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Prior to its suspension, the 2.3% medical device excise tax was seen by many as a “job killer” due to the noticeable rounds of layoffs seen by all during its roll up and tenure. Others saw the layoffs as a natural occurrence associated with an evolving industry. The proof of the pudding, so to speak, to potentially understand just what the layoffs were due to, would be a before-and-after comparison, a paired t-test statistic if you will, of job losses prior to the suspension versus during the suspension. Quite a while ago, right after the suspension, I stated that things early on really didn’t look too good, and that the Industry “Leaders” needed to focus on producing new products right away to gain and retain employees. In other words, don’t squander the gift you were handed! Well, things are looking worse, I’m afraid. Throughout the year, we have all seen the notifications of layoffs on QMed and FierceMedical Devices, among other sites. Here is a recent one: http://www.qmed.com/news/alphatec-laying-dozens-workers?cid=nl.x.qmed02.edt.aud.qmed.20161011 In addition, we’ve seen a number of significant plant closures. And, where are all the new, exciting medical devices to treat unmet medical needs? As I’ve said before, and I’ll say it again, those in Congress, in that pesky Congressional Budget Office, are keeping score. You can be very certain that, very shortly, it will be firmly decided by those in Washington that layoffs are completely unrelated to the tax. When the suspension lapses, new wolf cries will absolutely fall on deaf ears. It’s time you “Leaders” step up, because, right now, you’re failing us all. source: https://www.linkedin.com/groups/78665/78665-6191700548270514180 Marked as spam
 Posted by Asked on October 11, 2016 12:00 am
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Private answer
Martin Berka
To be fair, pipelines are long, and most report being "more likely" to hire and spend (http://www.medicalimaging.org/2016/07/14/mita-survey-finds-positive-impact-of-medical-device-tax-suspension-on-u-s-jobs-and-innovation/). Since most savings from tax cuts are pocketed, I would not expect the suspension to cause a proportionate amount of investment. On the bright side (for profits, not necessarily innovation), if the industry was able to get one suspension, it may well be able to get another, despite the CBO's findings.
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We are truly looking at the difference between a democracy and capitalism. There has always been a historical question that has never been proven. Can the two co-exist? The current presidential election is more like a Junior High name calling contest, but it does bring the question to light. I am attempting to simplify the answer...Trump, despite his faults represents capitalism, HRC despite her faults, represents a democracy and has a chance at controlling the Senate and possibly the House of Representatives. The two had the greatest relationship since the Reagan administration to answer the question. The inability of the three chambers of a democracy to agree on capitalism policy has been downfall of the Bush and Obama administrations. Neither could ever get anything passed despite the time where they controlled both houses, which is the issue of a democracy. You country faces the question that has never been answered... can a democracy and capitalism co-exist. This question is the most important issue poised to the United States in a presidential election, where neither candidate has a positive status according to current polls. This may be the point in which the question may be answered, despite the tapes and Wiki-leaks.
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Jon Gardner
That 2.3% got passed along to customers anyway. By far the greater issue is hyper-regulation. I don't see any way to get the FDA back to regulating products instead of processes, but that would make the most significant difference in terms of the overall cost of getting a medical device to market.
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Paul M. Stein
Thanks, Joe. Jeff and Jon bring up great points. I don't think that there is a problem with the coexistence between democracy and capitalism. It works fairly well when both function well. There needs to be a healthy Capitalistic market with logical protections of the citizenry. The problem is that everything is broken. Congress and its interaction with the President are dysfunctional, so little to nothing gets done. Industry, as an institution, for the most part, has been left to its own devices, so what did it do with this opportunity? It has chosen to not be a shining bastion of admiration, but a tarnished shell. It has relegated research and innovation to someone, anyone else, can't figure out what to do except merge, acquire, and lay off, and always looks to move overseas. We end up with a slew of quality issues leading to increasing recalls enforced by the FDA. One could go on pointing fingers, using all digits on both hands. Is there hope in this dog pile?
