At the Intersection of Health, Health Care and Policy Cite this article as: Sabin Russell Investor Drought And Regulatory Headwinds Slow Device Innovation Health Affairs, 34, no.2 (2015):199-202 doi: 10.1377/hlthaff.2014.1442
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Health Affairs is published monthly by Project HOPE at 7500 Old Georgetown Road, Suite 600, Bethesda, MD 20814-6133. Copyright © 2015 by Project HOPE - The People-to-People Health Foundation. As provided by United States copyright law (Title 17, U.S. Code), no part of Health Affairs may be reproduced, displayed, or transmitted in any form or by any means, electronic or mechanical, including photocopying or by information storage or retrieval systems, without prior written permission from the Publisher. All rights reserved.
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Entry Point
Money matters: Zach Zwirko at work in the Cambridge, Massachusetts, lab of biomedical company Foundation Medicine. Life sciences firms that develop new and innovative medical devices are finding it harder to attract investments from venture capital firms. doi:
10.1377/hlthaff.2014.1442
Investor Drought And Regulatory Headwinds Slow Device Innovation Is venture capital’s waning interest in medical devices a bellwether for innovation in a new health care economy? BY SABIN RUSSELL
V
enture capital is a gilded corner of the financial world where wealthy people and institutions trade higher risk for the prospect of outsize returns. In 2013 a resurgent US venture capital industry invested $29.8 billion1,2 in young companies, anticipating a big payback in the form of an
eventual acquisition or a successful initial public offering. The revival continues. In just the first three quarters of 2014, total venture investing soared above $33 billion.1,2 Left out of this latest excitement, however, are some of the traditional mainstays of venture capital portfolios: the developers of new and innovative medi-
Photograph by David L. Ryan/Boston Globe via Getty Images
cal devices. The medical technology sector is a huge and diverse field, with products that range from tongue depressors to positron emission tomography (PET) scanning equipment. At the high-tech end, today’s minimally invasive surgical instruments, cardiovascular stents, imaging systems, and glucose monitors owe their origins to venture-financed entrepreneurs. It is a business now struggling to find its place in a new economic environment, and the fast track from startup to acquisition by a larger company seems rutted and muddied. “For five years, this industry has been in a world of hurt,” says longtime venture capital investor Jonathan Fleming, president of the Network for Excellence in Health Innovation, a think tank in Cambridge, Massachusetts. For a variety of reasons, venture capitalists are shifting their bets toward different sectors. Richer and quicker returns beckon in social media. A medical device excise tax and regulatory hurdles add time, money, and uncertainty to the market for new medical devices. And, say industry leaders, the tectonic shifts in the US health care system that have slowed the growth of spending are making it harder for companies with new medical devices to sell them to costsensitive hospitals and health care systems or to find reimbursement from Medicare and private insurers.
A Long Journey Even for seasoned medical device entrepreneurs, navigating the financial and regulatory waters has been treacherous. Fourteen years ago industry veteran Frank Fischer was hired as CEO of NeuroPace Inc., a young company previously launched with $3 million in venture seed investments. NeuroPace developed a compact electronic device that is surgically implanted in the skull and then is programmed to reduce seizures in patients with epilepsy. Since NeuroPace’s founding in 1997, it has raised $230 million in venture capital financing; conducted three extensive clinical trials; survived years of review from federal regulators; and finally
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Entry Point brought its first product to market. The battery-powered implant, called the RNS System, is essentially a microcomputer that continually analyzes a person’s brain waves. It will send, through thin wires snaked deep into the brain, a faint electrical pulse at the first sign of an abnormal pattern, calming the disturbance at the trigger point before it becomes a seizure. It is the first medical device for treatment of epilepsy approved by the Food and Drug Administration (FDA) since 1997. In the United States alone, the company estimates, 400,000 epilepsy patients who don’t respond to drug therapies may potentially benefit. As positive as this company’s story appears to be, NeuroPace’s experience also illustrates why investors might prefer to place their bets on a smartphone app.With clinical data in hand, the company applied for FDA approval in early 2010, but it took the agency nearly four years to grant it.3 “They were nonresponsive, arbitrary, and they didn’t hold to their own timelines. It was close to an adversarial relationship,” says Fischer, who has shepherded products from four different implantable device companies through the FDA’s Premarket Approval (PMA) review process in three decades. “In my mind, it took a lot longer than it should have.” The lengthy review time strained the company’s finances and will continue to pinch until NeuroPace reaches profitability. It took seven rounds of venture capital infusions to get the RNS System approved—money that not only paid for the necessary clinical trials but also kept the company with its 120 employees afloat while awaiting the federal nod. In the wake of the Wall Street collapse of 2008, venture capital investment in all sectors fell by one-third. But like the stock market itself, it has recovered steadily since. The current rush is driven by eye-popping returns in the fields of software, media, and entertainment, such as Facebook’s $21.8 billion acquisition4 last year of venture capital– backed WhatsApp, a tiny, four-year-old instant messaging firm. But the years since the crash have been particularly bleak for aspiring medical device companies, with venture funding levels bottoming out in 2013 at $2.1 billion,1,2 the lowest since 2004. Significantly, medi200
