BB&T Washington Editor

WASHINGTON – The Advanced Medical Technology Association (AdvaMed; Washington) made use of its bully pulpit yesterday in a session during which the association's president and board chairman warned that the $40 billion tax on the device industry as embodied in the bill by the Senate Finance constitutes “a really devastating proposal for a large share of our membership.“

Mike Mussallem, the newest board chairman for AdvaMed and the CEO of Edwards Lifesciences (Irvine, California), acknowledged that he had “no idea what kind of year 2009 might be“ when he was voted in as chairman of the AdvaMed board. All that aside, he said of the proposed $40 billion tax, “we don't believe that taxing our industry is a great vehicle“ for covering the Finance Committee bill's costs.

Mussallem noted that the association's members have been “strong proponents of healthcare reform for a long time,“ a reference to the AdvaMed healthcare reform proposal of 2007. “We have been consistently engaged“ with various political leaders and have “tried to offer solid, credible ideas along the way,“ he asserted.

In reference to yesterday's Finance Committee markup of its healthcare reform bill, Mussallem said, “we still feel as though today could be a historical day, but we still have a long way to go“ to get to a final bill that deals with a number of issues, including value-based purchasing and comparative effectiveness research.

Physician payment disclosure is also “an important element that we endorse,“ providing “meaningful information“ regarding ties between industry and physicians, Mussallem said, adding that he is impressed by “the broad level of support for our industry“ as evidenced by the letter from 14 Senate Democrats to the Senate leadership, voicing opposition to the tax.

AdvaMed's President/CEO Steve Ubl acknowledged that Mussallem “really did draw the short straw in assuming the chairmanship“ at a turbulent time. He argued that of all times to impose a tax on the device industry, this is about the worst. “We're facing unprecedented challenges,“ he said, adding that the global economy “has yet to emerge from the worst global recession in 60 years.“

Ubl said, “we continue to believe that it's bad policy“ and is “bad for innovation,“ commenting further that “only in Washington is $40 billion a small amount of money.“ He made the case that firms with sales of less than $100 million will be hit especially hard, adding that research and development is liable to suffer. “This is a really devastating proposal for a large share of our membership,“ he commented.

Ubl also remarked that the device industry is “making an enormous contribution“ even without the tax on industry. He noted that “comparative effectiveness will create winners and losers,“ and the effect of the bill on Medicare will be to trim “hundreds of billions of dollars in reductions“ to payments.

Regarding how many of the 14 Senate Democrats might see the tax as a deal-breaker on the Finance Committee bill, Mussallem said he was “not sure I can specifically speak to that,“ but said the tax is dwarfed by the overall size of the bill's cost provisions. “Unfortunately a number like $40 billion has got a low priority ... and only in Washington could this be the case,“ he said.

When questioned about the reliability of the CBO scoring of the Finance Committee bill, Ubl said, “I think CBO has been pretty conservative actually. We firmly believe that investments in prevention and wellness,“ will have the desired effect on aggregate costs. However, Mussallem acknowledged that the Medicare physician fee schedule under Part B is a legitimate point of concern on the CBO score.

“The SGR experience does raise challenges in that regard,“ Mussallem said in reference to the sustainable growth rate mechanism that is routinely undercut by Congress. He intimated that the SGR is liable to be repealed yet again. “However hard Congress might try to find savings,“ it does not prevent future congresses from “revisiting those savings,“ Mussallem said.

MDMA rings in on industry tax

AdvaMed is not the only industry association that is vehemently opposed to the tax. In an Oct. 8 statement, the board of directors of the Medical Device Manufacturers Association (MDMA; Washington) issued a statement leaving no uncertainty as to the association's position.

According to the statement, the board “unanimously voted to oppose any device tax as part of the healthcare reform bills moving through Congress.“ MDMA's board chairman, Joe Kiani, who is also the CEO of Masimo (Irvine, California), says that MDMA “supports bipartisan legislation to improve patient care, reform the insurance industry and promote prevention and wellness.“ Kiani argues that the tax will slow down that process because of a disproportionate impact on small firms “who work closely with clinicians and engineers to develop the therapies and treatments of tomorrow.“

The MDMA statement indicates that the association's members “met with members of Congress to communicate their concerns about the device tax“ and quotes the association's President/CEO Mark Leahey as stating, “there can be little doubt – the proposed tax will have a cascading effect upon innovation, access to technology and employment in the industry.“

MDMA makes the argument that “given the bundled payment structure, the device industry will already be negatively impacted by $155 billion in cuts to the hospital industry over the next 10 years,“ which MDMA argues “will translate into $15-$17 billion in cuts to the device industry alone.“ MDMA further expects that “proposed cuts in the areas of imaging, durable medical equipment and clinical lab supplies are expected to total approximately $6 billion over 10 years.“

510(k) 'not a rubber stamp or fast-track' process

AdvaMed held a session at its annual meeting titled “Demystifying the 510(k) Process,“ but the mood at the meeting was that if there's anything cryptic about the process, it's not where the process currently stands; it's where the process is headed.

