Research shows that few device makers have offset the excise tax they began paying in January 2013; here's how they can reduce costs in targeted areas of SG&A in order to maintain profit margins.

1. A Playbook for Contending with the
Medical Devices Excise Tax
Research shows that few device makers have offset the excise tax
they began paying in January 2013; here’s how to reduce costs in
targeted areas of SG&A in order to maintain profit margins.
• Cognizant 20-20 Insights
Executive Summary
By now, you have probably read that in March
2013, the U.S. Senate voted 79-20 to repeal the
new excise tax on gross sales of medical devices,
which includes everything from CT scans and
replacement knees to tongue depressors.
While the move appears encouraging for device
manufacturers, there’s a catch: For the repeal to
go through, lawmakers must identify an alter-
native tax source to replace the $29 billion the
excise tax is expected to generate over 10 years.1
Sound futile? Exactly.
Given that the tax is likely here to stay, how
have medical device makers reduced their costs
to compensate for the 2.3% duty they began
paying on January 1? A review of manufactur-
ers’ SEC 10-K filings reveals that they haven’t.
To avoid margin erosion, however, the offsetting
cost reductions must happen soon. An objective,
disciplined approach to SG&A cost reduction can
help manufacturers meet the margin squeeze and
result in healthier businesses.
How the Tax Affects the Medical
Devices Industry
The tax comes at a difficult time for the industry.
High unemployment and the economy’s uncertain
recovery have caused prospective patients to
defer elective medical procedures such as knee
and hip replacements.
Moreover, because the manufacturers typically
draw from an older demographic already covered
by Medicare, they expect minimal new business
from the Affordable Care Act’s pool of newly
insured patients. Unlike other excise taxes — such
as the gasoline tax that funnels funds to road
repairs — the device makers’ tax has no mitigating
industry benefit.
Estimating the excise tax’s effect on companies is
complex. For one thing, the tax applies only to U.S.
sales. For another, it excludes associated services,
such as education and consulting. As a result,
calculating the tax’s impact on individual orga-
nizations depends on the company’s geographic
revenue mix, as well as the mix of device and
services revenues.
Major device manufacturers generate roughly
46% of their revenues outside the U.S. (see Figure
1). Least affected by the excise tax are those
companies with large non-U.S. revenues and
lucrative services revenues. For example, Becton
Dickinson and St. Jude Medical earn less than
half of their revenues from the U.S. On the other
cognizant 20-20 insights | june 2013

2. 2
hand, Stryker and C. R. Bard earn approximately
two-thirds of their revenue in the U.S., making
them more vulnerable to the tax’s impact.2
Equipment titan Thermo Fisher Scientific predicts
little impact on its business because the majority
of its sales are laboratory devices, which are not
subject to the tax. The company estimates its
exposure to result in a tax of only $20 million to
$25 million.3
Breaking out revenues of devices vs. services
adds an administrative burden to pricing and
accounting activities, and there’s no doubt it will
impact the way companies write future pricing
agreements. Bundled pricing of products and
services is likely to change.
It should be noted that the tax burden is especially
high for startup companies. Because the tax
applies to total device sales rather than profits,
young organizations with nascent profits pay dis-
proportionate shares of their profits toward the
tax. In addition, startups tend to earn a higher
percentage of revenues from U.S. domestic sales
and typically earn less service revenue. The result
is that the new tax may lead to increased industry
consolidation and discourage the innovation and
creativity that is often the hallmark of young
businesses.
Attempts to Offset the Tax
Data shows that in the three years between the
Affordable Care Act’s enactment and the date the
tax went into effect, device makers have taken
some steps to offset the tax, such as aggressively
pursuing new business outside the U.S. From 2009
to 2012, the industry grew non-U.S. revenues from
41.5% to 45.5% of total revenues — a surprisingly
large and rapid shift in such a short timeframe
(see Figure 2, next page).
In addition, empirical evidence shows device
makers putting the brakes on hiring. According
to a review of corporate 10-K filings, total
employment among the largest device manufac-
turers reached 183,298 in 2009, the year before
the Affordable Care Act was signed into law. By
2012, the companies’ employment had risen by
6.9% to 195,965. Revenues grew an even healthier
12.3% (see Figure 3, next page). Revenue growth
that outpaces hiring should result in produc-
tivity gains that appear in improved SG&A as a
percentage of sales.
Yet among medical device makers, SG&A as a
percentage of revenues has worsened (see Figure
4, page 4). The industry’s decline in SG&A perfor-
mance between 2009 and 2012 may in part reflect
the expansion overseas. It also suggests that the
productivity gains are showing up elsewhere in
the corporation, most likely in manufacturing.
Device makers’ sagging SG&A cost efficiency also
clearly indicates that the industry’s expansion
through mergers and acquisitions has produced
multiple redundant back-office functions that are
decentralized, nonstandardized and fragmented.
Despite the abundant M&A activity, we don’t see
the SG&A efficiency gains that would indicate
cognizant 20-20 insights
Source: Company 10-K filings
Figure 1
Medical Device Makers’ Non-U.S. Revenues
U.S. Revenues %
Non-U.S. Revenues %
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Becton
St. Jude
Therm
o
Fisher
Boston
Scientific
M
edtronic
Zim
m
er
Stryker
C.R. Bard