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cal devices are taking a much smaller slice of today’s restored venture capital pie. They accounted for only 7 percent of all venture funds in 2013, compared to 13 percent just four years earlier.1,2 “The climate is still very inhospitable,” says David Nexon, vice president for policy at AdvaMed, a Washington, D.C., trade group for medical technology companies. Given the role of venture capital in funding new medical devices, the industry has been raising the alarm that the United States is in danger of losing its customary edge in innovative health care.5 Nexon describes the level of venture capital investment as a kind of index of attractiveness. “Venture capital,” he says, “is a leading indicator that the whole innovation ecosystem is frayed.” Data from PricewaterhouseCoopers detail the significant slowdown in venture capital investment in medical device companies. From a high of $3.6 billion in 2008, investments in the sector fell a startling 42 percent by 2013.2 During 2014, however, there were signs of a positive change. For the first three quarters, venture investment in medical device firms grew 15 percent compared to the like period one year earlier—a significant turnaround.2 However, the numbers also show that most of the increase is accounted for by a surge in late-stage investments, the kind of cash infusions meant to keep existing companies alive rather than to start new ones. Earlystage investments grew a scant 5 percent.2 Without the means to cash out of young companies as they mature— through initial public offerings or acquisitions—investors and entrepreneurs face a major disincentive to starting new ones. “The big guys in medical devices have stopped buying venturebacked companies,” says Fleming.
Recent Reforms Medical device company executives are fond of referring to 2009–10—when NeuroPace filed its application—as the “nadir” of performance for the FDA’s Center for Devices and Radiological Health (CDRH), the branch that judges the safety and efficacy of their products.6 Under heavy criticism from Congress, the agency responded with a major overhaul. A more industry-friendly CDRH has emerged under Jeffrey Shuren,
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who began pushing for change after he was named its new director in 2010. In its own self-examination that year, the CDRH acknowledged that the review process was plagued by high staff turnover; insufficient training and oversight; a heavy and complex workload; and “unnecessary and/or inconsistent data requirements imposed on device sponsors.”7 Reforms were set in motion in July 2012 with passage8 of the Food and Drug Administration Safety and Innovation Act (FDASIA), and the backlog of applications at the CDRH has been shrinking since then.9 The measure raised user fees, authorizing over the five-year life of the program the collection of $595 million from applicants seeking approval for medical devices. In turn, those fees would cover the cost of adding 200 staffers to help expedite reviews. The CDRH agreed to meet a list of performance goals. “Leadership there is now clearly trying to strike the right balance,” says Fischer. These changes did not occur without a fight. Critics led by the Washington, D.C., consumer group Public Citizen argued that regulation of medical devices was already dangerously lax, and they faulted the industry for spending $33 million on lobbying in 2011, while the new policy was being formed.10 Michael Carome, director of Public Citizen’s Health Research Group, notes that the opposition was grounded in concerns over a spate of more than 4,000 medical device recalls since 2007 and by a series of high-profile medical device failures, such as artificial hip joints that shed metal fragments into surrounding tissue; infusion pumps that shut down or dispensed wrong dosages; and faulty implanted heart defibrillators.10 Carome believes that the 2012 FDASIA legislation represents a “net movement in favor of industry.” He does concede that it “was not as severe a shift as some of us feared,” with some positive changes—such as the creation of a unique device identification system that will make it easier to track down devices once they’ve been recalled. Nevertheless, Carome argues, “when you have a system that allows devices to come to market with so little evidence of safety and effectiveness, you are going to expect a certain number of recalls. That’s
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the way it was; that’s the way it still is.” Public Citizen was not alone in raising concerns about the effectiveness of FDA reviews. Most of the recalled products were approved for market under a process called 510(k) designated for products seen as posing a moderate-to-low risk—the overwhelming majority of medical devices considered for approval. In order for a product to be considered under the 510(k) threshold, the manufacturer had to show “substantial equivalence” between the new product and comparable products that are already legally marketed. Yet in 2011 the Institute of Medicine (IOM) issued a report—commissioned by the FDA—that found the 510(k) process so flawed that it urged the FDA to scrap it and replace it completely, instead of trying to reform it. Such a basic threshold, the IOM committee reported, “cannot assure that devices reaching the market are safe and effective.”11 The committee’s chair, David Challoner of the University of Florida, declared, “Simply modifying it again will not help.” The IOM offered no framework for a new system, however, and the FDA has not pursued one. The US medical device industry, on the other hand, argued that the various FDA approval processes were so cumbersome that European countries were approving new products years ahead of the United States. “If you want the latest, greatest stuff, you should probably go to Europe for the treatment, even if it was made by the company down the street,” says Tom Goff, founder of Hancock Medical, a firm in Mountain View, California, developing a device to treat obstructive sleep apnea.