Heather Rosecrans, director of the 510(k) staff at FDA's Center for Devices and Radiological Health, seemed to defend the 510(k) program at one point during her remarks, stating that the process is “not a rubber stamp or a fast-track approval“ procedure. She also pointed out that regulations governing investigational device exemptions apply to clinical trials used to clear 510(k) devices as well as to approve PMA devices.

Regarding the report on the 510(k) program by the Government Accountability Office, Rosecrans said, “the report ... didn't really talk about problems with 510(k)s per se, but with class III devices that had not been reclassified.“ The Medical Device Amendments of 1976 didn't require immediate reclassification at the time the law was passed, she noted, stating further that FDA has “made significant progress“ in the reclassification process. Prior to the GAO analysis, FDA had reclassified 122 of the original 149, Rosecrans said, although GAO undercounted the actual remaining number by seven because their review went back only five years.

Rosecrans reminded attendees that not all the original high-risk devices from 1976 are still in play. “Some of these have fallen into disuse“ owing to technological obsolescence, she said, adding that FDA has nonetheless ordered firms to submit safety and efficacy data on all remaining 27. Firms have done so for all but two and the remaining two are in the works, she said.

Rosecrans also said that GAO and the Office of Inspector General at the Department of Health and Human Services have reviewed the program on several occasions, and she reminded attendees that the Institute of Medicine (IOM; Washington) “will hold two public workshops over the next few months“ pursuant to the report FDA has commissioned from IOM.

The IOM report is expected in roughly 18 months and its delivery will more or less coincide with the next round of negotiations over the FDA user fee programs for the drug and device industries. This co-incidence is driving speculation that any legislation dealing with the 510(k) program may languish until 2011, when Congress could fold it into legislation reauthorizing the user fee programs.

However, Rosecrans cautioned that the agency's next steps will come sooner, including an effort “to tighten up under our existing authority“ under the program. As for periodic reviews of the 510(k) program, she said, “I think everyone should expect that we will constantly review it,“ adding that the agency may conclude, “new administrative, regulatory and even legislative changes may be indicated.“

Patricia Shrader, VP for corporate regulatory policy at Becton Dickinson Diagnostics (Franklin Lakes, New Jersey), also defended the 510(k) process, arguing, “for 30 years, the process has been used successfully by both industry and FDA to get a lot of good products to market“ without undue safety or efficacy issues.

Shrader also hinted that industry was a bit late to the party on this issue. “I think it's fair to say that in 2006, when criticism started to pick up steam, a fair number of us were not too concerned,“ she remarked. However, those reports picked up intensity and frequency over time and have yet to abate despite that the GAO report “didn't find much to criticize“ other than the need to examine the legacy devices from before 1976.

Shrader acknowledged that the flap over the Menaflex 510(k), a device owned by ReGen Biologics (Franklin Lakes, New Jersey), did little to help matters. She said that when she first picked up a copy of FDA's printed communiqu, she was initially “pretty heartened by the report,“ because of its attention to “how the political process got involved and drove the whole thing off track.“ She said her optimism held “until I got to page 15 and I read a section that extrapolated the findings from this one case to the entire process.“

The report by IOM, Shrader said, “could be very helpful provided IOM gets the appropriate expertise,“ but she also stressed the importance that IOM “starts with a neutral position“ and bears in mind that no drug or device review process is flawless.

Shrader noted that FDA is able to ask for as much data “as they feel they need“ in any device application and commented, “the big question ... is are we going to have new legislation, new regulation or administrative changes?“ She also raised the question of “why is the process misunderstood?“ Part of the reason, she said, is that the phrase “substantial equivalence“ is fuzzy because there are several components to the notion.

Still, “to get rid of that [process] and go into a process in which each device is reviewed as a stand-alone is a foolish endeavor,“ Shrader argued. She said industry is worried about lack of predictability and would like to see any changes imposed administratively rather than by legislation.

Shrader also confessed to some concern that FDA – and by implication Congress – will in the end “attack a gnat with a sledgehammer.“

Investors: diagnostics reliable avenue for returns

The outlook for therapeutic devices might look a little shaky in the eyes of many in the venture capital industry, but according to one speaker on the final day of AdvaMed 2009, venture capital (VC) managers are bullish on diagnostics.