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Great points, Mr. Stein -- It all comes down to leadership. Some leaders have to take a stand, aggressively engage their congresspeople and senators and connect the dots. It can be done. It's about forming relationships with those you're aligned with and working together to make things happen. Look what Elon Must has been able to do......create a non-governmental agency space launch service. How did he accomplish this? He couldn't have done this without making relationships and aligning himself with the right people, with a shared vision. So, the question is, who is going to step-up? I think we have too many "managers", not enough leaders and visionaries who also have the ability to manage. One of my favorite quotes, which I've heard Ted Turner has mounted on his desk, "Lead, follow, or get out of the way!"
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Andrew Kyle
Paul - your observations are in line with mine. The observation I have made is that medical devices are becoming a mature industry. Like a newly formed galaxy, there is usually an intense period of star creation that is followed by falling rates of star formation. In the early days, medical devices were absent for many needs and loosely regulated. The skills needed to create those devices were new and few had the combined engineering and medical skills that today's graduates have. So, like any mature industry, lower prices yield fewer profits as there is more competition. How many EKG choices are available today that are SE? Forty years ago, that number was fewer and purchased under the direction of a cardiologist, not the CFO. The observation you make is a reflection of that change. Cannabis medical devices are where medical devices were decades ago, and where I see the greatest near term growth.
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Joe McMenamin
Regulation is more of a job killer than taxes. Both need to be reined in, but by a substantial margin the regulators are the larger problem.
Democracy co-existed quite nicely with capitalism during this nation's first 125 years or so. No reason it can't now. Marked as spam
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Jack Gleason
The real "Wolf at the Door" is our regulatory system. It is prohibitively expensive & cumbersome to bring products to market with PMAs & 510Ks raising costs to a level that breaks the system.
We need regulation, I don't propose to exclude controls, but we have created what has become a non-navigable monster. Marked as spam
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Art Pichierri
@Paul- Perhaps good competition? Privatization of processes?
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Ken Powell
I'll add my thoughts from a diagnostic perspective. Clinical diagnostics are responsible for over 70% of all clinical decisions, yet consume less than 2.3-2.8% of the annual US health care spend.
What concerns me most are not taxes so much, but price controls. We can engineer, manage costs and do a great deal of work to reduce costs each and ever year. But controlling prices is actually an uninformed and uneducated way to distort the true value we bring to the delivery of health care. Marked as spam
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Julie Omohundro
Jon, I always say that the process IS the product, by which I mean that the product is determined entirely by the process that produces it. How do you see them as different?
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The impacts are much more far reaching than just lay-off data.
The market is growing, but it has been elsewhere. Been to Costa Rica lately, hundreds of thousands of medical device Mfg jobs and billions in revenue not coming back. The ACA Med device tax effectively incentivized the relocation and new industry in CR. We need smarter business savvy people in Washington Marked as spam
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Julie Omohundro
For capitalism and democracy to co-exist, they must first be able to exist. I don't think either one can. I think private ownership will always give way to public ownership; government by the governed will always give way to government by the powerful few.
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Paul M. Stein
I feel that capitalism and democracy can both co-exist and thrive. This was proven during the medical device industry's "golden age", circa 1985-2000 (my opinion as to dates, but, please, choose your own). For industry, all sorts of new and exciting technologies were tried. There were lots of competition, leaders who understood and trusted their technical staff, heavy investment into R&D, and dedicated employees knowing their creativity and hard work was rewarded with good paying jobs for as long as they wanted them. For government, there was a Congress that tried to look after the People, a working regulatory system, and courts allowing a patient to sue a company if it produced a damaging product. Since then, everything just went wrong. It all hasn't come crashing down all at once, but with a slow drifting of the two institutions, independently or in concert. The drift continues, to where who knows. But one thing is for certain, the only way to improve is to look back.
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Just a few thoughts to consider... The tax and regulatory environment will never disappear. To thrive, our businesses need to innovate vs. relocate, create real value for real customers, control the race for competitive advantage in their manufacturing sectors, and pay their taxes. Not to mention names, but there is an industrial conglomerate that makes aircraft engines and diagnostic medical imaging equipment that operates in a tax system that is considered onerous but pays nearly nothing in taxes due to their internal strategy to exploit loopholes and the "system."
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Aaron Liang
Like previous posters above have mentioned, taxes and regulation are two things that will never go away. Reasonable people can disagree as to what extent those should apply, but I think any industry needs to play by, especially one that relies on consumer trust (i.e. patients and healthcare professionals).
