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Blood Feud - The Device Battlefield: Will Regulators and Investors Ever Align?

November 2011

It seems like 2011 has brought unprecedented bickering and finger pointing among investors and FDA, across life sciences though most visible recently in the device segment. The rancor has been fueled by persistent bad news in private & public health care venture funding and overall sector R&D productivity losses (though, for instance, 2011 drug approvals are tracking ahead of 2010)… as well as the broader context of double-dip recession fears and intensifying anti-regulatory fervor in the US, particularly as the 2012 election season has heated up. FDA, while acknowledging some missteps, has also dug in its heels and engaged in some verbal combat.

So, what’s really happening and where is it leading? Is anything remotely positive or productive likely to emerge from the morass?

Bearings

For sure, private equity investment in the sector continues to falter as recently reported by (for instance) CB Insights¹:



According to a recent survey from the National Venture Capital Association (an industry lobbying group), close to 40% of 150 participating VC firms reported that life science investments declined during the past three years, with the same proportion planning to reduce sector investment further in the coming three years.² Medical device, accounting for close to half of Q3-11 deal volume (nearly the same in dollars), embodies the trend. The data from a regulatory throughput standpoint is similarly far from encouraging, as 510(k) approvals have fallen over 20% during the past ten years, with PMAs declining 70%.³ This is consistent with what seems to be a squeeze at the top of the funnel, as first-round IDE approvals have also fallen over the past decade, including a reported 43% decline in 2009-2010.⁴ Congruently, NVCA has pointed out that the number of new, venture-backed device companies dropped by 40% (from 118 to 60 firms) from 2008-2010⁵. Reams of equally concerning data are easily culled for the biopharma pipeline.

Not propitious by any stretch. And, of course, despair breeds contempt…

Culpability

Charges lobbed at the agency by a now tightly aligned investor and device industry community point to a range of policy, process, staffing, cultural and communications problems:

• Lack of clarity in guidance overall

• Poorly delineated 510(k) vs. PMA pathway guidelines

• Lack of (or arbitrary) performance standards for trials

• Inconsistency in responses to sponsors

• Personnel turnover and resulting lack of experience

• Overly risk averse approach to new technologies

• Politically influenced

• Significant variability across divisions

The alleged result has been a highly unpredictable regulatory scene that increasingly scares off investment and, ultimately, innovation and employment. To underscore, a slew of unfavorable comparisons to a friendlier EU climate have been made, centered on a European philosophy that medical devices should be treated differently from drugs – that is, via a less onerous and more expedited review process – whereas FDA generally requires a more drug-like pathway, including an efficacy standard. Shorter device approval timelines in Europe, particularly for more sophisticated products, validate the point. Despite this, it has been argued that the EU process is no less safe than that in the US.

For its part, FDA takes some issue and points its own fingers:

• Frequently poor quality applications submitted by sponsors

• Increasingly new & complex devices (requiring greater scrutiny)

• Mandate to evaluate device efficacy

• Need for safety metrics to evolve as new data is generated

• Companies downplaying device safety issues

• Increasing workload

Intractable? Maybe not…

Harbingers

Out of the crossfire have come some unusually introspective acknowledgments from the agency, and even a few tangible initiatives that, on the surface at least, appear productive and well-received by industry and investors. In June testimony, Jeffrey Shuren, Director of the FDA’s Center for Devices and Radiological Health agreed with criticism that “in many areas, insufficient clarity, consistency and predictability” contributes to applicant frustrations and costs. More recently, FDA Commissioner Margaret Hamburg, in addition to often acknowledging unacceptably high costs and long timelines, has introduced a number of new programs geared towards streamlining the approval process for both drugs and devices, including efforts to incorporate industry thinking and guidance into agency policy planning.

On the legislative front, the post August recess period has bustled with bills geared towards improving the review process, again with a focus on device. One notably bi-partisan Senate bill hits on the hot button issue of the “least burdensome” provision in the 1997 FDA Modernization Act (essentially laying out what is necessary to establish safety & efficacy), the language of which industry and the agency long squabbled over. By better defining this bar and effectively preventing the agency from requesting information deemed unrelated or irrelevant, the goal is to alleviate sponsor concerns that FDA exceeds statutory standards by demanding unnecessary and superfluous data. It also tasks the agency with using “all reasonable mechanisms to lessen review times and render regulatory decisions”… open to interpretation for sure, but directionally new and impactful nonetheless, especially when combined with other provisions.⁶

These efforts are clearly subject to political whims, bureaucratic nuances and the like, and thus their fates are far from certain. Still, collectively they do indicate a departure from the status quo and suggest that some combination of investor cage rattling and FDA self prescription has moved the needle in a good direction. The agency deserves some credit on these grounds.

Investors and managers, for their part, would be well served by not losing sight of how private equity and device & biopharma company practices contribute to development productivity falloff. Short investment timelines, poor capital allocation decisions, lack of understanding of translational research, short-sighted milestones, insufficient dossiers, etc. have at best exacerbated the problem, and in the big picture may well be every bit as culpable as regulatory intransigence.

In the words of esteemed Catskill Mountains naturalist John Burroughs, “A man can fail many times, but he isn't a failure until he begins to blame somebody else.”

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About the author: Marc Tomassi is a Managing Director at the Frankel Group. To contact him regarding this post, email blog@frankelgroup.com.

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Works Cited
¹CB Insights - Venture Capital Activity Report (Q3-11)
²Bloomberg (11/06/11)
³FDA data cited by Venture Capital Dispatch, Wall Street Journal (06/24/11)
⁴Senate lawmakers letter to FDA Commissioner Margaret Hamburg (2011)
⁵PricewaterhouseCoopers data cited by the National Venture Capital Association (2011)
⁶The Gray Sheet (10/14/2011)