Uncle Sam Hearts Drugs, Not Devices. Why?

Xconomy National — 


You can forgive medical device investors and CEOs if they’ve uttered that not-so-family-friendly acronym during the last year or so.

First, the Food and Drug Administration signals it will likely tighten restrictions on the popular 510(k) regulatory program, which allows device makers to quickly develop new products that are slightly better or different than previous generations. Then Uncle Sam slaps the industry with a 10-year, $20 billion tax to help pay for healthcare reform. Politicians on both the right and left predict Medicare will soon start paying less than it does today for certain medical devices.

Compare this with the relative love the feds have bestowed on the drug industry. On the eve of the State of the Union address, Obama Administration officials announced the creation of a $1 billion drug development center to speed the commercialization of therapies. This comes on top of the $1 billion in tax credits the federal stimulus program gave biotech startups last year.

So what has happened?

It was only a few years ago that the public demonized Big Pharma as greedy institutions that opposed the sale of generic drugs to protect their multi-billion dollar profits. Now the medical device industry seems to be bearing the brunt of rage from Washington DC.

There’s no one simple answer. But the shift in fortunes can be traced to a number of factors, including healthcare reform, the erosion of the business model underpinning Big Pharma, and political ineptitude from the medical device industry.

YOUR TURN—The FDA tends to regulate by crisis. For the medical device industry, that crisis was Sprint Fidelis, the ultra-thin wires that connect implantable cardioverter defibrillators to the heart.

In 2007, Fridley, MN-based Medtronic issued a worldwide recall of Sprint Fidelis after the wires began to fall apart. It’s a design flaw that affects hundreds of thousands of patients and may have contributed to at least dozen of deaths, the company said.

“I do know that the agency is faced with extreme scrutiny by the government and that any ‘event’ that is published because a device (or drug) has caused a problem puts what I consider an unfair amount of blame on the agency,” says Tom Clement, chairman and co-founder of Pathway Medical Technologies in Kirkland, WA. “So much of what we do in the world of bringing new products to market is to help very sick people and unfortunately in that environment, some outcomes are not good—even when most are.”

Though the FDA approved Sprint Fidelis from its stricter pre-market approval (PMA) program, which requires extensive clinical trials to prove the safety and effectiveness of truly novel new devices, industry critics soon shifted to the FDA’s 510(k) regulatory program. Critics, some from within the FDA itself, accused of the agency of green lighting 510(k) applications without proper safety reviews. “From investors’ and entrepreneurs’ perspective, it certainly seems like the process is getting harder,” Clement says. “There is more scrutiny on the 510(k) devices, and more of them are being required to have clinical data.”

In some ways, it’s now easier to win FDA approval for drugs than devices, said one venture capitalist based in Silicon Valley near San Francisco.

Ironic, since medical device companies like to complain the FDA regulates the industry as if they made pharmaceuticals. If only.

Companies face a much more predictable FDA regulatory path towards drugs; the same cannot be said for devices, the venture capitalist said.

TOO FEW DRUGS, TOO MANY DEVICES—Despite spending billions of dollars on developing drugs to treat cancer, Alzheimer’s and Parkinson’s diseases, Big Pharma so far has little to show for its efforts.

The economics also don’t favor Big Pharma: it takes about $1.3 billion and seven years to bring a product to market, according to Tufts University’s Center for the Study of Drug Development.

The drug industry’s research productivity has been declining for 15 years, “and it certainly doesn’t show any signs of turning upward,” Dr. Francis Collins, director of the National institutes of Health, told the New York Times.

By contrast, there seems to be plenty of medical devices on the market, maybe a few too many. Though medical devices make a relatively small proportion of overall healthcare spending, some politicians are proposing to save Medicare dollars by cutting reimbursement for some technologies.

Last month, Rep. Darrell Issa, the California Republican who is the new chairman of the House Oversight and Government Committee, told the Wall Street Journal he would specifically target the orthopedics industry.

Issa, according to the newspaper, said his own doctor told him surgeons have an incentive under Medicare to implant many joint and bone screws to support patients’ spines, when fewer implants—or none at all—might be equally effective and safer.

“They have got to come up with a system that doesn’t reward people for putting more metal in somebody’s spine,” Issa told the Journal.

The medical device industry often boasts of innovation but in reality, most of the devices approved under the 510(k) represent only incremental improvements to existing technologies.

Medical device companies face an odd quandary, says Scott Merz, president of MC3, a medical device incubator based in Ann Arbor, MI.

On the one hand, companies seek 510(k) approval by convincing the FDA that similar devices already exist on the market. On the other hand, they try to win funding by convincing investors that their technologies are truly groundbreaking and address an unmet medical need, Merz says.

YOU SNOOZE, YOU LOSE—Big Pharma was one of the first industries to strike a deal with the Obama Administration over healthcare reform. The medical device industry didn’t, and it paid the price. The medical device industry initially got whacked with a $40 billion excise tax over 10 years, though Congress later cut that amount by half.

Last week, Rep. Erik Paulson, a Minnesota Republican, proposed a bill that would repeal the tax entirely. It’s unclear whether it has a real shot of becoming law.

The medical device industry was also slow to mobilize against changes to the 510(k) program, though its work is starting to show progress. Last month, a bipartisan group of 15 U.S. Senators urged FDA Commissioner Margaret Hamburg to adopt a more deliberate, cautious approach to amending 510(k) versus the radical wholesale restructuring that medical device firms fear.

The FDA recently released a series of changes that did not include the most controversial provisions the industry opposes such as granting the agency the power to strip 510(k) clearances.

However, the agency said it would revisit those ideas once the Institutes of Medicine issues its recommendations in the spring.

The uncertainty is already taking its toll on medical device companies. Venture funding for medical device startups totaled $2.3 billion last year, a drop of 9 percent from 2009, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

If the FDA tightens the 510(k) process, startups will find it even harder to raise more money, Merz of MC3 says.

By posting a comment, you agree to our terms and conditions.

2 responses to “Uncle Sam Hearts Drugs, Not Devices. Why?”

  1. Saumitra says:

    I guess it’s time for Dx companies to step up lobbying (read campaign donations)