That being said, I don't think the US regulatory framework is exactly out of step. If anything, it is trying to keep pace with new trends (see the recent FDA software as a medical device and software changes for 510k guidances). At least based on their published thinking, I think the FDA is at the forefront of trying to keep modernizing the playing field in an ever changing environment compared to its peers. This kind of modernized thinking is what will set the foundation for products from non-traditional companies such as Google's Verily unit and IBM's Watson Health to name a few. If anything is hurting the commercial prospects, its the pricing mechanisms for product adoption. Marked as spam
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Julie Omohundro
Stacy, the truest thing I know about politics is that you can't elect change.
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Julie Omohundro
The problem is that, once you stray from the basic definitions, everyone has their own ideas of what "democracy" and "capitalism" REALLY are.
In my personal lexicon, a Congress that tries to "look after the People" is much closer to a benign dictatorship than a democracy. Government by the powerful few is just a stone's throw from government by the powerful one. Marked as spam
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Julie Omohundro
Paul, when people talk about things being broken, often those things are working just fine, but they not happy with the end result. In this case, I think pretty much everything you describe is simply the result of the medical device industry cycling quite normally and predictably through the industry life cycle, like all industries do.
Industries always have a"golden age" of startup and growth, when it's almost impossible to fail, and everyone who succeeds is a genius, and people learn a lot of the wrong lessons. Then maturity and decline invariably set in, which invariably means layoffs. Marked as spam
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There is clearly a deep rift in our country in regards to whether healthcare in the US should remain subject to "market forces" and capitalistic concepts or if it should become centralized and be an exception to these rules vs. other industries. I of course believe to allow the market to function in such a way that it encourages, drives, and rewards innovation? Isn't this the engine that fueled so many advancements in medical technology? While I believe that there needs to be the proper patient protections, insurer oversights, etc., we don't want to "give-up" and say centralized, fully government healthcare is the way to go. As Mr. Stein said, let's look back, see where we got off-course and work to get back to that "happier" place.
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John Eckberg
A story today in one of the cybertrade journals: The number of start-up companies in the U.S. medical technology industry dropped nearly 70 percent to just 600 in 2012, the year before the device tax was actually applied. Three decades ago it was 1,500. "Freefall" is a term used to describe the trend. Freefall is never good. Also, medtech/device firms receive a much smaller share of "early-stage investing” at 3% of venture capital dollars compared to 10% of all U.S. venture investment in the early 1990s. In a nutshell, this industry has been crushed.
Some untruths, too, in this string. Here's one: price hikes, as any graduate student should know, are not passed on in this space because of three-year and five-year contracts with GPOs and IDNs. And that CBO analysis was badly flawed because it did not denote that 60 percent of all sales are to GPOs and IDNs these days. That tax claimed 1/3 of companies' 2012 profits. It's amazing the industry is still alive in the USA, frankly. Marked as spam
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Paul M. Stein
John cites a particular recent story that is circulating in a number of medtech online sites. Here are two:
https://minnov8.com/2016/10/17/whats-future-medtech-startups-reasons-worried-ray-hope/ http://www.massdevice.com/report-medtech-seing-shrinking-vc-funds-less-startups/ The articles cite this specific AdvaMed report very much worth reading: https://www.advamed.org/sites/default/files/resource/a_future_at_risk_advamed_october_2016.pdf Marked as spam
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Julie Omohundro
John Eckberg If you buy into the equally unsubstantiated, but also often repeated, statistic that 90% of all VC-backed medtech startups fail, it seems like we've now progressed to the point that only another 20% still need crushing.
Again, all industries are overrun with startups in the startup phase. (Hmmm....perhaps that's why they call it the startup phase.) Demand and euphoria wildly exceed supply and good sense, so many of these startups will do well in the short run. In the end, the life cycle wins, so many will start to stumble and fall. If they are lucky, they will be acquired before they go bust. Every industry has its limits. Device startups have declined over time for the same reason that the number of apples you can get off a tree declines as the low-hanging fruit are harvested. Marked as spam
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Julie Omohundro
Paul, thanks. Zero methodology = zero credibility, so I will ignore.