Obstacles Far Beyond The FDA Although the medical device industry welcomes the prospect of a more streamlined FDA approval process, problems in attracting investors run deeper. The economics of the health care system are changing under the industry’s feet. A growing body of evidence suggests that the efforts to “bend the cost curve” down in health care are having an effect. US health care spending has hovered at 17.4 percent of gross domestic product since 2009.12 Spending rose just 3.6 percent to $2.9 trillion in 2013, the fifth consecutive year of unprecedentedly
slow growth.12,13 Consequently, medical device industry leaders are focusing their concern on payers, such as private insurers and the Centers for Medicare and Medicaid Services (CMS), whose decision to cover new products can be as consequential as FDA approvals are. “Reimbursement is the new big issue,” says Ashley Wittorf, vice president of the Emerging Growth Council at AdvaMed, which is proposing a set of reforms to make CMS more open to novel technologies and more transparent in its decision making. Wittorf is concerned by a trend exhibited by both public and private insurers demanding clinical data on new products. “Increased evidence increases cost and increases time to market,” she says. Technology can be a tempting target for cost cutters. A Congressional Budget Office study in 2008 found that technological advances in medical science were the single largest driver of spending growth, responsible for half or more of the vast increase since the 1940s.14 AdvaMed maintains that spending on medical devices has held steady at about 6 percent of the nation’s health care bill and that hospitals and doctors are responsible for the historical growth. “Payers are trying to control health care costs, and the easiest way to do that in the short run is to not pay for things that are new,” says medical device investor Ross Jaffe, of San Francisco, California—based Versant Ventures. That is a short-sighted response, Jaffe adds, because new technologies can reduce costs by trimming hospital stays and making medical care safer and less invasive. The conundrum is that to prove these long-term advantages often requires the same kind of costly clinical evidence that is discouraging venture investment. In response to a changing marketplace, however, companies may have no choice but to invest in additional trials and evidence development. In Austin, Texas, LDR Holdings is celebrating a decision by one of the nation’s largest insurers, UnitedHealthcare, to cover its Mobi-C Cervical Disc for patients suffering from degenerative disk disease in their necks. The company was formed to bring to the US market an artificial disc made of metal alloy and
polymers that had been approved for marketing in France in 2004. In addition to funding years of clinical trials that led to FDA approval in 2013,15 the company also paid for a study that compared Mobi-C disc replacement’s costeffectiveness to that of the surgical alternative, cervical spinal fusion. The results,16 showing that its device was “highly cost-effective,” could bolster its case with both insurers and the surgical community. “It’s a challenge to navigate the private payer environment,” says Joe Ross, vice president for LDR’s global marketing. “We recognized they have to make sound and well-researched decisions, based on evidence.” The Affordable Care Act has accelerated consolidation of health care systems, national contracting, bundled payment, and new forms of financial risk-sharing that raise cost sensitivity among physician groups and hospitals. Decisions to pay for new technologies are often highly decentralized, made by hospital-based physician committees, and weighed against fixed sums of money: If something new comes in, something old must go. Recently, the political winds have been blowing more favorably for medical device makers. Their concern about the FDA approval process struck a chord with Congress. The 2.3 percent excise tax on medical devices is almost certain to be repealed this year. But the shifting economics of health care may pose a bigger challenge, and device makers’ problems may be a bellwether for all stakeholders in the health care system. In this environment, a new model of “value-based” purchasing17 is emerging, which demands metrics and, yes, evidence to determine where health care dollars go. Kelly Slone, vice president for life science policy at the National Venture Capital Association, in Arlington, Virginia, sees an opportunity for a more nuanced coverage system that recognizes the potential of technology to improve outcomes while lowering costs. “We need to create a payment system in both the public and private sectors that will truly value innovation,” she says. ▪ Sabin Russell ([email protected]) is a freelance health and science writer based in San Francisco, California.
