Jim Stommen , Contributing Writer11.09.12
A year of change … or maybe not. A year of holding fast to the “new normal” … or maybe not. A year of transition to … something.
Medical Product Outsourcing set out to gather a variety of opinions as medtech 2012 draws to a close, and what we got was just that—and agreement on some of the key issues.
Mark Leahey, for instance, said he believes that “many pieces are in place for the industry to turn the corner of what have certainly been some challenging years.” The president and CEO of the Medical Device Manufacturers Association (MDMA) in Washington, D.C., hailed what he termed “the successful completion and negotiation of the medical device user fee reauthorization and the beginning of its implementation.”
Looking ahead to 2013, Leahey figuratively leveled the association’s and industry’s guns at the 2.3 percent medical device excise tax due to take effect on Jan. 1.
“I don’t think it can be overstated just how onerous the impact of the medical device tax will be if this policy is not repealed,” he said. “The past several years have been challenging with the regulatory environment, pricing pressures and uncertainties in the marketplace. Just as we are starting to see some improvements in the economy, this vibrant sector will be severely impacted by an excise tax that will thwart innovation and patient care.”
David Nexon, senior executive vice president at the Advanced Medical Technology Association (AdvaMed), the other national-level, Washington, D.C.-based medical device industry trade association, also pointed to the pending medical device tax as the biggest single issue facing the industry as it makes the turn into 2013. “We’re working our tails off to try to prevent it from happening,” Nexon said.
He added that U.S. Food and Drug Administration’s (FDA) performance “is terribly important” to the industry, “and in the vast scheme of things, the FDA is probably more important to the industry than anything, but we’re hopeful that’s on a better course and it’s not like there’s a single decision that is going to change things. There are more accretive changes that will work . . . over time.”
Mark DuVal, whose Minneapolis, Minn.-based DuVal & Associates PA practice focuses on drug, device and food law, shared Nexon’s view. He passionately emphasized medtech’s continuing poor relationship with the agency as the major issue facing the industry this year and next.
He said he’s fond of saying that FDA is “predictably unreasonable and very transparent about it. There’s nothing that has been reasonable about this administration.”
In describing the state of medtech as 2012 nears an end, John Babitt, medtech leader for the Americas at global consulting giant Ernst &Young, referenced the company’s recently issued “Pulse of the industry: medical technology report 2012.”
“As we look back at 2012, we’ll see that it was for the most part a good year for the medical device industry; not a great year, not a bad year,” Babitt said. “In our report, we highlight the fact that in the financial performance of the industry, most of the metrics were pointed in the right direction. Globally, revenue was up about 5 percent, R&D spending was up 4 percent, and the overall number of employees in the sector was up 3 percent. Those are all metrics that point in the right direction.”
Venkat Rajan, advanced medical technologies industry manager in the San Antonio, Texas, offices of global consulting firm Frost & Sullivan, described the industry as being “in a state of flux.” He cited a combination of factors: “Healthcare reform issues, all the changes that are happening there; a great deal of transition in a lot of the big medtech companies with new CEOs coming into place, business units being merged or contracted, new strategies being looked at in terms of emerging markets; the scheduled enactment of the medical device tax next year.”
Rajan added: “I think you’re seeing a lot of companies in a state of transition where they were geared to a certain market and business model over the past decade or more, and now they’re readjusting in terms of how they look at certain disease states and their technologies, how they look at the importance of emerging markets, things like that.”
For her part, Joanne Wuensch, medical device industry analyst for BMO Capital Markets in New York, N.Y., said the industry is looking ahead.
“It’s looking toward the device tax in 2013,” she said. “It’s looking toward managing in a more mature market environment. The markets have become more stable—stable ortho markets, stable cardio markets. The word ‘stable’ keeps coming up as we think about and write about these companies.”
The medical device tax might be the singular, discrete issue facing the industry in the near term, she said, but she considers other matters such as FDA warning letters, product launches, healthcare utilization, pricing, and austerity measures in Europe as “the main issues that we worry about.”
Larry Haimovitch, president of Mill Valley, Calif.-based Haimovitch Medical Technology Consultants and a longtime investor in and observer of the medtech sector, said the most important thing impacting the industry today is the regulatory environment. “I’ve been following medical devices for a long time, and the FDA has always been an issue of some degree, but in medical devices, and particularly ophthalmic devices, which I follow closely, the handling by the FDA has been just awful.”
Noted medtech entrepreneur and investor Josh Makower, M.D., long has been critical of the FDA’s performance, but he now says that on the heels of most recent iteration of the medical device user fee deal—(the Medical Device User Fee Amendments of 2012, or MDUFA III) —and some of the milestones that were agreed to, “I am hopeful that we will see improvements to the medtech ecosystem that will benefit patients and innovators alike. The health of American innovation is too important for us not to achieve the improvements we all seek.”