3. companies integrating their combined systems
and wringing out the inefficiencies. These non-
optimized SG&A costs are an obvious target for
offsetting the excise tax.
What Device Makers Need to Do
From all appearances, the excise tax is here to
stay, but company options are limited. Few can
pass along the tax costs as price increases. Most
medical product lines are sold in highly competi-
tive markets that preclude marking up prices to
offset the increased tax.
As a result, organizations face one of two choices:
decrease margins or reduce costs. Given Wall
Street’s penchant for punishing companies with
falling margins, the obvious approach is to cut
costs. But the data shows companies have not yet
begun to do so.
To carry out the reductions, manufacturers may
need to reduce their research and development
investments and take a fresh look at marginally
profitable product lines; however, SG&A is the
obvious target. The goal should be a 50%
reduction in costs for activities such as payroll,
general HR support, general accounting, accounts
receivables processing, accounts payables
processing, fixed assets accounting and support
of redundant IT applications.
The industry needs to assess and benchmark
its SG&A functions, document the landscape
— people, processes, systems and costs — and
3cognizant 20-20 insights
Medical Device Makers’ Business Expansion Outside the U.S.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
U.S. Revenues %
Non-U.S. Revenues %
58.5% 54.5%
41.5% 45.5%
2009 2012
Source: Company 10-K filings
Figure 2
Medical Device Makers’ Employment Levels
58.5% 54.5%
41.5% 45.5%
2009 2012
2009 2012
0
50,000
100,000
150,000
200,000
Number of Employees
Medtronic
Thermo Fisher
Becton
Stryker
St. Jude
Zimmer
C.R. Bard
Boston Scientific
Boston Scientific
0
20,000
40,000
60,000
Revenues
Medtronic
Thermo Fisher
Becton
Stryker
C.R. Bard
Zimmer
St. Jude
Up 6.9%
Up 12.3%
Source: Company 10-K filings
Figure 3

4. cognizant 20-20 insights 4
develop plans to reduce costs through stan-
dardization, systems rationalization, increased
automation, shared services and outsourcing (see
Figure 5).
Looking Forward
The time for device makers to act is rapidly
running out. The effect of the new tax is already
rippling through 2013 earnings. Integra Life
Sciences and Cytomedix are among the device
makers that cited the excise tax as a factor in their
decreased margins in the first quarter of 2013.4,5
Engineering giant Smiths Group is mulling plans
to sell its medical division, citing a 10% decline in
operating profits that it attributes to factors that
include the new tax.6
With limited options, companies need to take an
objective and disciplined approach to SG&A cost
reduction that meets the margin squeeze and
results in healthier businesses.
Although SG&A is the target, let’s be clear: we
recommend not cutting sales but focusing on
the general and administrative expenses that fall
within SG&A, such as human resources, finance
and procurement. In general, HR is not a primary
target for cost reduction because it is more of
a “people function” that companies need to
maintain at least partially in the field. As such,
this function does not always lend itself as well to
centralization and automation.
Finance, however, is an important target for cost
reduction. Approximately 60% of companies’
finance and accounting headcount is related to
transaction processing. As such, companies can
generate significant savings by wringing inef-
ficiencies out of finance transaction processes
such as accounts payables, accounts receivables,
fixed assets, general accounting and the payroll
process — whether managed by HR or finance —
and typically with little impact to the customer.
Procurement, too, is a major part of a company’s
cost structure, and any savings from more
effective procurement go straight to the bottom
line. The key in procurement is not to reduce
headcount but to make people more effective.
Strategic sourcing is a critical exercise through
which organizations analyze spending, rationalize
vendors, re-bid contracts and centralize master
data maintenance, both vendor and item masters.
A disciplined approach is essential to identifying
costs that can be reduced. Start by assessing and
benchmarking functions. What systems are used?
How automated are they? To what degree has
outsourcing been used? Are best practices being
utilized?
Once your organization has assessed and
documented the operational landscape, it can
begin making the strategic choice of which
functions to retain and which are candidates for
automation and outsourcing. With the develop-
ment and implementation of a transformation
roadmap, your organization can make the adjust-
ments to offset the excise tax and emerge a
stronger, more efficient business.
Rising SG&A Costs
(percent of revenues)
Figure 4
Figure 5
Cost Reduction Levers
2009 2012
Zimmer 42% 40%
Stryker 37% 40%
Boston Scientific 32% 35%
Medtronic 35% 35%
St. Jude 36% 34%
C.R. Bard 27% 29%
Thermo Fisher 26% 27%
Boston 24% 25%
Total 32% 33%
•Process redesign
•Lean
•Standardization
•Benchmarking
•Best practices
•Tool
enhancement
•New technology
• Workflow tool
•Organizational
structure
redesign
•Rightsizing
•Offshoring
Processes
People
Tec
hnology