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NOTES 1 PricewaterhouseCoopers. MoneyTree life sciences report [Internet]. New York (NY): PwC; 2014 Nov [cited 2014 Dec 30]. Available from: http://www.pwc.com/us/ en/health-industries/ publications/life-sciences-moneytree.jhtml 2 Unpublished analytical work of PricewaterhouseCoopers and the National Venture Capital Association, based on data provided by Thomson Reuters. 3 Food and Drug Administration [Internet]. Silver Spring (MD): FDA; 2013. Press release, FDA approves medical device to treat epilepsy; 2013 Nov 14 [cited 2014 Dec 30]. Available from: http:// www.fda.gov/NewsEvents/News room/PressAnnouncements/ ucm375041.htm 4 Gelles D. Facebook’s $21.8 billion WhatsApp acquisition lost $138 million last year. New York Times. 2014 Oct 28. 5 Advanced Medical Technology Association. Comments on 21st Century Cures: A Call to Action: submitted to the House Energy and Commerce Committee [Internet]. Washington (DC): AdvaMed; 2014 Jun 1 [cited 2014 Dec 30]. Available from: http:// advamed.org/res.download/725 6 Gillenwater T, Calcoen D, Elias L.
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Taking the pulse of medical device regulation and innovation. La Jolla (CA): California Healthcare Institute; 2014 Oct 23 [cited 2014 Dec 30]. Available from: http:// www.chi.org/fdareport/ 7 Food and Drug Administration. Medical device pre-market programs: an overview of FDA actions [Internet]. Silver Spring (MD): FDA; 2011 Nov 12 [cited 2014 Dec 30]. Available from: http:// www.fda.gov/AboutFDA/Centers Offices/OfficeofMedicalProduct sandTobacco/CDRH/CDRH Reports/ucm276272.htm 8 Food and Drug Administration. Medical device user fee amendments 2012 (MDUFA III) [Internet]. Silver Spring (MD): FDA; 2014 Sep 30 [cited 2014 Dec 30]. Available from: http://www.fda .gov/MedicalDevices/Device RegulationandGuidance/ Overview/MDUFAIII/ 9 Food and Drug Administration. Agenda for quarterly meeting on MDUFA III (FY 2013–2017) performance [Internet]. Silver Spring (MD): FDA; 2014 Nov 18 [cited 2014 Dec 30]. Available from: http://www.fda.gov/downloads/ MedicalDevices/Device RegulationandGuidance/ Overview/MedicalDeviceUser FeeandModernizationAct
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MDUFMA/UCM423533.pdf 10 Mouzoon N, Carome M. Substantially unsafe: medical devices pose great threat to patients; safeguards must be strengthened, not weakened [Internet]. Washington (DC): Public Citizen; 2012 Feb 15 [cited 2014 Dec 30]. Available from: http://www .citizen.org/documents/sub stantially-unsafe-medical-devicereport.pdf 11 The National Academies [Internet]. Washington (DC): Institute of Medicine; c2014. Press release, FDA should invest in developing a new regulatory framework to replace flawed 510(k) medical device clearance process; 2011 Jul 29 [cited 2014 Dec 30]. Available from: http://www8.national academies.org/onpinews/news item.aspx?RecordID=13150 12 Centers for Medicare and Medicaid Services. National health expenditure data by type of service and source of funds CY 1960–2013 [Internet]. Baltimore (MD): CMS; [cited 2014 Dec 30]. Available from: http://www.cms.gov/ Research-Statistics-Data-andSystems/Statistics-Trends-andReports/NationalHealthExpend Data/NationalHealthAccounts Historical.html 13 Hartman M, Martin AB, Lassman
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D, Catlin A. National health spending in 2013: growth slows, remains in step with the overall economy. Health Aff (Millwood). 2015;34(1):150–60. Congressional Budget Office. Technological change and the growth of health care spending [Internet]. Washington (DC): CBO; 2008 Jan [cited 2014 Dec 30]. Available from: https:// www.cbo.gov/publication/41665 Food and Drug Administration. 2013 device approvals [Internet]. Silver Spring (MD): FDA; 2014 Jul 23 [cited 2014 Dec 30]. Available from: http://www.fda.gov/ MedicalDevices/Productsand MedicalProcedures/Device ApprovalsandClearances/ Recently-ApprovedDevices/ ucm335803.htm Ament JD, Yang Z, Nunley P, Stone MB, Kim KD. Cost-effectiveness of cervical total disc replacement vs fusion for the treatment of 2-level symptomatic degenerative disc disease. JAMA Surg. 2014;149(12):1231–9. Obremskey WT, Dail T, Jahangir AA. Value-based purchasing of medical devices. Clin Orthop Relat Res. 2012;470(4):1054–64.