Makower, the CEO of Mountain View, Calif.-based ExploraMed Development LLC, a venture partner at New Enterprise Associates, and consulting professor of medicine at Stanford University, said the biggest question will be “whether the key ideas supporting better risk-benefit balance, predictability, transparency or ‘least-burdensome’ [processes] that have been reinforced within the user-fee program will be able to be implemented in a manner that will drive the visible, meaningful and swift improvements needed to bring investors back into the space.”
Ann Quinlan Smith, president of the Minneapolis, Minn.-based Clinical & Consulting Division of NAMSA, a regulatory consulting firm headquartered in Northwood, Ohio, also cited FDA performance as the key issue facing the medtech sector.
“FDA appears to be trying to respond to concerns from industry that timelines for new approvals are just too long,” she said. “However, we may need to be careful what we wish for as the new post-market requirements are defined.”
She added that the advent of the medical device tax is placing incredible pressure on the industry, and, combined with the challenges of getting FDA approval, many companies are considering commercialization outside the United States in more lucrative and easily accessible markets such as China, India and Brazil.
Evangeline Loh, Ph.D., vice president of global regulatory affairs at Austin, Texas-based Emergo Group, said the biggest single regulatory issue for both the United States and European Union in 2013 would be the importance of total product life cycle and post-marketing surveillance.
“There is not just the challenge of getting your product to market, but also actively monitoring your product and reviewing the data collected from your device,” Loh said.
Long-Term Strengths
AdvaMed’s Nexon said the long-term prospects of the industry are “extremely” good. “We’re having a very large growth in the aging population, both here and all over the world. That’s a huge opportunity, because our products are used so much more heavily by the elderly than by younger people,” Nexon said. “We’re also seeing an explosion in the emerging growth markets of people who are of the middle class and really want First World medical care, and they can’t get that without our products, so that’s another huge market. It’s the century of the life sciences, and we’re expecting just a flood of new products and breakthroughs that will really transform medicine over time, and of course that means expanding business for the industry.”
Leahey also took a longer view, noting that “the future can be brighter than it ever has been for America’s medical technology innovators,” in particular if the goals and milestones as highlighted in the MDUFA commitment letter are met.
“It is crucial that the relationship between industry and FDA continues to improve, as patients are the ones who have the most to gain,” Leahey continued. “I continue to strongly believe that our best days can be ahead, but we need to enact policies that respect just how dynamic and delicate this ecosystem is. Medical technology represents the trifecta of improved patient care, innovation and jobs, primarily from small businesses and startups. If there was only one ‘absolute’ I could identify for 2013, it is that policies and proposals related to this proud American success story take the long view for exactly how they would affect the industry. In the end, patient care, job creation and innovation will suffer the most if we don’t get it right.”
According to Ernst & Young’s Babitt, when medtech is examined compared to overall healthcare spending, the medtech growth rates are forecasted below overall healthcare spending for 2013 and 2014.
“So I would suggest that the biggest issue and opportunity is how medtech companies really get a larger slice of healthcare economics,” he noted. “If they’re treating disease states such as congestive heart failure, can they move closer to the provider and participate in some of the dislocation of healthcare delivery to really get a bigger slice of the economics for treating those patients? In order to really accomplish that—and this is really the bigger challenge over the next several years—medtech needs to rethink its business model. If you look at the value proposition for medical technology, traditionally it’s been delivered by manufacturing new products for physicians and maintaining highly specialized, well-trained sales forces that focused on selling to physicians. The value proposition going forward is going to have to be more focused on payers and demonstrating value.”
Frost & Sullivan’s Rajan said the old “build it and they will come” approach doesn’t work anymore, particularly in emerging markets. But he said the new rule of thumb applies not just for emerging markets, but for established markets as well.
“The reality of the healthcare system now is one that is focused toward cost containment. It’s not so much how the devices are going to change, but how you position the device,” Rajan said. “I think you’ll see the sort of approach with a lot of new medtech products of whether or not they are going to reduce complication rates, or if the technology is going to improve outcomes and reduce the number of readmissions.”
BMO Capital Markets’ Wuensch said, “I think you’re still going to see U.S. companies push more and more outside the U.S. for a number of reasons, including the fact that it’s easier to get regulatory approval there. And companies are pushing more and more into emerging markets like India and China. And quite frankly, the medical device tax also encourages OUS (outside United States) sales versus U.S. sales, and with that comes manufacturing outside the U.S. as well.”
Haimovitch agreed, noting that executives at small to midsize companies with new technology are “recalibrating” their thinking. “They say, ‘Well, OK, I can’t raise $50 million or $100 million. Let me do it offshore and maybe never sell in the U.S.,’” he noted.