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Andrew Kyle
In project management, there is the phrase 'better is the enemy of good enough'. A revolution by slashing regulations based on a 'drain the swamp' change in the political administration is the only way to cut the straight jackets that decrease innovation. GE moved MEDICAL IMAGING HQ from the USA to China. That really is going to help us - but the others are all HQ off shore too.
Too many lawyers who are employed to write regulations in Washington DC. BREXIT could disrupt IEC60601. That would be a revolution! Marked as spam
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Paul M. Stein
Julie, great thought about the low-hanging fruit. First off, one must recognize the genius of the fantastic technology created to perform the tasks associated with the greatest medical devices. At the same time, one must understand that those tasks were quite simple. How much effort does it take to stimulate a heart (pacemaker), shock a heart (defibrillator), reinforce a flexible tube (stent), intermittently stop flow (heart valve), squirt stuff (implantable drug pumps), field stimulate (neurostimulators), etc.? Anyone in the Industry knows that "etc." is very long, and I apologize ahead of time to my orthopedics colleagues for excluding the medical indications that stuff in the hardware section of Home Depot can do. After further amazing iterations to perfect these technologies, we are now stuck with the truly difficult disease processes (Alzheimer's and dementia, ALS, cancer, etc.) that the medical device industry must dig really, really deep to contribute.
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John Eckberg
Innovation that does not happen leaves no footprint in the sand . As for unsubstantiated, well, I can bury folks with real world examples from real world company founders and c-suit types whose perspectives offer all the substantiation needed that this tax was dumb. An aside, name one other industry that brings life saving treatments to fruition that was saddled with a tip line tax...
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Julie Omohundro
Paul, I'm not sure they can. You aren't talking about innovation, but invention. I agree, that's what can reset the industry life cycle. But this industry has been "innovating" for so long, I don't think it has the capacity to invent. So it goes with most industries...they keep improving what they've got, rather than inventing something novel. Too risky.
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Julie Omohundro
John, I have no comment on the tax, except that it occurred to me it might have been intended as an offset for the corporate taxes have gone offshore, not to name any names. I don't think it had much to do with the decline in start-ups or innovation. Joe posted a discussion some time ago about one large device company's response to its repeal, and it wasn't to invest in innovation. Paul has made his case for it not being responsible for the layoffs.
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Paul M. Stein
Julie, in my mind, innovation includes invention. That words "too risky" regarding invention, are, I feel, a horrible misnomer. During the "golden age", it was invention that was responsible for making the Giants exactly what they are today. Once the new beancounter CEO's figured R&D was too" risky", circa 2000, we entered into the era of "maximizing shareholder return"...producing the exact opposite results and the downward drift of our Industry (offshoring, layoffs, plant closures, mergers and acquisitions). Whether or not the tax had anything to do with the vast majority of the layoffs, I find it doubtful as layoffs are continuing apace right now...all part of behind closed-door corporate strategy. A much worse effect of the tax was delays in plant openings, as John's company's president stated at the time. I totally agree that the tax had zero effect on startups as the 2.3% was built into their devices' initial prices.
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The medical device tax is an excise tax, not an income tax. Excise taxes are paid on revenues, not income. Excise taxes are typically called luxury taxes (also called "sin taxes"). Excise taxes are typically paid on yachts, airplanes etc. When did a medical device become a luxury? In simplistic terms, but at the risk of making a point:
-If revenues are $1M, that’s an opportunity cost of $23K -a piece of instrumentation -At $10M in revenues, the opportunity cost is $230K -a few FTEs -At $100M, the opportunity cost is $2.3M -a small department -At $1B in revenues that’s an opportunity cost of $23M -a small company Taxes effect behavior - assuming you pay taxes. Manufacturers will adjust to minimize the impact, but the ability to ascertain what that behavioral change was presupposes that you knew what they would have done in the absence of the tax … it’s complicated, but if you don’t think that taxes effect behavior, then file the 1040EZ next year and don’t take any deductions Marked as spam
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Paul M. Stein
Martin, what you say is quite true for the Giant medical device companies. Indeed, what they paid is in the public record, and it is peanuts...compared to their profits. However, there are many smallish companies that have scant profits, and 2.3% will make the difference between surviving and falling into the red. Originally, when the tax was envisioned, I thought like you, and could only see what I was used to (Medtronic, St. Jude Medical, Boston Scientific, etc.). It took me some education from folks like John to see the much broader picture.
