MINNEAPOLIS — A panel at the IBF Med-Tech Investing conference here in May discussed the role of evidence-based medicine and comparative effectiveness in developing medical policy. The panel that consisted largely of medical directors also discussed the challenges that medical directors face today and the best strategies for communicating with them and what should be avoided. The 8th annual conference was co-presented by International Business Forum (IBF; Massapequa, New York) and LifeScience Alley (St. Louis Park, Minnesota).
Expressing a hope that no audience members would be throwing "stone and sticks," Brent O'Connell, panel moderator and chief medical officer at Argenta TEC Advisors (Woodbury, Minnesota), acknowledged he and the other panel members were the people responsible for making the policy and making technology evaluations, "we're the people that actually have a lot to do with your success as investors and in the success of your products."
As an example of how an insurance company decides to cover new products, Elizabeth Brown, MD, a board-certified pathologist in Woodbury, Minnesota, described the five technology evaluation center criteria used by Blue Cross Blue Shield (Chicago) to assess whether a technology improves health outcomes such as length of life, quality of life and functional ability.
The criteria are:
— The technology must have final approval from the appropriate governmental regulatory bodies.
— The scientific evidence must permit conclusions concerning the effect of the technology on health outcomes.
— The technology must improve the net health outcome.
— The technology must be as beneficial as any established alternatives.
— The improvement must be attainable outside the investigational settings.
Brown noted that nowhere in these Blue Cross criteria is there any mention of cost. she said that once the organization decides to prioritize something and look at it through its technology evaluation, "cost goes out the window."
Fiona Wilmot, a principal at the Glas Group (San Francisco) and a former medical director for Blue Shield of California, stressed that while an FDA approval is important in making a coverage decision, it doesn't mean that the product is assured of coverage by Blue Shield. FDA approval "is considered a floor, not a ceiling," for the coverage decision, she said.
At the health plan, Wilmot said, "we look at the bigger picture." By this, she said other options available to the patient are looked at. She also noted that sometimes good evidence is lacking when it comes time to evaluate the benefit of new technology on health outcomes. However, she acknowledged that when CMS makes a coverage decision "it's very hard to be in opposition to that unless the evidence is very at odds with that."
Brown concurred that many new product candidates vying for coverage often fail the good scientific evidence test. "You have to define the outcome of what is going to be of the greatest interest to the plan and the payer and define what type of data are going to be required to meet that outcome."
As to the data itself, Wilmot acknowledged that much of it comes from company sponsored trials and that is unavoidable until there becomes a way for more government involvement in the process via heightened sponsorship in trials. However, she noted that the data still need to be "appropriately powered" in order for it to be taken seriously for a positive coverage decision.
O'Connell concurred with Wilmot's assessment of corporate sponsorship of trials. "When I see a study where every one of the 12 authors is an officer of the corporation an investor in the corporation or has done the research as a paid employee of the corporation that's involved, it really raises some doubts." He said it would be a good idea to get some academicians in the mix of the study that don't have any vested interest. "When you go to publish, if everyone has to release their associations, it's a very difficult sell from our perspective as reimbursement advisors to the insurance companies."
An audience question touched on the difficulty of applying these technology criteria to diagnostics, and Brown acknowledged that diagnostic technologies are always a challenge "because you have to define what the outcome is, and a lot of times payers will try to tie the therapeutic outcome to the diagnostic technology."
She said that if a company has a novel diagnostic technology, "it's quite likely that plans are going to want to see that not only does the product change the management of the patient but that the change in management will improve health outcomes, which is obviously very challenging if you don't expect the health outcome to improve for several years."
O'Connell discussed the comparative effectiveness agenda of the Obama administration and noted that most of the money committed to it so far is being used to study how to implement it. "There's a lot of work to be done between now and time we adopt such a radical change in the way that we look at evidence. He added that he thinks comparative effectiveness on a national level is going to be a "slow moving train with changes along the way, but it's still moving down the track and sooner or later we will have something that's acceptable to most people involved."
Brown noted that comparative effectiveness "has always been with us," and insurance companies have already been doing it for years, as evidenced by the Blue Cross technology criteria. "I think the issue is that hopefully we're going to have better data," with more direct vs. indirect data.
Fredrik Tolin, MD, a medical director for Chicago Commercial Market (Chicago), said "cost effectiveness and comparative effectiveness are a very important part" of fixing a broken healthcare system. "As physicians, we would like to think that we look at things totally independent of cost in caring for our patients. The truth is you can't practice that way anymore and we can't approach technology that way anymore."
Wilmot said she sees comparative effectiveness as a good thing and that it will accelerate rather than squelch innovation. "The way I see it is that it's actually going to channel innovation so that there's more successes. I think in the best possible world, it will make the criteria evidentiary standards very clear and that way you'll know where you are along the way with that."