He added, however, that despite the negatives impacting the startup side of the industry, the entrepreneurial spirit “still burns brightly” and he hasn’t seen any reduction in the “enthusiasm, creativity or the passion for entrepreneurship or innovation. Of course, I live in a hotbed for high-tech and medtech, but I think people are continuing to be very enthusiastic about trying to build value with medtech.”
Still About the FDA
Babitt said it would be critical to see how the FDA responds to its new user-fee mandate.
“Now the FDA has all this extra money that the medical device companies are putting up,” he said. “They have to go out and hire, and there is a real push that they will be held accountable to Congress in 2013 to demonstrate that they are making progress.”
DuVal isn’t holding his breath. His biggest concern is the way the FDA is changing the 510(k) program unilaterally.
“They have a real disdain for the 510(k) program. If you take the totality of the small, incremental definitional and procedural changes that CDRH (the FDA’s Center for Devices and Radiological Health) has made in the aggregate—and there’s a ton of them—they are essentially rewriting the 510(k) program almost out of existence through administrative fiat. The FDA is not a legislative body; it is an administrative organization meant to implement laws, not create them. Yet the sum of their administrative reinterpretation is rewriting the 510(k) program.”
He said the result of FDA’s “administrative reinterpretation” is to change FDA’s risk classification system in its entirety.
“This administration is pushing everything toward a de novo or a Class III medical device classification. The evidence of that is in CDRH’s use of ‘stage-gated’ reviews in which the agency makes a legal/regulatory determination about whether the device meets the definition of substantial equivalence—i.e., a.) same intended use, b.) same technological characteristics, and c.) if there are different technological characteristics, do they raise new questions of safety and effectiveness? The original goal of these reviews is laudable: To save FDA and industry wasted time from reviewing the non-clinical and clinical performance data, if FDA believes the device has no predicate.”
But, he added: “The problem is the data in the applicant’s file submitted by the manufacturer usually answers those questions and FDA won’t look at that data. FDA’s own guidance documents require the agency to look at the non-clinical and clinical performance data to make those determinations. When FDA refuses to look at the data in an applicant’s file, the applicant is given a NSE (not substantially equivalent) letter and told to consider the de novo path. FDA likes it when companies are on the de novo path because they are no longer tethered to the 510(k) substantial equivalence standard that requires establishing safety and effectiveness in comparison to a predicate.”
The bottom line, he said, is that “the slow destruction” of the 510(k) program is taking place.
“A lot of incremental innovation that would have been accepted as part of the 510(k) path in previous FDA administrations are no longer being accepted today,” DuVal said. “The agency uses its newly constructed interpretations of the 510(k) program definitions to kick devices off the 510(k) path. We cannot make the 510(k) program like the PMA (premarket approval application) path or we’re going to be shutting down this industry.”
Haimovitch recounted the regulatory woes of Laguna Hills, Calif.-based Glaukos Corp., a company that received a positive FDA panel recommendation in mid-2010, only to see two more years pass before receiving agency approval of its product.
“On July 31, 2010, the panel recommended the approval of the Glaukos eye stent, a little device that’s put into the eye to facilitate flow of aqueous from the back of the eye to the front of the eye, thereby lowering intraocular pressure and having a positive effect on treating glaucoma,” he said. “It took nearly two years from that panel meeting to get the final approval. Imagine how much money it cost the venture capitalists in extra investment by having this device delayed—another year of, who knows, $10 million, $15 million, or $20 million for this company alone?”
Rajan said that what it comes down to is companies paying more for reviews in hope that the FDA will beef up its procedures, its predictability, and add experienced reviewers evaluating products.
“It’s a challenge from the FDA’s standpoint as well,” he said. “Just based on their funding, the reviewers they hire tend to be a little green and inexperienced. Hopefully there’s a little more transparency and predictability in the process with the passage of the user fee act. Is that going to make device approvals faster? I don’t necessarily know, but the hope by companies is to get more experienced reviewers, which also should make the process more predictable.”
NAMSA’s Smith said the biggest issue facing the industry in the coming year is FDA’s “unpredictable and risk-averse” mindset.
“Over the past several years the industry has experienced a significant decline in approvals of new, novel technologies,” she noted. “These types of products are requiring large clinical trials, but there is no guarantee that such trials will be sufficient for product approval. There needs to be a balance between getting products on the market quickly and holding the product off the market until everything is known about it. FDA is currently far over on the conservative side of that balance, and innovation is being stifled.”
Makower sounded a somewhat conciliatory note: “It’s probably no surprise to anyone that the relationship between industry and regulators has been through some very difficult times recently. What is often unfortunate is that this is also painted in broad strokes, when there are countless professionals across the United States working on these issues that are passionate about patient care and innovation.”
Investment Falloff Still a Problem
As for whether the falloff in venture capital healthcare investing has started to turn, Haimovitch said he doesn’t think it has.
