you pay the 2.3 percent topline tax. That will be anywhere, depending on your margin of profits, just call it a 15 percent tax on earnings.
It’s going to be a lot worse for some companies; it’ll be a haircut for others. The numbers will be about 27.5 percent for that catheter made in Ireland.
Cook has a catheter plant in Spencer, Indiana where today 600 people showed up for work. The catheter made in Spencer, Indiana 35 percent corporate tax, he paid the 2.3 percent topline tax because it’s being sold in the US.
So you’re up to, I’m not real good with numbers. When I was a reporter at the Inquiry they said if you saw me with a calculator look for correction the next day.
But this is a 35 and 15 so you’re up to 50 percent tax. There’s going to be state taxes so you’re up to 55 percent tax for the product made in Spencer, Indiana. Where are you going to build your next factory?
Costa Rica has an enterprise zone where products that come out of there pay no taxes to the Costa Rican government. There is no question that taxes will drive policies on where factories are located and I think we’re seeing the effects of that today now.
Back to the buckets of where you find the money. Emergo Group did a survey of a couple of hundred – I think about 800 device companies and found that I think the way the press reported was just 11 percent were going to lay people off.
If there’s 15,000 medical device companies according to the NAIC in the US, if 11 percent lay people off and if they have a five percent layoff rate, it could be as high as 10 percent at those companies. These are companies that have anywhere from 80 to 30 people working for them, that’s 6,000 layoffs.
There won’t be any warning notices, there won’t be anybody probably much noticing it at all because these are going to be small companies that lay off five people. There’ll be thousands of companies laying off five people.
And I think that’s happening right now. There’s no question that this is has lead to a migration of jobs, manufacturing particularly offshore.
Rep. Eric Paulsen: Maybe I’ll just add from this context. I think the reality is that with many industries or many companies knowing 95 percent of the consumers are outside of the United States, there is going to be a tendency to want to locate close to different customer bases overseas. That’s going to be a fact.
However, it’s also true that because of tax law and tax structure, we’ve got to get the earnings back home. And that’s a big part of tax reform is to making sure that you’re able to improve healthcare outcomes abroad for instance, but then in the end keep the headquartered companies here, keep the innovation here where that dynamic energy is.
And then those are the more high-paying jobs. So that’s why tax reform is such an essential component from a competitive standpoint. That’s actually a big driver for this medical device repeal because it’s not just 2.3 percent; it’s actually a much higher effective rate.
Well, this industry is facing one of the highest rates in the world of any other industry now. And that’s the opportunity I think for us in the context of actually driving this discussion is really making it about jobs and making sure there’s always going to be some of that locating overseas and growth overseas but get the innovation and headquartered companies retain that here in the United States.
Senator Klobuchar: Yeah, I would agree and that’s the driving reason for tax reform as you’ve heard up here. But I think those are the things that have to be part of the competitive agenda too. You bring up the auto industry and the safety issues here. I want to be able to show that we produce the best stuff here in America.
And I think there are still issues with other countries you know that depending on where you are in terms of what kind of quality product you’re going to get and we have to play that to our advantage.
Secondly, I brought up the transportation issues. America is not dead in manufacturing in part because we’ve been able to bring some manufacturing back when you look at the numbers nationally, and certainly in Minnesota.
Our people had thought the auto industry in America was dead, it’s not. It’s come back to the point where we are making stuff at some levels that people didn’t think possible. That our car companies are doing much better than people thought possible.
That there is this actual belief right now that people want stuff that’s made in America. I’ve certainly seen it in Minnesota from everything from Red Wing Shoes to Duluth Pack purses.
And I’m not sure people are going to care where their pacemaker is made but we can try. And so I think that that has got to be factored in as well. I brought up the educated workforce, the fact that we got all this natural gas coming out of North Dakota, oil coming out of North Dakota that we’ve been able to keep those costs down vis-à-vis shipping things way across the ocean.
Those are all our advantages in America and we have to keep those advantages strong. And the way we do that is coming up with a competitive agenda where we focus on making stuff, inventing things, exporting to the world. All the things we’ve talked about today from fair trade to doing things about the tax system, the corporate tax system, to repealing this medical device tax.
To really having a plan nationally where we’re taking kids in high school again and having them get those one or two-year degrees at the community colleges. And looking at what Germany has done instead of just thinking we’re going to keep going along our merry way.
When kids are getting degrees that they’re not able to use to make things and then we have openings at plants all over Minnesota whether it’s for welders or people to repair the robotics equipment.
So that’s got to be a piece of this. So while the tax system I hear up here is a number one driver for many companies, there’s other things that make our country desirable for manufacturing.
But we’ve got to play on those strengths and then make the changes that we need to do to make us competitive globally.
Rep. Eric Paulsen: Let me just add one more thing, I mean from the folks sitting in this room and I think in this industry, I think the message that I have heard pretty loud and clear too over the years is that the number one determining factor whether this industry is going to be successful isn’t your product success unfortunately.
It’s been the uncertainty brought on by the FDA and then you’ve got the tax structure. And so those are the areas that we as policy makers can help focus on to bring success.
Joe Hage: Stephen, John, Congressman, Senator, thank you for the gifts of your time and your talents this morning with us. Thank you very much for joining us.
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