The online version of this article, along with updated information and services, is available at: http://content.healthaffairs.org/content/34/2/199.full.html
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Health Affairs is published monthly by Project HOPE at 7500 Old Georgetown Road, Suite 600, Bethesda, MD 20814-6133. Copyright © 2015 by Project HOPE - The People-to-People Health Foundation. As provided by United States copyright law (Title 17, U.S. Code), no part of Health Affairs may be reproduced, displayed, or transmitted in any form or by any means, electronic or mechanical, including photocopying or by information storage or retrieval systems, without prior written permission from the Publisher. All rights reserved.
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Entry Point
Money matters: Zach Zwirko at work in the Cambridge, Massachusetts, lab of biomedical company Foundation Medicine. Life sciences firms that develop new and innovative medical devices are finding it harder to attract investments from venture capital firms. doi:
10.1377/hlthaff.2014.1442
Investor Drought And Regulatory Headwinds Slow Device Innovation Is venture capital’s waning interest in medical devices a bellwether for innovation in a new health care economy? BY SABIN RUSSELL
V
enture capital is a gilded corner of the financial world where wealthy people and institutions trade higher risk for the prospect of outsize returns. In 2013 a resurgent US venture capital industry invested $29.8 billion1,2 in young companies, anticipating a big payback in the form of an
eventual acquisition or a successful initial public offering. The revival continues. In just the first three quarters of 2014, total venture investing soared above $33 billion.1,2 Left out of this latest excitement, however, are some of the traditional mainstays of venture capital portfolios: the developers of new and innovative medi-
Photograph by David L. Ryan/Boston Globe via Getty Images
cal devices. The medical technology sector is a huge and diverse field, with products that range from tongue depressors to positron emission tomography (PET) scanning equipment. At the high-tech end, today’s minimally invasive surgical instruments, cardiovascular stents, imaging systems, and glucose monitors owe their origins to venture-financed entrepreneurs. It is a business now struggling to find its place in a new economic environment, and the fast track from startup to acquisition by a larger company seems rutted and muddied. “For five years, this industry has been in a world of hurt,” says longtime venture capital investor Jonathan Fleming, president of the Network for Excellence in Health Innovation, a think tank in Cambridge, Massachusetts. For a variety of reasons, venture capitalists are shifting their bets toward different sectors. Richer and quicker returns beckon in social media. A medical device excise tax and regulatory hurdles add time, money, and uncertainty to the market for new medical devices. And, say industry leaders, the tectonic shifts in the US health care system that have slowed the growth of spending are making it harder for companies with new medical devices to sell them to costsensitive hospitals and health care systems or to find reimbursement from Medicare and private insurers.
A Long Journey Even for seasoned medical device entrepreneurs, navigating the financial and regulatory waters has been treacherous. Fourteen years ago industry veteran Frank Fischer was hired as CEO of NeuroPace Inc., a young company previously launched with $3 million in venture seed investments. NeuroPace developed a compact electronic device that is surgically implanted in the skull and then is programmed to reduce seizures in patients with epilepsy. Since NeuroPace’s founding in 1997, it has raised $230 million in venture capital financing; conducted three extensive clinical trials; survived years of review from federal regulators; and finally
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Entry Point brought its first product to market. The battery-powered implant, called the RNS System, is essentially a microcomputer that continually analyzes a person’s brain waves. It will send, through thin wires snaked deep into the brain, a faint electrical pulse at the first sign of an abnormal pattern, calming the disturbance at the trigger point before it becomes a seizure. It is the first medical device for treatment of epilepsy approved by the Food and Drug Administration (FDA) since 1997. In the United States alone, the company estimates, 400,000 epilepsy patients who don’t respond to drug therapies may potentially benefit. As positive as this company’s story appears to be, NeuroPace’s experience also illustrates why investors might prefer to place their bets on a smartphone app.With clinical data in hand, the company applied for FDA approval in early 2010, but it took the agency nearly four years to grant it.3 “They were nonresponsive, arbitrary, and they didn’t hold to their own timelines. It was close to an adversarial relationship,” says Fischer, who has shepherded products from four different implantable device companies through the FDA’s Premarket Approval (PMA) review process in three decades. “In my mind, it took a lot longer than it should have.” The lengthy review time strained the company’s finances and will continue to pinch until NeuroPace reaches profitability. It took seven rounds of venture capital infusions to get the RNS System approved—money that not only paid for the necessary clinical trials but also kept the company with its 120 employees afloat while awaiting the federal nod. In the wake of the Wall Street collapse of 2008, venture capital investment in all sectors fell by one-third. But like the stock market itself, it has recovered steadily since. The current rush is driven by eye-popping returns in the fields of software, media, and entertainment, such as Facebook’s $21.8 billion acquisition4 last year of venture capital– backed WhatsApp, a tiny, four-year-old instant messaging firm. But the years since the crash have been particularly bleak for aspiring medical device companies, with venture funding levels bottoming out in 2013 at $2.1 billion,1,2 the lowest since 2004. Significantly, medi200