“There are two reasons for it. First, the returns have been dismal. I can’t think of any fund offhand that has had stellar returns,” he explained. “As a result, when they want to go out and raise new money, raising money with lousy returns is not greeted very enthusiastically by their current or potentially new limited partners. Second, many of the folks in the venture capital (VC) industry have gotten older, many have made a lot of money, and I don’t see a lot of young blood coming into the venture business. In fact, I hear more and more about exits, people saying they don’t want to be in this business anymore.
The falloff in VC investing in healthcare is worrisome, said AdvaMed’s Nexon.
“That’s a major problem,” he said. “You’re sort of chilling the seeds of the industry until we can get that flow going again. I think a lot of that is related to the FDA, and to a lesser extent the uncertainty of the payment market, so assuming that we can get the FDA turned around and assuming that the payment environment becomes a little more clear and predictable, I’m hopeful those will turn around.”
He added there’s a broader issue that often isn’t discussed—the overall U.S. tax system (apart from the device tax).
“Although we’re still the world leader in this sector, our relative strength is declining a bit, and in part that’s because we have a very uncompetitive tax system,” Nexon explained. “The fact that both [political] parties are committed to tax reform and see competitiveness as an important issue offers an opportunity to improve the prospects for our industry in the U.S., and may also play a role in freeing up an improvement in venture capital and other investment in the industry.”
MDMA’s Leahey said healthcare investing continues to be challenging. “However, given the aging baby boomer population and significant unmet clinical needs that exist among the patient population, the macro environment bodes well for medical technology innovation,” Leahey said. “At the micro level, successfully completing MDUFA reauthorization making the FDA process more predictable, ongoing efforts to adequately cover and pay for medical technologies and a potential social media/tech bubble make me optimistic that more dollars will begin to flow back to medical technology.”
Ernst & Young’s Babitt predicts “continued tightening” and a decline in venture capital investing.
“A number of traditional VC funds did raise funds last year, and many raised large funds, but a lot of that capital has been tagged for growth equity and won’t necessarily be true venture capital that is funding new products going to clinical trials; it’ll be funding carve-outs of large organizations,” he said.
“We see true ‘risk’ capital declining.”
He does, however, predict a “pretty robust” merger and acquisition environment.
“We’ll see smaller deals, but there’s a pretty active environment amongst the corporate, the conglomerates, the private equity firms,” he said. “There’s pretty good activity, and we expect that to continue in 2013 as well.”
Growth Opportunities
As for growth segments in 2013, BMO’s Wuensch said: “We still prefer the more diversified names, whether it’s a Baxter or Covidien or CareFusion—names where none of the products are what I would call big-ticket items; they don’t have the bulls-eye on them for pricing pressure. Also they’re the products that will be used more broadly throughout the medical world with healthcare reform and they’ll be the first to benefit if there’s an increase in utilization with the recovering economy.”
Babitt said the cardiovascular and orthopedic sectors are probably not going to be the growth areas going forward, unless they’re “really focused” on the less-invasive procedures, which he says “seem to have some good momentum.” Less-invasive technologies, however, have the burden of showing efficacy and strong value. “Otherwise they’re going to be fighting reimbursement headwinds,” he added.
He said that Ernst & Young analysts feel that healthcare IT will continue to experience emphasis and growth.
“We’re seeing that particularly with private equity investors in the medtech space,” he said. “They’re less bullish on products and more so on services and technology—technology for technology’s sake. The other area is diagnostics, which dovetails with health IT. We would expect to see continued growth in that space. That’s another area where we’re seeing more investment as well.”
Frost & Sullivan’s Rajan said the hot growth markets “include transcatheter valve technologies, and you see a lot of push around renal denervation technologies. Medtronic is making a big push around those. The hypertension market also is seeing device interventions for those for whom pharmaceuticals haven’t worked. And obviously there’s a lot of interest around wellness, preventive technologies, especially upgrading devices to improve the sharing of information.”
There remains a lot of unmet need in ophthalmology, according to Haimovitch.
“We need better treatment for glaucoma; we need better treatment for macular degeneration,” he said. “In terms of needing new technology, it has always been an innovative, creative part of the industry and I think that will continue.”
AdvaMed’s Nexon said that in this environment, technologies that reduce cost and help with the management of chronic disease are going to have good markets.
“But lots of other things are going to have good markets too depending on the macro forces we’ve been talking about,” he explained. “If you build a better mousetrap, even if it’s more expensive, if it really provides a clinical benefit you’re going to do well. Americans want high-quality healthcare, and I think anything like that is going to do very well.”
Leahey of MDMA agreed that any sector of the healthcare system that is improving outcomes with strong data showing that the cost of care is being driven down is destined for success.
“We believe this can be achieved in every sector, and that this isn’t a concept that will be isolated to one field of medicine as opposed to others,” he said.