5. About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 162,700 employees as of March 31, 2013, Cognizant is a member of the
NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
World Headquarters
500 Frank W. Burr Blvd.
Teaneck, NJ 07666 USA
Phone: +1 201 801 0233
Fax: +1 201 801 0243
Toll Free: +1 888 937 3277
Email: inquiry@cognizant.com
European Headquarters
1 Kingdom Street
Paddington Central
London W2 6BD
Phone: +44 (0) 20 7297 7600
Fax: +44 (0) 20 7121 0102
Email: infouk@cognizant.com
India Operations Headquarters
#5/535, Old Mahabalipuram Road
Okkiyam Pettai, Thoraipakkam
Chennai, 600 096 India
Phone: +91 (0) 44 4209 6000
Fax: +91 (0) 44 4209 6060
Email: inquiryindia@cognizant.com
­­© Copyright 2013, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is
subject to change without notice. All other trademarks mentioned herein are the property of their respective owners.
About the Authors
Paul Nowacki, CFA, is Leader of Finance & Accounting, Transformation Consulting, within Cognizant’s
Business Process Services Group. In this role, Paul oversees all F&A consulting activities. He also serves
as a thought leader in F&A and helps identify market trends and shape new Cognizant offerings. He is a
frequent conference and webinar speaker and author of numerous articles and whitepapers on various
finance and accounting topics. By combining his industry experience in IT and finance leadership roles
with a background in transformational consulting, Paul looks holistically at finance and accounting orga-
nizations and blends process and systems with organizational design perspectives. He has a B.S. in quan-
titative business analysis and an M.B.A. with a concentration in operations research. Paul also holds the
Chartered Financial Analyst professional designation. He can be reached at Paul.Nowacki@cognizant.com.
Moses Mallela, CPA, is a Principal Consultant within the Finance and Accounting Practice of Cognizant’s
Business Process Services Group. In this role, Moses engages with clients on strategic assessments and
identifying opportunities for value creation. Moses has extensive experience in offshore service delivery
and has led global consolidation and standardization of F&A processes across multiple countries and
languages into offshore and near-shore delivery centers. He holds a master’s degree in commerce and
is a gold medalist from Osmania University, Hyderabad, India. He also holds the Cost and Management
Accounting professional designation. He can be reached at Moses.Mallela@cognizant.com.
Footnotes
1
“Description of H.R. 436, The ‘Protect Medical Innovation Act of 2011,’” Joint Committee on Taxation,
Publication JCX-45-12, May 29, 2012.
2
U.S. Securities And Exchange Commission, Form 10-K.
3
Ibid.
4
“Disappointing 1Q Earnings for IART,” Zacks Equity Research, May 10, 2013.
5
“Cytomedix’s CEO Discusses Q1 2013 Results - Earnings Call Transcript,” SeekingAlpha, May 10, 2013.
6
“Smiths in Talks Over Medical Sale,” Midland News Express & Star, May 31, 2013.