Roopom Banerjee, director of investment banking at Leerink Swann (Boston), said that diagnostics historically have been “a mature, slow-growth industry, a place that only large players really played.“ He noted that “on the small cap side, there weren't a lot of notable companies“ involved in times gone by. The lay of the investor land has largely been driven by the fact that diagnostics have traditionally served as “a secondary supporting cast to therapeutics,“ he said, but change is in the wind because research into genomics is feeding diagnostics at least as much as it is therapeutics.

Hence, the expansion of “the right-drug-right-patient“ paradigm “has certainly led to the opportunity for significant expansion“ in investment in diagnostics, which Banerjee said is “expected to go up by four or five times over the next eight to 10 years.“

Banerjee said investors should expect “a quite robust“ merger/acquisition season in the months ahead, especially compared to the level of activity in the last half of 2008 and the first half of 2009, which he described as “the lost year.“ He said the discussion now is more hopeful “because we've turned the corner from one of the worst train wrecks“ in recent economic history.

Despite the overall optimism, Banerjee warned, “we're also seeing a bias toward later-stage assets,“ with potential buyers seeking developers with a revenue stream of about $30 million, whereas half that sum might have sufficed in times gone by.

Diagnostics are doing well because investors see “a large commercial opportunity,“ in part because the concept of the biomarker has acquired a lot of heft in the eyes of physicians, Banerjee observed. Investors are of the view that small firms can do well in diagnostics because in some instances, the “potential is as large as a blockbuster therapeutic,“ he said.

All the same, Banerjee noted that the diagnostics arena is “a very fragmented market,“ and doctors have to be persuaded as to the value of a new product, but it's not just doctors. Formularies are arising that screen out some diagnostics, so hospital administrators have to be sold on them as well.

Banerjee said that while there were relatively few initial public offerings from diagnostic makers toward the beginning of the decade, there has been more activity of late. Inverness Medical (Waltham, Massachusetts) “has been on quite the acquisition spree in the last couple of years,“ he said, but Inverness is not alone. Quest Diagnostics (Madison, New Jersey) and Perkin Elmer (Boston) have both been busy in this sector as well.

Banerjee said the good bets have a few characteristics. A product that is best in its class or meets an unmet need is a good prospect, but so is anything that qualifies as a “disruptive“ technology. However, a firm should not neglect to “establish a reimbursement pathway,“ as well as a strong economic justification to get payers on board, he said.

Commercial adoption hinges on having a product that offers important benefits to hospitals as well as to doctors. Banerjee said that developers and investors consequently have to ask three questions. “Why is it better, why is it cheaper, why should hospitals use it?“

Venture capitalists are getting pickier, he said. “A lot of realism has set in“ about valuation and the amount of time needed to derive that value, Banerjee said. He also stated that while financial markets generally are bouncing back, VC is lagging where healthcare is concerned.

The silver lining is that VCs “like revenues“ and diagnostics offer revenues. “The A-list companies are getting funded,“ Banerjee said. As for whether the days of the one-hit wonder are gone, Banerjee said, “I think the answer is probably no,“ because investors see a strong initial product as key to a company's long-term viability.

Donald St. Pierre, deputy director for pre-market evaluation at the Office of In-Vitro Diagnostics (OIVD) at FDA's Center for Devices and Radiological Health, gave attendees a brief on impending changes at OIVD. “I think the best thing FDA can do in this changing environment is to be predictable.“

St. Pierre said the guidance for in vitro diagnostic multivariate assays (IVDMIAs) is still in development. “We have briefed the commissioner's office ... and it is kind of working its way through,“ he said. However, he declined to offer a due date. “I don't predict [the timing of] guidance documents anymore,“ he said, but added it is impending. “There's general agreement“ at FDA “that this is a reasonable document,“ he reassured the audience.

St. Pierre also tackled the issue of analyte-specific reagents (ASRs) and research-use only (RUO) diagnostics. He told industry, “You did a clever thing. You changed ASR to RUO,“ which he said is “probably not the right thing to do.“ This, he said, is the subject of another guidance that may come out soon to distinguish between the two.

“If it's research, it's research and you shouldn't be using it in a clinical setting,“ St. Pierre asserted. “It's not that RUOs are horrible products,“ he said, but there are no QSR requirements for them and FDA is “a big believer in the quality systems requirements,“ he said. For FDA, this is “a real big thing.“

St. Pierre urged industry to think proactively. “If you have an RUO product ... you should probably start conversations with us“ about the product.