Jim Stommen, retired editor of industry publication Medical Device Daily, is a freelance writer focusing on the medical product sector.
Medical Product Outsourcing set out to gather a variety of opinions as medtech 2012 draws to a close, and what we got was just that—and agreement on some of the key issues.
Mark Leahey, for instance, said he believes that “many pieces are in place for the industry to turn the corner of what have certainly been some challenging years.” The president and CEO of the Medical Device Manufacturers Association (MDMA) in Washington, D.C., hailed what he termed “the successful completion and negotiation of the medical device user fee reauthorization and the beginning of its implementation.”
Looking ahead to 2013, Leahey figuratively leveled the association’s and industry’s guns at the 2.3 percent medical device excise tax due to take effect on Jan. 1.
“I don’t think it can be overstated just how onerous the impact of the medical device tax will be if this policy is not repealed,” he said. “The past several years have been challenging with the regulatory environment, pricing pressures and uncertainties in the marketplace. Just as we are starting to see some improvements in the economy, this vibrant sector will be severely impacted by an excise tax that will thwart innovation and patient care.”
David Nexon, senior executive vice president at the Advanced Medical Technology Association (AdvaMed), the other national-level, Washington, D.C.-based medical device industry trade association, also pointed to the pending medical device tax as the biggest single issue facing the industry as it makes the turn into 2013. “We’re working our tails off to try to prevent it from happening,” Nexon said.
He added that U.S. Food and Drug Administration’s (FDA) performance “is terribly important” to the industry, “and in the vast scheme of things, the FDA is probably more important to the industry than anything, but we’re hopeful that’s on a better course and it’s not like there’s a single decision that is going to change things. There are more accretive changes that will work . . . over time.”
Mark DuVal, whose Minneapolis, Minn.-based DuVal & Associates PA practice focuses on drug, device and food law, shared Nexon’s view. He passionately emphasized medtech’s continuing poor relationship with the agency as the major issue facing the industry this year and next.
He said he’s fond of saying that FDA is “predictably unreasonable and very transparent about it. There’s nothing that has been reasonable about this administration.”
In describing the state of medtech as 2012 nears an end, John Babitt, medtech leader for the Americas at global consulting giant Ernst &Young, referenced the company’s recently issued “Pulse of the industry: medical technology report 2012.”
“As we look back at 2012, we’ll see that it was for the most part a good year for the medical device industry; not a great year, not a bad year,” Babitt said. “In our report, we highlight the fact that in the financial performance of the industry, most of the metrics were pointed in the right direction. Globally, revenue was up about 5 percent, R&D spending was up 4 percent, and the overall number of employees in the sector was up 3 percent. Those are all metrics that point in the right direction.”
Venkat Rajan, advanced medical technologies industry manager in the San Antonio, Texas, offices of global consulting firm Frost & Sullivan, described the industry as being “in a state of flux.” He cited a combination of factors: “Healthcare reform issues, all the changes that are happening there; a great deal of transition in a lot of the big medtech companies with new CEOs coming into place, business units being merged or contracted, new strategies being looked at in terms of emerging markets; the scheduled enactment of the medical device tax next year.”
Rajan added: “I think you’re seeing a lot of companies in a state of transition where they were geared to a certain market and business model over the past decade or more, and now they’re readjusting in terms of how they look at certain disease states and their technologies, how they look at the importance of emerging markets, things like that.”
For her part, Joanne Wuensch, medical device industry analyst for BMO Capital Markets in New York, N.Y., said the industry is looking ahead.
“It’s looking toward the device tax in 2013,” she said. “It’s looking toward managing in a more mature market environment. The markets have become more stable—stable ortho markets, stable cardio markets. The word ‘stable’ keeps coming up as we think about and write about these companies.”
The medical device tax might be the singular, discrete issue facing the industry in the near term, she said, but she considers other matters such as FDA warning letters, product launches, healthcare utilization, pricing, and austerity measures in Europe as “the main issues that we worry about.”
Larry Haimovitch, president of Mill Valley, Calif.-based Haimovitch Medical Technology Consultants and a longtime investor in and observer of the medtech sector, said the most important thing impacting the industry today is the regulatory environment. “I’ve been following medical devices for a long time, and the FDA has always been an issue of some degree, but in medical devices, and particularly ophthalmic devices, which I follow closely, the handling by the FDA has been just awful.”
Noted medtech entrepreneur and investor Josh Makower, M.D., long has been critical of the FDA’s performance, but he now says that on the heels of most recent iteration of the medical device user fee deal—(the Medical Device User Fee Amendments of 2012, or MDUFA III) —and some of the milestones that were agreed to, “I am hopeful that we will see improvements to the medtech ecosystem that will benefit patients and innovators alike. The health of American innovation is too important for us not to achieve the improvements we all seek.”