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Julie Omohundro
Paul, whatever you call them, there is a world of difference between modifying/improving something that has already been invented and inventing something new. It takes something new to reset the industry life cycle. Modifications/improvements just prolong it.
What is interesting about the device industry is that each of the two regulatory paths that were crafted in 1976 tracked directly to one of these two options. Add in the financial incentives to drive development down the path that was based on modifying/improving existing devices versus inventing something new, and everything that has happened since then would seem to have been a foregone conclusion. Marked as spam
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Julie Omohundro
Paul, I think you probably have it backwards. Beancounter CEOs are not new. If they weren't seen much in the medical device industry prior to circa 2000, it was probably because the industry wasn't ready for them yet. They were probably otherwise occupied in pharma, automotive, textiles, steel, and other industries that matured ahead of medical devices. As maturity is reached, it's time to bring in the beancounters. They don't create the situation by their beancounting; the situation creates a demand for beancounters.
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Paul M. Stein
Julie, I appreciate the comment on beancounters. The thing is, the industry transition was so rapid, there was a lot more going on than industry maturity, and there was. It's a long story, previously described, revolving around Medtronic looking to be too big to be acquired, which was a real fear back then. A great beancounter CEO was necessary, and they got one in Art Collins. Medtronic put R&D on the shelf and went on a monster buying spree. Everyone else in the Industry then followed what the "leader" did, got their own beancounters and emulated, and that's where we are with the Giants. It's a simple story.
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Julie Omohundro
So I would say that someone at Medtronic had their eye on the big picture and decided to aim for the position it if consolidator rather than consolidated. The flip side of this coin is the start-ups that aren't really trying to start anything, but instead only aim to be acquired, another strategy that leads to layoffs.
It would be interesting to what percent of the 1500 start-ups 30 years ago started with the goal of being acquired, versus the 600 start-ups today. Marked as spam
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Paul M. Stein
Here is another example of the medtech industry doing everything it possibly can to do it wrong: http://www.biospace.com/News/becton-dickinson-and-company-to-lay-off-120-in/440870?type=email&source=DS_120516 Way to go BD. Never miss that opportunity to miss that opportunity, and take down everyone else in the process. All you had to do was nothing.
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Laura Henze Russell
For greater success and fewer costly mistakes, the device industry needs to reinvent itself by adopting a Precision Device framework - recommending, welcoming, encouraging, even asking FDA to require pre-screening each patient for biocompatibility before any device is permanently installed in the body. The growing prevalence of allergies and immune reactivity means that more devices are causing harm and making headlines because the basic principle of biocompatibility is ignored. How many agree, or have other suggestions?
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The fact that many see this tax as job killer is the problem of and in itself. What is that based on? A lot of people repeating the same thing? I have yet see study that would make this determination, but may be I am wrong , would love to see data. Any proper study IMHO would be challenged with the amount of noise and ability to account for all variables.
However, if you take simple logic into account I do not see how high taxes lead to job losses. Businesses hire and fire based on revenue and the need to make stuff or service the customers. If a business makes a decision to fire employees because of higher tax, then there are built in inefficiencies that allow it to do so. or the ability to produce service or goods will suffer. I do not see a 3rd option. Marked as spam
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Paul M. Stein
Laura, your comment is not very germane to this discussion. As it does point to a potential for Industry improvement, perhaps you would like to start your own.
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Paul M. Stein
Chaz, you hit on some very important points. In fact, a government study found that the "job killer" claim was without merit. You rightly point out all the reasons for, say, large companies laying off for any and all strategic reasons discussed in their cloistered board rooms. There are, however, small companies that were barely in the black when the tax came along...and then they got pushed into the red. These sort of folks were probably not even considered by the Government, or probably many others. I know I didn't until this sort of situation was explained to me by my friend John Eckberg at the Cook Group, illustrating several company examples around the time when the tax began. The numbers of jobs lost were probably low due specifically to the tax, no where near the tens of thousands cited by the AdvaMed folks, but I don't think anyone has made a full tally. I too would love to see the data.
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Regardless of whether the med dev excise tax is causing layoffs or not, the tax is wrong, given its premise and underlying purpose, which, I understand is to fund AHA. Given that it is most likely it will be torn down and altered drastically, the tax then has no grounds.