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cal devices are taking a much smaller slice of today’s restored venture capital pie. They accounted for only 7 percent of all venture funds in 2013, compared to 13 percent just four years earlier.1,2 “The climate is still very inhospitable,” says David Nexon, vice president for policy at AdvaMed, a Washington, D.C., trade group for medical technology companies. Given the role of venture capital in funding new medical devices, the industry has been raising the alarm that the United States is in danger of losing its customary edge in innovative health care.5 Nexon describes the level of venture capital investment as a kind of index of attractiveness. “Venture capital,” he says, “is a leading indicator that the whole innovation ecosystem is frayed.” Data from PricewaterhouseCoopers detail the significant slowdown in venture capital investment in medical device companies. From a high of $3.6 billion in 2008, investments in the sector fell a startling 42 percent by 2013.2 During 2014, however, there were signs of a positive change. For the first three quarters, venture investment in medical device firms grew 15 percent compared to the like period one year earlier—a significant turnaround.2 However, the numbers also show that most of the increase is accounted for by a surge in late-stage investments, the kind of cash infusions meant to keep existing companies alive rather than to start new ones. Earlystage investments grew a scant 5 percent.2 Without the means to cash out of young companies as they mature— through initial public offerings or acquisitions—investors and entrepreneurs face a major disincentive to starting new ones. “The big guys in medical devices have stopped buying venturebacked companies,” says Fleming.
Recent Reforms Medical device company executives are fond of referring to 2009–10—when NeuroPace filed its application—as the “nadir” of performance for the FDA’s Center for Devices and Radiological Health (CDRH), the branch that judges the safety and efficacy of their products.6 Under heavy criticism from Congress, the agency responded with a major overhaul. A more industry-friendly CDRH has emerged under Jeffrey Shuren,
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who began pushing for change after he was named its new director in 2010. In its own self-examination that year, the CDRH acknowledged that the review process was plagued by high staff turnover; insufficient training and oversight; a heavy and complex workload; and “unnecessary and/or inconsistent data requirements imposed on device sponsors.”7 Reforms were set in motion in July 2012 with passage8 of the Food and Drug Administration Safety and Innovation Act (FDASIA), and the backlog of applications at the CDRH has been shrinking since then.9 The measure raised user fees, authorizing over the five-year life of the program the collection of $595 million from applicants seeking approval for medical devices. In turn, those fees would cover the cost of adding 200 staffers to help expedite reviews. The CDRH agreed to meet a list of performance goals. “Leadership there is now clearly trying to strike the right balance,” says Fischer. These changes did not occur without a fight. Critics led by the Washington, D.C., consumer group Public Citizen argued that regulation of medical devices was already dangerously lax, and they faulted the industry for spending $33 million on lobbying in 2011, while the new policy was being formed.10 Michael Carome, director of Public Citizen’s Health Research Group, notes that the opposition was grounded in concerns over a spate of more than 4,000 medical device recalls since 2007 and by a series of high-profile medical device failures, such as artificial hip joints that shed metal fragments into surrounding tissue; infusion pumps that shut down or dispensed wrong dosages; and faulty implanted heart defibrillators.10 Carome believes that the 2012 FDASIA legislation represents a “net movement in favor of industry.” He does concede that it “was not as severe a shift as some of us feared,” with some positive changes—such as the creation of a unique device identification system that will make it easier to track down devices once they’ve been recalled. Nevertheless, Carome argues, “when you have a system that allows devices to come to market with so little evidence of safety and effectiveness, you are going to expect a certain number of recalls. That’s
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the way it was; that’s the way it still is.” Public Citizen was not alone in raising concerns about the effectiveness of FDA reviews. Most of the recalled products were approved for market under a process called 510(k) designated for products seen as posing a moderate-to-low risk—the overwhelming majority of medical devices considered for approval. In order for a product to be considered under the 510(k) threshold, the manufacturer had to show “substantial equivalence” between the new product and comparable products that are already legally marketed. Yet in 2011 the Institute of Medicine (IOM) issued a report—commissioned by the FDA—that found the 510(k) process so flawed that it urged the FDA to scrap it and replace it completely, instead of trying to reform it. Such a basic threshold, the IOM committee reported, “cannot assure that devices reaching the market are safe and effective.”11 The committee’s chair, David Challoner of the University of Florida, declared, “Simply modifying it again will not help.” The IOM offered no framework for a new system, however, and the FDA has not pursued one. The US medical device industry, on the other hand, argued that the various FDA approval processes were so cumbersome that European countries were approving new products years ahead of the United States. “If you want the latest, greatest stuff, you should probably go to Europe for the treatment, even if it was made by the company down the street,” says Tom Goff, founder of Hancock Medical, a firm in Mountain View, California, developing a device to treat obstructive sleep apnea.