Makower, the CEO of Mountain View, Calif.-based ExploraMed Development LLC, a venture partner at New Enterprise Associates, and consulting professor of medicine at Stanford University, said the biggest question will be “whether the key ideas supporting better risk-benefit balance, predictability, transparency or ‘least-burdensome’ [processes] that have been reinforced within the user-fee program will be able to be implemented in a manner that will drive the visible, meaningful and swift improvements needed to bring investors back into the space.”
Ann Quinlan Smith, president of the Minneapolis, Minn.-based Clinical & Consulting Division of NAMSA, a regulatory consulting firm headquartered in Northwood, Ohio, also cited FDA performance as the key issue facing the medtech sector.
“FDA appears to be trying to respond to concerns from industry that timelines for new approvals are just too long,” she said. “However, we may need to be careful what we wish for as the new post-market requirements are defined.”
She added that the advent of the medical device tax is placing incredible pressure on the industry, and, combined with the challenges of getting FDA approval, many companies are considering commercialization outside the United States in more lucrative and easily accessible markets such as China, India and Brazil.
Evangeline Loh, Ph.D., vice president of global regulatory affairs at Austin, Texas-based Emergo Group, said the biggest single regulatory issue for both the United States and European Union in 2013 would be the importance of total product life cycle and post-marketing surveillance.
“There is not just the challenge of getting your product to market, but also actively monitoring your product and reviewing the data collected from your device,” Loh said.
Long-Term Strengths
AdvaMed’s Nexon said the long-term prospects of the industry are “extremely” good. “We’re having a very large growth in the aging population, both here and all over the world. That’s a huge opportunity, because our products are used so much more heavily by the elderly than by younger people,” Nexon said. “We’re also seeing an explosion in the emerging growth markets of people who are of the middle class and really want First World medical care, and they can’t get that without our products, so that’s another huge market. It’s the century of the life sciences, and we’re expecting just a flood of new products and breakthroughs that will really transform medicine over time, and of course that means expanding business for the industry.”
Leahey also took a longer view, noting that “the future can be brighter than it ever has been for America’s medical technology innovators,” in particular if the goals and milestones as highlighted in the MDUFA commitment letter are met.
“It is crucial that the relationship between industry and FDA continues to improve, as patients are the ones who have the most to gain,” Leahey continued. “I continue to strongly believe that our best days can be ahead, but we need to enact policies that respect just how dynamic and delicate this ecosystem is. Medical technology represents the trifecta of improved patient care, innovation and jobs, primarily from small businesses and startups. If there was only one ‘absolute’ I could identify for 2013, it is that policies and proposals related to this proud American success story take the long view for exactly how they would affect the industry. In the end, patient care, job creation and innovation will suffer the most if we don’t get it right.”
According to Ernst & Young’s Babitt, when medtech is examined compared to overall healthcare spending, the medtech growth rates are forecasted below overall healthcare spending for 2013 and 2014.
“So I would suggest that the biggest issue and opportunity is how medtech companies really get a larger slice of healthcare economics,” he noted. “If they’re treating disease states such as congestive heart failure, can they move closer to the provider and participate in some of the dislocation of healthcare delivery to really get a bigger slice of the economics for treating those patients? In order to really accomplish that—and this is really the bigger challenge over the next several years—medtech needs to rethink its business model. If you look at the value proposition for medical technology, traditionally it’s been delivered by manufacturing new products for physicians and maintaining highly specialized, well-trained sales forces that focused on selling to physicians. The value proposition going forward is going to have to be more focused on payers and demonstrating value.”
Frost & Sullivan’s Rajan said the old “build it and they will come” approach doesn’t work anymore, particularly in emerging markets. But he said the new rule of thumb applies not just for emerging markets, but for established markets as well.
“The reality of the healthcare system now is one that is focused toward cost containment. It’s not so much how the devices are going to change, but how you position the device,” Rajan said. “I think you’ll see the sort of approach with a lot of new medtech products of whether or not they are going to reduce complication rates, or if the technology is going to improve outcomes and reduce the number of readmissions.”
BMO Capital Markets’ Wuensch said, “I think you’re still going to see U.S. companies push more and more outside the U.S. for a number of reasons, including the fact that it’s easier to get regulatory approval there. And companies are pushing more and more into emerging markets like India and China. And quite frankly, the medical device tax also encourages OUS (outside United States) sales versus U.S. sales, and with that comes manufacturing outside the U.S. as well.”
Haimovitch agreed, noting that executives at small to midsize companies with new technology are “recalibrating” their thinking. “They say, ‘Well, OK, I can’t raise $50 million or $100 million. Let me do it offshore and maybe never sell in the U.S.,’” he noted.
He added, however, that despite the negatives impacting the startup side of the industry, the entrepreneurial spirit “still burns brightly” and he hasn’t seen any reduction in the “enthusiasm, creativity or the passion for entrepreneurship or innovation. Of course, I live in a hotbed for high-tech and medtech, but I think people are continuing to be very enthusiastic about trying to build value with medtech.”