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Great and interesting points, Laura Henze Russell. I've noticed that Philips' is focused on "personalized medicine." Per your points, pacemaker wire endocarditis has been called the "disease of the 21st Century."
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Paul M. Stein
Okay, now Medtronic. Welcome to the Wall of Shame. http://m.startribune.com/medtronic-eliminating-some-twin-cities-jobs/405716796/
Now that we are out of the excise tax spotlight, it needs to be known that large companies perform these sort of layoffs all the time based primarily on high-level strategic decisions made behind closed doors. The reasons for such are never known to the general public, but, in this case, they cannot be due to a tax that does not exist. I will continue to add these layoffs to this discussion until the question is brought up to Congress on whether or not to permanently repeal or, better, modify this tax. So, next time anyone tries to attribute the dinky 2.3% medical device excise tax to being a major "job killer", the truth that it is no such thing will be found here. Marked as spam
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Julie Omohundro
Chaz, yes, it is based on a lot of people repeating the same thing. As for whether taxes can kill jobs, that depends on a number of variables, including the nature of the tax. Industries often respond to excise taxes by raising prices. In this scenario, it is not the ability to produce services or goods that suffer, but potentially the ability to sell them.
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Julie Omohundro
Paul, what is "it" is that BD is doing wrong, and why is that the wrong thing to do? What do you think it should be doing instead? Why?
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Paul M. Stein
Julie, as I said, they could have done nothing and saved a boondocks little town from a major hardship. It could have gained some great publicity by saying that despite all the reasons for leaving (as stated in the article), they were going with Made in America. For such a large company, the new savings are peanuts, and they join the list of other "deplorables" shipping jobs to Mexico. In this age where corporations are people, as defined by the Supreme Court, it's time our "citizenry" step up. This past Presidential election pointed out how many feel most of our institutions have failed to serve the common man-woman. Industry/Capitalism is seen as the last hope...and then this company's decision happened bashing that.
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Laura Henze Russell
Paul, perhaps if certain device companies were more concerned with patient safety using a "Precision Device" framework and integrated it into their R&D plans, they would not be facing layoffs. It is germane. I will consider a post specifically on that soon. An economist by training, I find this discussion interesting.
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Paul M. Stein
And then, some good news. We have this to add Siemens to the Hall of Fame: http://www.biospace.com/News/siemens-healthineers-300-million-expansion-to/441883?type=email&source=DS_121416
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Julie Omohundro
Paul, then I'm inclined to think that is simply another example of expectations that were never warranted going predictably unmet.
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Paul M. Stein
And, even more good news from J&J: http://www.qmed.com/mpmn/medtechpulse/johnson-johnson-open-health-tech-center?cid=nl.x.qmed02.edt.aud.qmed.20161222
One will notice that in the articles announcing the addition of jobs, there is no attribution of using the savings from the 2.3% medical device excise tax. Only basic corporate strategic issues are mentioned. Marked as spam
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Brad Belmore
Years ago in business school one of my professors taught me something very important about layoffs. He said that High Tenure was the key to inflating the bottom line quickly by laying off the employees earning near the top of their job classification and re-staffing at the bottom. Hospitals and medical device companies are the #1 abuser of this mechanism to rapidly manipulate the accounting for a company and still be perfectly legal. There are many grandiose theories that try to map the relationship of lay-offs to legal actions, government regulations, economic impacts, and social trends. But really, in the end, it is corporate greed that drives it. Releasing long term, reliable, well trained people - with little to no warning - is NOT good business. But the execs that make the decisions (or the shareholders that drive that thinking) will most certainly get their rewards. I left medical devices 10 years ago and watched as many of my former coworkers and friends got devastated.
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Julie Omohundro
Brad, if releasing long-term, reliable, well-trained people with little to no warning does in fact reward shareholders, then, on the contrary, it IS good business.
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Paul M. Stein
Brad, very important point regarding "strategic leadership". When a company lays off all the people who actually got the company to the elevated place it is, usually bold R&D, the upward trajectory stops immediately. With new products gone, only further cost-cutting measures, trying to push in non-existent "emerging markets", and mergers and acquisitions can then stem a decline in the company. But, none of these help revive the initial self-inflicted gunshot wound to the head.
