New medical devices improve patient outcomes, reduce costs, create jobs and contribute to a healthier US economy and balance of trade. For nearly a decade, rising regulatory costs, delays and uncertainty have made it harder for medical device companies to succeed. The Medical Device Tax that went into effect on January 1, 2013 is compounding other challenges that threaten US leadership in medical device innovation. This report is based on responses from medical device startups who participated in Silicon Valley Bank’s annual Startup Outlook survey.

1. Startup Outlook 2013: The Medical Device
Tax’s Impact on U.S. Innovation
March 2013

2. Overview of the Startup Outlook 2013 Survey
The Startup Outlook report is based on an annual survey of private companies across the
U.S. in the software, life science, hardware and cleantech sectors. Silicon Valley Bank — the
bank for high growth tech startups across the United States — asks startups how things are
going, whether they’re planning to hire, and how government policies are affecting their
growth.

3. Medical Devices: The Situation
This year, we took a deep dive into a critically important segment of the U.S. innovation
economy: the medical device sector.
For a variety of reasons, policymakers and ordinary Americans should care about the
health of the device industry. Perhaps most importantly, new, innovative devices help
improve patient outcomes and reduce costs. In addition, U.S. leadership in
commercializing medical devices helps ensure that U.S. patients have early access to new
tools for diagnosing and treating conditions. The device industry also creates high paying
jobs and is a major exporter and an important contributor to the U.S. balance of trade.
Yet for nearly a decade, rising regulatory costs, delays, and uncertainty have made it
significantly harder for device companies to succeed. This has reduced the amount of
capital being invested in new device companies to an 11 year low. It has also caused a
shift in investments away from capital intensive segments, impeding the discovery and
commercialization of treatments for chronic, costly conditions such as diabetes, obesity,
and vascular disease.
While Congress and the FDA are taking steps to turn this around, those efforts are still in
the relatively early stages. And now a new challenge has emerged for growing
companies: starting January 1, 2013, all device companies must pay a 2.3% tax on their
total U.S. sales. This tax applies even to companies that are not making a profit. We
wanted to hear firsthand how executives are dealing with the tax and how they think it will
affect the device industry going forward.

4. Key Findings: 98 Device Executives Share Their Stories
Eight in 10 respondents believe the device tax will affect their company’s long term
growth
o One in four will focus on expanding overseas instead of domestically
o Two or more in 10 will take one or more other steps in response to the tax, including reducing their workforce or
foregoing new hires, shifting resources away from growing their business, investing less in R&D for existing and new
devices, or trying to raise more capital from investors
The device tax compounds other challenges that threaten to affect U.S. leadership in
medical device innovation
o Device companies were much more likely than startups in other sectors to say they fell far short of their 2012 revenue
targets (17% versus 9% for other segments)
o Device executives were much less optimistic about business trends than their peers in other sectors
o Not surprisingly, this translates into less robust expectations for hiring than is true for other startups
The survey captures the front row view of those leading small device startups – the
kind of companies that create break-throughs in medical care but that are also the
most vulnerable
o 70% of the companies had fewer than 25 employees. 98% had fewer than 100 employees
o 61% aren’t yet earning revenues. Of those earning revenues, 56% earned less than $5 million in 2012, 95% earned
less than $25 million in 2012, and fewer than one in ten expected expect to be profitable in 2012
o Most of the respondents were either the CEO (63%) or the CFO (28%)

5. Views on the Device Tax

6. Many Small Businesses are Still Trying to Figure it Out …

7. … and Deciding How to Cope

8. Eight in 10 Believe the Tax Will Affect their Long Term Growth

9. A Sector Already Under Stress

10. Device Companies Were Already Facing a
Tougher Environment Than Other Startups

11. Device Companies Are Less Optimistic About the Coming Year

12. Device Companies Are Less Likely to Hire in 2013

13. Device Headwinds Are Further Undermining US Manufacturing & Jobs
About half of the device respondents (46%) currently manufacture devices
o 93% of these manufacture mostly in the U.S.
Most of the remaining device companies (45%) plan to start manufacturing
in the next 18 months
o Of these, only 50% expect to manufacture mostly in the U.S.
If we don’t reverse this trend, good middle class jobs will be lost
o More than half of the device manufacturing jobs require only a high school degree (28%)
or hire based on experience regardless of education (28%)
o Only 16% of these jobs require college or above

14. In Their Own Words: Device Executives’ Advice and Insights
“[T]he device user fees and Obamacare mandates will force our expenses to far
exceed revenue and anticipated financing. Regulation seems to haunt the start ups.
The rising costs due to regulations such as Healthcare, US based manufacturing
(2.3%), proposed reimbursement reductions etc are all major concerns.”
“If there has to be a tax, I would stage it and over 5 years. I would also not tax
companies on revenues but on profits and would also not tax companies with less than
$10M in revenues because those companies need more support so they can innovate
and create jobs and skills that will impact America longer term.”
“Our team wants nothing more than to change the world for our patients. In the process
this creates well paying jobs and prosperity. It baffles me that the US government adds
to the slope of the hill we have to climb with an unpredictable FDA process, uncertainty
with regard to investment tax rates and pre-profitability corporate taxes.”

15. In Their Own Words: Device Executives’ Advice and Insights (cont.)
“Please repeal Med Dev Tax for small companies (<$100M) to allow us
to focus on growing our business with these funds.”
“Recognize that the US medical device industry contributes jobs to the US economy
and contributes to the balance of payments. Reconsider and urge repeal of the
medical device tax.”
“We have now been selling our medical device product in Europe for over 1 year,
providing safe and effective pain relief to suffering patients. It will be more than another
3 years at best before the product will be available to patients in the USA.
With absolutely no additional benefit to patients.”
“Foster incentives, not taxes for medical devices - this is one industry where the U.S.
used to lead the world and this position is eroding and at significant risk.”

16. Survey Methodology
Results for Silicon Valley Bank’s Startup Outlook Study were collected through an online survey conducted between
December 4 and 20, 2012. The survey was completed among a national sample of 758 executives of innovation companies
with less than $100 million in annual revenues and fewer than 500 employees. Over 60% of respondents are President/
CEO, 18% CFOs and 19% all other executive titles. The industry distribution of respondents is 433 Software/Internet, 212
Healthcare, 50 Hardware and 63 Cleantech.
98 medical device respondents completed the survey. 63% of device respondents were President/CEOs, 23% were CFOs,
and 14% were from other executives combined.
Find the Startup Outlook report at http://www.svb.com/startup-outlook-report/
About Silicon Valley Bank
Silicon Valley Bank is the premier bank for technology, life science, cleantech, venture capital, private equity and premium
wine businesses. SVB provides industry knowledge and connections, financing, treasury management, corporate investment
and international banking services to its clients worldwide through 28 U.S. offices and six international operations. (Nasdaq:
SIVB) www.svb.com.
Silicon Valley Bank is the California bank subsidiary and the commercial banking operation of SVB Financial Group. Banking
services are provided by Silicon Valley Bank, a member of the FDIC and the Federal Reserve System. SVB Financial Group
is also a member of the Federal Reserve System.