Still About the FDA
Babitt said it would be critical to see how the FDA responds to its new user-fee mandate.
“Now the FDA has all this extra money that the medical device companies are putting up,” he said. “They have to go out and hire, and there is a real push that they will be held accountable to Congress in 2013 to demonstrate that they are making progress.”
DuVal isn’t holding his breath. His biggest concern is the way the FDA is changing the 510(k) program unilaterally.
“They have a real disdain for the 510(k) program. If you take the totality of the small, incremental definitional and procedural changes that CDRH (the FDA’s Center for Devices and Radiological Health) has made in the aggregate—and there’s a ton of them—they are essentially rewriting the 510(k) program almost out of existence through administrative fiat. The FDA is not a legislative body; it is an administrative organization meant to implement laws, not create them. Yet the sum of their administrative reinterpretation is rewriting the 510(k) program.”
He said the result of FDA’s “administrative reinterpretation” is to change FDA’s risk classification system in its entirety.
“This administration is pushing everything toward a de novo or a Class III medical device classification. The evidence of that is in CDRH’s use of ‘stage-gated’ reviews in which the agency makes a legal/regulatory determination about whether the device meets the definition of substantial equivalence—i.e., a.) same intended use, b.) same technological characteristics, and c.) if there are different technological characteristics, do they raise new questions of safety and effectiveness? The original goal of these reviews is laudable: To save FDA and industry wasted time from reviewing the non-clinical and clinical performance data, if FDA believes the device has no predicate.”
But, he added: “The problem is the data in the applicant’s file submitted by the manufacturer usually answers those questions and FDA won’t look at that data. FDA’s own guidance documents require the agency to look at the non-clinical and clinical performance data to make those determinations. When FDA refuses to look at the data in an applicant’s file, the applicant is given a NSE (not substantially equivalent) letter and told to consider the de novo path. FDA likes it when companies are on the de novo path because they are no longer tethered to the 510(k) substantial equivalence standard that requires establishing safety and effectiveness in comparison to a predicate.”
The bottom line, he said, is that “the slow destruction” of the 510(k) program is taking place.
“A lot of incremental innovation that would have been accepted as part of the 510(k) path in previous FDA administrations are no longer being accepted today,” DuVal said. “The agency uses its newly constructed interpretations of the 510(k) program definitions to kick devices off the 510(k) path. We cannot make the 510(k) program like the PMA (premarket approval application) path or we’re going to be shutting down this industry.”
Haimovitch recounted the regulatory woes of Laguna Hills, Calif.-based Glaukos Corp., a company that received a positive FDA panel recommendation in mid-2010, only to see two more years pass before receiving agency approval of its product.
“On July 31, 2010, the panel recommended the approval of the Glaukos eye stent, a little device that’s put into the eye to facilitate flow of aqueous from the back of the eye to the front of the eye, thereby lowering intraocular pressure and having a positive effect on treating glaucoma,” he said. “It took nearly two years from that panel meeting to get the final approval. Imagine how much money it cost the venture capitalists in extra investment by having this device delayed—another year of, who knows, $10 million, $15 million, or $20 million for this company alone?”
Rajan said that what it comes down to is companies paying more for reviews in hope that the FDA will beef up its procedures, its predictability, and add experienced reviewers evaluating products.
“It’s a challenge from the FDA’s standpoint as well,” he said. “Just based on their funding, the reviewers they hire tend to be a little green and inexperienced. Hopefully there’s a little more transparency and predictability in the process with the passage of the user fee act. Is that going to make device approvals faster? I don’t necessarily know, but the hope by companies is to get more experienced reviewers, which also should make the process more predictable.”
NAMSA’s Smith said the biggest issue facing the industry in the coming year is FDA’s “unpredictable and risk-averse” mindset.
“Over the past several years the industry has experienced a significant decline in approvals of new, novel technologies,” she noted. “These types of products are requiring large clinical trials, but there is no guarantee that such trials will be sufficient for product approval. There needs to be a balance between getting products on the market quickly and holding the product off the market until everything is known about it. FDA is currently far over on the conservative side of that balance, and innovation is being stifled.”
Makower sounded a somewhat conciliatory note: “It’s probably no surprise to anyone that the relationship between industry and regulators has been through some very difficult times recently. What is often unfortunate is that this is also painted in broad strokes, when there are countless professionals across the United States working on these issues that are passionate about patient care and innovation.”
Investment Falloff Still a Problem
As for whether the falloff in venture capital healthcare investing has started to turn, Haimovitch said he doesn’t think it has.