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Paul M. Stein
Julie, I think the shareholder value idea is more of a myth. Seeking "shareholder value" by crushing "risky" R&D and then laying off those who did it, is totally recognized by Wall Steet. A growth stock becomes a value stock. Previously rising share prices stall and companies try to mollify shareholders with dividends. Unfortunately, those dividends are woefully less than if there were just one or two dollar increases in share price. Killing the upward trajectory of a company with the myth of shareholder value is stupid, stupid, STUPID.
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Private answer
Brad Belmore
Julie - point taken. Perhaps I should have said "sustainable" instead of "good" business. Paul's comments capture what I meant to say more eloquently, and with good reasoning.
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Julie Omohundro
Paul, that's the model, yes. Once an industry reaches maturation, the investors who see their financial goals as best served by growth stocks move on to companies in industries that are still in their growth phase, while those who see their financial goals as served by reliable dividends start to invest in the companies in industries that have reached maturation.
Can you give some examples of companies that have been successful at sustaining long-term growth by ongoing investment in bold R&D? Marked as spam
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Private answer
Paul M. Stein
Julie, it seems, unfortunately, all tend to hit a wall where once all the simple stuff is taken care of the "leaders" just quit. Some take a lot longer than others. I think it's the frustration of being right there on that exponential rise and then experiencing the sudden plateau, that just, well, kills the soul. It's like, "I'm ready! Why is everyone giving up?!" Tackling the really hard stuff is no longer looked on as a noble pursuit...and that is just sad.
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Private answer
Julie Omohundro
Then it seems to me that there is no evidence that growth can actually be sustained by bold R&D.
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Private answer
Julie Omohundro
Paul, I think that's a good question, but I'll let you go first, since you were the first to use the term (4 comments up); I was just repeating it.
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Private answer
Paul M. Stein
It took me a while and some reflection to come up with a good answer. "Bold" is where there is confidence in and of the in-house scientists and engineers, with sufficient monetary backing, to come up with real, substantial medical device solutions for either unmet medical needs or marked clinical improvements in the recognized, inadequate standard of care. As a result, "bold" produced every one of the designated blockbuster products out there, and in effect, made every one of the Giants we know today. "Bold" also produced significant financial gain for all employees smart enough to deeply commit to their employee stock purchase plans when stock share prices went exponential; e.g. Medtronic, circa 1988-2003. "Bold" made CEO stars out of nobody's. "Bold" works, but, as you have pointed out regarding industry maturity, it is situational, technologically and culturally. I think, however, lack of gonads is an additional factor lately.
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Private answer
Julie Omohundro
Paul, I looked it up in Merriam Webster. The focus is on fearlessness, from risk or danger expressed or implied. “Assured, Confident” is listed as outdated.
I think that in practice these all bound up together. Confidence can be false, or it can be based in knowledge and understanding. The less you know and understand, the less confident and bold you are likely to be, and the more fearful and the greater the perceived danger...fear of the unknown. So I wonder how much of risk aversion is based in a lack of knowledge and understanding. I do think that the actual risk was lower back in the day. I'm not sure if bold R&D really made the Giants? It got them off to a good start, but then they became gigantic through acquisition, rather than bold R&D? If you really have sufficient monetary backing, then the risk of running out of money (a commonly cited cause for a failed device startup) is low. But is it sufficient? That's where the knowledge and understanding comes in. Marked as spam
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Private answer
Paul M. Stein
I agree that actual risk was truly lower in the day, and that "bold" did not make the Giants. However, that early boldness did put them into such a huge money-making position that they could then do those acquisitions without having to make any real immediate sacrifices. But, it was at that point, where all that cash came in, where they had to make a decision: use the cash internally to try to crack much tougher nuts or do those acquisitions.
And, as you say, here is where that all-important knowledge comes. Sure it was there before, with physician KOL's and a great team of scientists and engineers, during the lower risk times. But now, well, what to do, what to do? The physicians are of no help, and the engineers don't know what to do. Those crazy scientists are coming up with possibilities that involve moving into new indications where we have no customer base nor do we have any company experience. What to do, what to do? Punt, acquire. That was easy. Marked as spam
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