Internal communication still a danger zone

The legal process known as discovery offers defendants many tripwires where internal communication is concerned, not just because of the Thompson and McNulty memos released over the past decade by the Department of Justice. One of the executive sessions held on the first day of AdvaMed 2009, sponsored by the Advanced Medical Technology Association (AdvaMed; Washington), dealt with the topic of internal communications, and the underlying message was “think before you press the 'send' button.“

Nancy Singer, President of Compliance Alliance (Arlington, Virginia), is a former prosecutor with the Department of Justice who worked on a number of cases for FDA. She offered a little employment humor to start the session. “If you don't win 98% of your cases [as a DoJ prosecutor], you're fired,“ she wisecracked.

Singer remarked on some of the more commonplace perceptions of attorneys, noting that an attorney “is not allowed to tell a lie,“ but she acknowledged attorneys are sometimes inclined to “present the facts [so as] to support the client's story.“ This comes as no surprise to fans of legal dramas on television, but hard evidence is nonetheless the primary driver of legal outcomes.

Defense attorneys have a problem with some clients in that those clients have often inadvertently generated and saved the most problematic evidence against them, namely e-mails and other forms of documentation. “Documents are like diamonds,“ Singer observed. “They are precious and they last forever.“

These documents don't have to address egregious ethical violations in order to create headaches. Documents spell out a company's standard operating procedures and woe to the firm that does not hew to it's own SOPs. As many device makers know, those who fail to follow their SOPs often get hung out to dry in warning letters. Singer reminded attendees that if a failure to observe SOPs comes to light in a patient's lawsuit, the damage can be far greater than that imposed by a letter from FDA.

Management's responsibility for all this is difficult to overstate, Singer noted. “For FDA it's the buck stops here,“ she said, using the example of Jack Welch, the former CEO of General Electric (GE; Fairfield, Connecticut). She reminded attendees that GE earned a warning letter for lack of a quality system in connection with its acquisition of Marquette Medical (Milwaukee, Wisconsin) in 1998. She said GE had not had time to rewire the firm's compliance systems between the acquisition and the inspection, but that was no matter where FDA is concerned. The irony was not lost on the media, either, she indicated.

“The lay press and the trade press picked it up because Welch was the guru of quality management,“ Singer said, adding that the press covered the story exhaustively.

Singer posed the question of whether a lawyer would be more peeved by the failure of a client or employer to follow its SOPs, or by a failure to have a procedure covering a function required by regulations. She said that one could make the argument that the answer is a lack of a procedure required by regulations in that it suggests a disregard for regulations, but concluded that most legal counsel would be more frustrated by deviations from existing SOPs. This more effectively conveys that a firm is “not taking the government seriously and you're going through the motions,“ she said.

On the flip side of the documentation coin, the absence of a document can be damning as well when it comes to the details of good manufacturing practices. “From FDA's perspective ... if you didn't document it, it didn't happen,“ Singer shrugged.

Singer spent little time dealing with state liability law, but reminded that “product liability is very expensive“ because a sympathetic jury gives large awards, another reason to carefully dot and cross the appropriate members of the alphabet.

There is no need to spell out the acronym “CYA“ to corporate America, so Singer didn't. She did say, however, that CYA memos typically exacerbate the very headache they are intended to cure because they point directly and loudly to the problem. The process of discovery requires that everything be forwarded to the adversary, so any time the boss writes a CYA memo, “the plaintiff's lawyer is going to see it,“ she said.

Internal documents of all sorts can create headaches not just because of what they say, but also because of who said it. “It's important to distinguish facts from opinions,“ Singer observed, and industry ought to emphasize to employees that they should “write facts in e-mails, not opinions“ to avoid liability.

Telling a jury that the e-mail contained an overstatement that was intended to highlight a perceived problem usually does not work. “'I didn't mean it' is not a very persuasive defense,“ Singer said in reference to courtroom denials of such dramatic statements.

Singer also recommended that industry bear in mind that there is a difference between an expert opinion and the opinion of a layperson regarding whether an adverse event qualifies as a medical device report (MDR). She said that in the case of a disagreement over whether an adverse event qualifies, the two non-experts would do well to shelve their differences and consult a medical expert. If “you have a medical officer making that decision,“ you're on solid ground because “FDA has a tremendous amount of respect for doctors.“

Even something as seemingly harmless as an e-mail to one's spouse or significant other that the “company's stock is doing great,“ could boomerang if your mother-in-law holds shares of your employer's stock. Such a communication may be construed as insider trading, Singer said.

Singer recommended that firms go through these issues with employees regularly, and such sessions might even use samples of e-mails and other documents – submitted anonymously of course – for an exercise as to why something is potentially problematic. She also offered some words of wisdom even when an important regulatory matter is not under consideration. “I should never send an e-mail when angry“ and “I should pause before I hit the send button,“ she said.