“There are two reasons for it. First, the returns have been dismal. I can’t think of any fund offhand that has had stellar returns,” he explained. “As a result, when they want to go out and raise new money, raising money with lousy returns is not greeted very enthusiastically by their current or potentially new limited partners. Second, many of the folks in the venture capital (VC) industry have gotten older, many have made a lot of money, and I don’t see a lot of young blood coming into the venture business. In fact, I hear more and more about exits, people saying they don’t want to be in this business anymore.
The falloff in VC investing in healthcare is worrisome, said AdvaMed’s Nexon.
“That’s a major problem,” he said. “You’re sort of chilling the seeds of the industry until we can get that flow going again. I think a lot of that is related to the FDA, and to a lesser extent the uncertainty of the payment market, so assuming that we can get the FDA turned around and assuming that the payment environment becomes a little more clear and predictable, I’m hopeful those will turn around.”
He added there’s a broader issue that often isn’t discussed—the overall U.S. tax system (apart from the device tax).
“Although we’re still the world leader in this sector, our relative strength is declining a bit, and in part that’s because we have a very uncompetitive tax system,” Nexon explained. “The fact that both [political] parties are committed to tax reform and see competitiveness as an important issue offers an opportunity to improve the prospects for our industry in the U.S., and may also play a role in freeing up an improvement in venture capital and other investment in the industry.”
MDMA’s Leahey said healthcare investing continues to be challenging. “However, given the aging baby boomer population and significant unmet clinical needs that exist among the patient population, the macro environment bodes well for medical technology innovation,” Leahey said. “At the micro level, successfully completing MDUFA reauthorization making the FDA process more predictable, ongoing efforts to adequately cover and pay for medical technologies and a potential social media/tech bubble make me optimistic that more dollars will begin to flow back to medical technology.”
Ernst & Young’s Babitt predicts “continued tightening” and a decline in venture capital investing.
“A number of traditional VC funds did raise funds last year, and many raised large funds, but a lot of that capital has been tagged for growth equity and won’t necessarily be true venture capital that is funding new products going to clinical trials; it’ll be funding carve-outs of large organizations,” he said.
“We see true ‘risk’ capital declining.”
He does, however, predict a “pretty robust” merger and acquisition environment.
“We’ll see smaller deals, but there’s a pretty active environment amongst the corporate, the conglomerates, the private equity firms,” he said. “There’s pretty good activity, and we expect that to continue in 2013 as well.”
Growth Opportunities
As for growth segments in 2013, BMO’s Wuensch said: “We still prefer the more diversified names, whether it’s a Baxter or Covidien or CareFusion—names where none of the products are what I would call big-ticket items; they don’t have the bulls-eye on them for pricing pressure. Also they’re the products that will be used more broadly throughout the medical world with healthcare reform and they’ll be the first to benefit if there’s an increase in utilization with the recovering economy.”
Babitt said the cardiovascular and orthopedic sectors are probably not going to be the growth areas going forward, unless they’re “really focused” on the less-invasive procedures, which he says “seem to have some good momentum.” Less-invasive technologies, however, have the burden of showing efficacy and strong value. “Otherwise they’re going to be fighting reimbursement headwinds,” he added.
He said that Ernst & Young analysts feel that healthcare IT will continue to experience emphasis and growth.
“We’re seeing that particularly with private equity investors in the medtech space,” he said. “They’re less bullish on products and more so on services and technology—technology for technology’s sake. The other area is diagnostics, which dovetails with health IT. We would expect to see continued growth in that space. That’s another area where we’re seeing more investment as well.”
Frost & Sullivan’s Rajan said the hot growth markets “include transcatheter valve technologies, and you see a lot of push around renal denervation technologies. Medtronic is making a big push around those. The hypertension market also is seeing device interventions for those for whom pharmaceuticals haven’t worked. And obviously there’s a lot of interest around wellness, preventive technologies, especially upgrading devices to improve the sharing of information.”
There remains a lot of unmet need in ophthalmology, according to Haimovitch.
“We need better treatment for glaucoma; we need better treatment for macular degeneration,” he said. “In terms of needing new technology, it has always been an innovative, creative part of the industry and I think that will continue.”
AdvaMed’s Nexon said that in this environment, technologies that reduce cost and help with the management of chronic disease are going to have good markets.
“But lots of other things are going to have good markets too depending on the macro forces we’ve been talking about,” he explained. “If you build a better mousetrap, even if it’s more expensive, if it really provides a clinical benefit you’re going to do well. Americans want high-quality healthcare, and I think anything like that is going to do very well.”
Leahey of MDMA agreed that any sector of the healthcare system that is improving outcomes with strong data showing that the cost of care is being driven down is destined for success.
“We believe this can be achieved in every sector, and that this isn’t a concept that will be isolated to one field of medicine as opposed to others,” he said.
Jim Stommen, retired editor of industry publication Medical Device Daily, is a freelance writer focusing on the medical product sector.