Obstacles Far Beyond The FDA Although the medical device industry welcomes the prospect of a more streamlined FDA approval process, problems in attracting investors run deeper. The economics of the health care system are changing under the industry’s feet. A growing body of evidence suggests that the efforts to “bend the cost curve” down in health care are having an effect. US health care spending has hovered at 17.4 percent of gross domestic product since 2009.12 Spending rose just 3.6 percent to $2.9 trillion in 2013, the fifth consecutive year of unprecedentedly
slow growth.12,13 Consequently, medical device industry leaders are focusing their concern on payers, such as private insurers and the Centers for Medicare and Medicaid Services (CMS), whose decision to cover new products can be as consequential as FDA approvals are. “Reimbursement is the new big issue,” says Ashley Wittorf, vice president of the Emerging Growth Council at AdvaMed, which is proposing a set of reforms to make CMS more open to novel technologies and more transparent in its decision making. Wittorf is concerned by a trend exhibited by both public and private insurers demanding clinical data on new products. “Increased evidence increases cost and increases time to market,” she says. Technology can be a tempting target for cost cutters. A Congressional Budget Office study in 2008 found that technological advances in medical science were the single largest driver of spending growth, responsible for half or more of the vast increase since the 1940s.14 AdvaMed maintains that spending on medical devices has held steady at about 6 percent of the nation’s health care bill and that hospitals and doctors are responsible for the historical growth. “Payers are trying to control health care costs, and the easiest way to do that in the short run is to not pay for things that are new,” says medical device investor Ross Jaffe, of San Francisco, California—based Versant Ventures. That is a short-sighted response, Jaffe adds, because new technologies can reduce costs by trimming hospital stays and making medical care safer and less invasive. The conundrum is that to prove these long-term advantages often requires the same kind of costly clinical evidence that is discouraging venture investment. In response to a changing marketplace, however, companies may have no choice but to invest in additional trials and evidence development. In Austin, Texas, LDR Holdings is celebrating a decision by one of the nation’s largest insurers, UnitedHealthcare, to cover its Mobi-C Cervical Disc for patients suffering from degenerative disk disease in their necks. The company was formed to bring to the US market an artificial disc made of metal alloy and
polymers that had been approved for marketing in France in 2004. In addition to funding years of clinical trials that led to FDA approval in 2013,15 the company also paid for a study that compared Mobi-C disc replacement’s costeffectiveness to that of the surgical alternative, cervical spinal fusion. The results,16 showing that its device was “highly cost-effective,” could bolster its case with both insurers and the surgical community. “It’s a challenge to navigate the private payer environment,” says Joe Ross, vice president for LDR’s global marketing. “We recognized they have to make sound and well-researched decisions, based on evidence.” The Affordable Care Act has accelerated consolidation of health care systems, national contracting, bundled payment, and new forms of financial risk-sharing that raise cost sensitivity among physician groups and hospitals. Decisions to pay for new technologies are often highly decentralized, made by hospital-based physician committees, and weighed against fixed sums of money: If something new comes in, something old must go. Recently, the political winds have been blowing more favorably for medical device makers. Their concern about the FDA approval process struck a chord with Congress. The 2.3 percent excise tax on medical devices is almost certain to be repealed this year. But the shifting economics of health care may pose a bigger challenge, and device makers’ problems may be a bellwether for all stakeholders in the health care system. In this environment, a new model of “value-based” purchasing17 is emerging, which demands metrics and, yes, evidence to determine where health care dollars go. Kelly Slone, vice president for life science policy at the National Venture Capital Association, in Arlington, Virginia, sees an opportunity for a more nuanced coverage system that recognizes the potential of technology to improve outcomes while lowering costs. “We need to create a payment system in both the public and private sectors that will truly value innovation,” she says. ▪ Sabin Russell ([email protected]) is a freelance health and science writer based in San Francisco, California.
