Firms Not Being Left to Their Own Devices

Wisconsin production may be in good shape, with two major metro areas – Madison and Milwaukee – in the nation's top 10 for medical devices, but that doesn't mean there aren't worry lines forming on the faces of area company executives who manufacture medical devices.

The recent sale of TomoTherapy to Accuray, maker of the CyberKnife radiosurgery system, speaks to the attractiveness of Wisconsin firms. However, it has some people wondering how much of TomoTherapy's 340-strong workforce will remain in Madison, and others bemoaning the loss of another corporate headquarters.

The potential fallout from a new excise tax on medical device sales – part of the financing for the new health care bill – is still being evaluated while some in Congress attempt to repeal it. The tax, which would raise about $2 billion per year, has been roundly criticized as a job-killer whose costs will either be passed on to hospitals and clinics or perhaps erode R&D spending. Other concerns include calls for a more stringent FDA approval process for higher-risk medical devices, and the fact that the latest Small Business Innovation Research re-authorization only extends to May 31.

On the bright side, state exports of scientific and medical devices took a hit in 2009, but rallied in 2010 to exceed the $2 billion mark. It continues to be Wisconsin's third-largest export product category, and federal reform could soon reduce a massive patent application backlog.

No matter how these matters play out, expect more outside interest from big pharma and medical device players. "It's another way for the smaller companies here to pay back investors," noted Bryan Renk, executive director of BioForward, a statewide association for the bioscience industry. "A lot of the larger companies are stockpiling their cash and letting the smaller companies grow so they can eventually offer them a buyout and strengthen their product pipelines."


Running the Gammex

Peggy Lescrenier, president of Gammex, Inc., a Madison-based maker of optical alignment components used in mammography, ultrasound, and diagnostic radiology, sells on a global basis, which has kept her company in the black. She said that in the United States, health care reform is causing hospitals and clinics to hold back on purchases until they understand how much they will be reimbursed for procedures, which determines their capital expenditures. Unless these facilities already have money specifically budgeted for a certain expansion, nothing is being replaced if it's in good working order. "Although we manufacture accessory devices, we're still considered a capital expenditure," Lescrenier said. "As a result, our profits and our sales right now are mostly coming from overseas."

Health care reform taketh and giveth. Another reason sales are resurgent is that regulations in the new health care law classify Gammex's devices as quality control test devices; therefore, their use is mandated by the FDA. "Our sales are picking up on certain products that are regulated and have to be tested, and because they have to use a certain type of equipment, which fortunately we happen to make," Lescrenier noted.

International sales are mostly dependent on quality dealers, but Gammex also is benefitting from a weaker dollar, which gives it a slight competitive advantage. It also has some very long-standing customers who understand its products and their use in the marketplace.

The company also continues to innovate, having replaced lasers with LED technology as the light source for patient alignment. In the late 1970s, lasers had replaced incandescent lights, but Lescreneier believes that LEDs are the lighting source of the future because they use less electricity, are durable, don't generate much heat, and produce more light colors, improving visualization of the light on a wider range of skin tones. Since they are not regulated by the Center for Devices and Radiological Health (CDRH), they don't require annual reporting to the FDA regarding their use.

It doesn't always work that way with most products or product components. In Europe, which has its own regulatory standards, compliance testing is expensive. For the LED component alone, Gammex has spent $67,000 on compliance testing, and it's not finished yet. The European Union has tried to establish a harmonized system of standards, but individual nations are still inclined to protect their turf. "All it's really doing is setting up these little fiefdoms," Lescrenier said. "They are saying, 'No, I'm not going to harmonize to you. You harmonize to us.'"

The hoops are still worth jumping through, however. Without exports, Lescrenier probably would have to lay off people, and she probably couldn't develop as many new products. During the recession, Gammex froze employee salaries and pared back the employer contributions to their 401(k) plan and profit sharing because there hasn't been enough profit to share.

Since its products are classified as Class I-Non Invasive, Gammex is not subject to the tax on medical devices. "From what I hear, it's similar to what the Europeans call a VAT or value added tax," she said. "It's an added tax on every stage [of production]. Eventually, the consumer is going to pay for it."

Lescrenier said the tax produces "an awfully large amount of money" for the European governments. The VAT has only been proposed here, but Lescrenier, who has two offices overseas, has to deal with it in Europe. "I saw this excise tax on medical devices as a forerunner to putting a VAT-like tax on other manufactured goods," she opined.

Patented reform

Medical device manufacturers are tracking a patent reform bill that has passed the U.S. Senate. The likely change from a first-to-invent to first-inventor-to-file system will accomplish two things, according to intellectual property attorney James Peterson of Godfrey & Kahn. First, since there often is some lag time between the date of invention and a patent filing, it will eliminate disputes over who first invented something. Secondly, it will more clearly define prior art, which is used to evaluate patent validity.

Other aspects of the Senate bill would allow the patent office to charge higher fees for expedited patent reviews, and prevent the diversion of patent fee revenue to other purposes, a source of irritation for the scientific community. These measures are designed to decrease the backlog of patent applications, now estimated to be more than 700,000. "There is a widespread perception that the patent office was underfunded and the speed and quality of its work was lacking, so by stopping the diversion and increasing fee revenue, the thought is that there will be ample funds to improve systems at the patent office," Peterson said.

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