Zimmer Moving Part of its Operations to Memphis

Medical device makers are running scared.

With less than 10 months to go before most medical devices are subject to a 2.3 percent tax, manufacturers are anxiously formulating plans to recoup the lost revenue. Some companies are hoping to pass the tax on to hospitals and other customers that purchase their products, while others simply are cutting staff.

Last fall, for instance, Kalamazoo, Mich.-based Stryker Corp. announced plans to reduce its global workforce by 5 percent to offset an additional $150 million in taxes it expects to pay under the device tax. The layoffs are projected to save the orthopedic implant behemoth $100 million in operating costs. “The targeted reductions and other restructuring activities are being initiated to provide efficiencies and realign resources in advance of the new Medical Device Excise Tax…as well as to allow for continued investment in strategic areas and drive growth despite the ongoing challenging economic environment and market slowdown in elective procedures,” a statement from the company read.

Covidien plc is following suit by laying off 200 workers in Argyle, N.Y., and shifting production to Mexico and Costa Rica. And, while Medtronic Inc. executives haven’t specifically mentioned layoffs, Chief Financial Officer Gary Ellis acknowledged there would be “things” the company couldn’t afford thanks to the additional $125 million to $175 million it will have to pay annually under the tax. Those “things” conceivably could be additional employees.

“We’ve looked at this as basically one of the costs we’re going to have to cover as we put together our plans for fiscal year 2013 and as we put together our initiatives on a long-term basis,” Ellis said in a conference call last month with investors. “We’re going to have to make the tradeoffs and there’s probably going to be things that we can’t do as a result of that. It means we won’t have as much to invest going forward.”

Neither will Zimmer Holdings Inc., the latest device maker to unveil its excise tax compensation strategy. Late last month, the Warsaw, Ind.-based company announced plans to close its national distribution center in that city and shift operations to an outsourced facility in Memphis, Tenn. The transition will begin in the third quarter of this year and end before the third quarter of 2013, according to company spokesman Garry Clark.

The company will attempt to transfer between 120 and 130 employees who currently work at the distribution center to other positions in Warsaw, but some positions also are being eliminated. Zimmer did not quantify the anticipated number of positions that would be cut.

Zimmer is moving its distribution operations to Memphis to take advantage of the city’s FedEx Express world hub and improve shipping times (deliveries to the West Coast can make it there in a day).

“Zimmer announced several planned organizational changes as part of the company’s ongoing effort to improve customer responsiveness, enhance quality and fuel growth and innovation initiatives,” a statement from Clark read. “Among these actions is the first phase of an eventual transition of a number of Warsaw-based logistics functions to an outsourced partner at a national transportation hub. These changes will result in the elimination of some positions at the company beginning in late 2012.”

“Zimmer anticipates many of the impacted employees will be reassigned,” the statement continued. “All impacted employees who do not continue with the company will be supported with outplacement benefits and services. The cost savings achieved by these actions also are intended to partially offset the costs associated with the federal medical device excise tax, which will take effect in 2013. In addition, we believe the changes to our logistics functions will lower the cost of service delivery to our hospital customers, helping them address challenges brought on by healthcare reform.”

Scheduled to take effect Jan. 1, 2013, the medical device tax is a top-line levy that will be applied to sales. Internal Revenue Service (IRS) guidelines define taxable medical devices as “any device defined under the Federal Food, Drug & Cosmetic Act as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory that is recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them; intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease; or intended to affect the structure or any function of the body, and that does not achieve its primary intended purposes through chemical action within or on the body and that is not dependent upon being metabolized for the achievement of its primary intended purposes.”

Among the exemptions carved out by the IRS are a specific retail exemption for eyeglasses, contact lenses, hearing aids, and any other medical devices purchased by the general public at retail for individual use. Also exempted from the tax are instruments that fall under U.S. Food and Drug Administration investigational device exemptions and devices labeled for “research purposes only,” as well as products used in veterinary medicine.