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NOTES 1 PricewaterhouseCoopers. MoneyTree life sciences report [Internet]. New York (NY): PwC; 2014 Nov [cited 2014 Dec 30]. Available from: http://www.pwc.com/us/ en/health-industries/ publications/life-sciences-moneytree.jhtml 2 Unpublished analytical work of PricewaterhouseCoopers and the National Venture Capital Association, based on data provided by Thomson Reuters. 3 Food and Drug Administration [Internet]. Silver Spring (MD): FDA; 2013. Press release, FDA approves medical device to treat epilepsy; 2013 Nov 14 [cited 2014 Dec 30]. Available from: http:// www.fda.gov/NewsEvents/News room/PressAnnouncements/ ucm375041.htm 4 Gelles D. Facebook’s $21.8 billion WhatsApp acquisition lost $138 million last year. New York Times. 2014 Oct 28. 5 Advanced Medical Technology Association. Comments on 21st Century Cures: A Call to Action: submitted to the House Energy and Commerce Committee [Internet]. Washington (DC): AdvaMed; 2014 Jun 1 [cited 2014 Dec 30]. Available from: http:// advamed.org/res.download/725 6 Gillenwater T, Calcoen D, Elias L.
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Taking the pulse of medical device regulation and innovation. La Jolla (CA): California Healthcare Institute; 2014 Oct 23 [cited 2014 Dec 30]. Available from: http:// www.chi.org/fdareport/ 7 Food and Drug Administration. Medical device pre-market programs: an overview of FDA actions [Internet]. Silver Spring (MD): FDA; 2011 Nov 12 [cited 2014 Dec 30]. Available from: http:// www.fda.gov/AboutFDA/Centers Offices/OfficeofMedicalProduct sandTobacco/CDRH/CDRH Reports/ucm276272.htm 8 Food and Drug Administration. Medical device user fee amendments 2012 (MDUFA III) [Internet]. Silver Spring (MD): FDA; 2014 Sep 30 [cited 2014 Dec 30]. Available from: http://www.fda .gov/MedicalDevices/Device RegulationandGuidance/ Overview/MDUFAIII/ 9 Food and Drug Administration. Agenda for quarterly meeting on MDUFA III (FY 2013–2017) performance [Internet]. Silver Spring (MD): FDA; 2014 Nov 18 [cited 2014 Dec 30]. Available from: http://www.fda.gov/downloads/ MedicalDevices/Device RegulationandGuidance/ Overview/MedicalDeviceUser FeeandModernizationAct
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MDUFMA/UCM423533.pdf 10 Mouzoon N, Carome M. Substantially unsafe: medical devices pose great threat to patients; safeguards must be strengthened, not weakened [Internet]. Washington (DC): Public Citizen; 2012 Feb 15 [cited 2014 Dec 30]. Available from: http://www .citizen.org/documents/sub stantially-unsafe-medical-devicereport.pdf 11 The National Academies [Internet]. Washington (DC): Institute of Medicine; c2014. Press release, FDA should invest in developing a new regulatory framework to replace flawed 510(k) medical device clearance process; 2011 Jul 29 [cited 2014 Dec 30]. Available from: http://www8.national academies.org/onpinews/news item.aspx?RecordID=13150 12 Centers for Medicare and Medicaid Services. National health expenditure data by type of service and source of funds CY 1960–2013 [Internet]. Baltimore (MD): CMS; [cited 2014 Dec 30]. Available from: http://www.cms.gov/ Research-Statistics-Data-andSystems/Statistics-Trends-andReports/NationalHealthExpend Data/NationalHealthAccounts Historical.html 13 Hartman M, Martin AB, Lassman
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D, Catlin A. National health spending in 2013: growth slows, remains in step with the overall economy. Health Aff (Millwood). 2015;34(1):150–60. Congressional Budget Office. Technological change and the growth of health care spending [Internet]. Washington (DC): CBO; 2008 Jan [cited 2014 Dec 30]. Available from: https:// www.cbo.gov/publication/41665 Food and Drug Administration. 2013 device approvals [Internet]. Silver Spring (MD): FDA; 2014 Jul 23 [cited 2014 Dec 30]. Available from: http://www.fda.gov/ MedicalDevices/Productsand MedicalProcedures/Device ApprovalsandClearances/ Recently-ApprovedDevices/ ucm335803.htm Ament JD, Yang Z, Nunley P, Stone MB, Kim KD. Cost-effectiveness of cervical total disc replacement vs fusion for the treatment of 2-level symptomatic degenerative disc disease. JAMA Surg. 2014;149(12):1231–9. Obremskey WT, Dail T, Jahangir AA. Value-based purchasing of medical devices. Clin Orthop Relat Res. 2012;470(4):1054–64.
