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Will GOP Tax Bills Bring a Gift for Medtech Startups?

Wednesday, November 22, 2017   (0 Comments)
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The Invest in Innovative Small Businesses Act would create a tax credit for investments in high-tech businesses, including pre-revenue medtech and diagnostics startups, and could be attached to Republican tax bills moving through Congress.

 

A bill that would create an incentive for investment in high-tech startups stands a chance of passing if it’s attached to one of the tax bills moving through Congress.

That’s the opinion of Justin Klein, MD, a partner at New Enterprise Associates, a large venture capital firm that’s a major investor in medtech.

AdvaMed recently announced its support for H.R. 4175 — the Invest in Innovative Small Businesses Act — which would create a tax credit for investments in high-tech businesses, including pre-revenue medtech and diagnostics startups.

The company must have fewer than 250 employees, be headquartered in the U.S., and have been in existence for less than 12 years. The credit would be equal to 25% of the investment and be temporary and capped. Over the lifetime of the investor, the total amount of credits would be limited to $25 million, and to no more than $5 million in a single year. Reps. Jason Smith (R-Mo.) and Brad Schneider (D-Ill.) introduced the bill in the House of Representatives on Oct. 31.
 

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“I think H.R. 4175 would have a very meaningful impact on the medical device sector,” Klein wrote in an email. “All of our pre-revenue stage medical device companies are spending between $5M and $25M or more annually to fund their programs through clinical development and regulatory approval so that they can eventually generate revenue through product sales in the U.S.

“The capital requirements for our most promising medical technology companies have only increased over time,” Klein added. “A tax credit that provides for up to $5M a year for investment in these companies would provide a meaningful boost to medical technology entrepreneurship, job creation, and investment, and our global competitiveness now and for years to come.”

Funding for early-stage technologies in the medical technology industry has been slim for years, in part because of the time, capital, and uncertainty associated with reaching meaningful milestones, clearing regulatory hurdles, and securing reimbursement. 

“The legislation … will help reverse the negative funding trend facing medtech by providing an incentive for investors to return to the sector,” AdvaMed said in a statement.

Several states have successfully pioneered similar tax credits specific to high-technology investors. For example, the $245 million fund Venture Michigan Fund generated more than $1.4 billion in additional investments to 68 bioscience companies, creating more than 1,500 jobs created, according to a report byCrain’s Detroit Business. The fund began in 2003 and has run out of money, the report said.

Median North American seed-stage venture capital deals across industries declined in size from $1.9 million to to $1.6 million in the third quarter of 2017, according to the most recent PWC MoneyTreeReport.

In its most recent report, the Angel Resource Institute said that software and healthcare continued to attract the most angel group investments, but the percentage of these deals has dropped. “Angels are going back to basics and making a conscious decision to put a portion of their investments in lower risk categories,” the report concludes.

Most startups lose money in the early stages of generating revenue. Plus, the medical device tax, which is set to return on January 1, 2018, has been disproportionately challenging for smaller device companies, according to Klein. He sees a new tax credit could act as an incentive to invest in smaller, newer companies.

“I think it’s a great opportunity for the medical device industry,” he said.

 

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