Wilmont mentioned that it's possible to game the system to avoid the technology review. Some examples she cited included high volume, low-cost diagnostics testing products and testing done in doctors' offices. "One of the ways to keep things moving is to stay under the radar," by avoiding all the reviews.
If something is low cost, it's not worth going to the trouble of reviewing it, Brown concurred. "If it's low cost and fits under an existing CPT code that's not going to draw their attention, then it's just going to be under the radar and payers aren't going to choose to try and manage it under any normal mechanisms."
Entrepreneurs explore ways to innovate
Providing a different perspective from the majority of the presenters, as well as what was perhaps the most consistently interesting panel of the conference, was a group comprised of five serial entrepreneurs with experience in the healthcare field.
The panel consisted of people who provide the leadership in the trenches of any company, and several of them have worn many hats including entrepreneurs, founders and operating officers to name but a few.
In today's challenging financial climate, panel moderator William Kaufman, a partner in the corporate finance and transactions group of law firm Oppenheimer Wolff & Donnelley (Minneapolis), asked the panel what it takes today to create a successful new company.
The "perfect company," according to Mike Berman, medical device venture catalyst at Berman Medical (Minnetonka, Minnesota) who currently serves on the board of 11 emerging medical companies, would have a potential multi-million-dollar market; with airtight patents; would not require a PMA; quick to market; not need to raise to much money; have little competition.
"If you can get all those things," he deadpanned, "you're going to have winner."
"Good people and good advice always go a long way," said Rich Lunsford, president/CEO of Acorn Vascular (St. Paul, Minnesota), a company that has developed the CorCap, a mesh wrap implanted around the heart to provide ventricular support. He also noted that success in one field of healthcare can transfer that to a company in a different field. "People who do well in one specialty will do well in another specialty."
A lot of the focus in early stage companies, according to AMS (Minnetonka, Minnesota) COO Ross Longhini, is on the technologies and not on the market for the technology.
"I think we need be more cognizant of the markets we're entering into and how the customers are different than just physicians." By that he said he meant looking at the hospitals, insurers and regulatory bodies around the world that are actually going to pay for the new products and not just the doctors who are looking for some cool new toys for their practice.
"I believe that the entire market that you're trying to serve has to take a tremendous amount of precedence over neat technology."
Dan Sullivan, president/CEO of superDimension (Minneapolis), whose minimally-invasive inReach system is designed to enable doctors to diagnose lung cancer at earlier stages and potentially provide treatment sooner, said that an entrepreneur must have a very clear vision of what they are going to do with a company from day one in order for it to succeed "or your already behind the 8 ball."
He said that 30 years ago when the med-tech industry was still in its infancy you could concoct something in you garage and then go out and sell it. "You can't do that anymore," he said.
Lunsford agreed with the general assessment that it's a 510(k) world now and that PMAs are unpredictable and potentially very costly. "You can do exactly what the FDA wants you to do and get to the panel and get a whole new scenario."
Lunsford is no stranger to the potential pitfalls of the PMA pathway. His company's CorCap cardiac support device was not recommended for approval by an FDA panel in June 2005. Another setback came in December 2006 when an FDA dispute resolution panel rejected the company's appeal for CorCap, saying that more study was needed to prove the device is safe and effective when used on patients. The company reached an agreement with the FDA for a new clinical trial in May of last year.
Berman said not to expect any help from large-cap med-tech companies to help lower some of the barriers for pursuing PMAs in the public policy realm. "It is absolutely in the keen self-interest of the large caps who already have PMAs approved to keep those PMA barriers up and growing."
Regardless of what clinical regulatory pathway one pursues, Lunsford stressed the need for as much good clinical data as a company can muster coupled with a substantive reimbursement plan. "You can't wait down the road . . . that's something that has to be done at the very beginning and incorporate the clinical data that you have so that you can utilize that to help you with your reimbursement plan."
If a product is only useful to a very highly skilled subset of doctors, Longhini said that could be a problem for a company. By catering to only the most highly skilled surgeons, a company shrinks its potential market size, even if they are really cool devices and provide good results. "If you say only the best of the best physicians can use this product, I for one would walk away from those products."
Berman said that that mantra about volume depends on the average selling price of a product. He cited the emerging percutaneous heart valve market and the neuro aneurysm market as two businesses that may not see a lot of volume, but have expensive capital equipment that makes them "nice little business."
One key ingredient to a successful company is hiring and keeping talented people. And at a smaller company the CEO is especially important because he or she sets the tone for the culture there. "From a board perspective, who your CEO is frankly is the most important decision you can make," said Berman. "There are lots of curveballs that come towards the company and what you original plan is generally changes."
Given the difficulty of utilizing the IPO as an exit strategy in the current economic climate, Kaufman queried the panel on their vision for an alternative model especially given their leadership role at a company.
"I think the No. 1 thing you need to do if you're running a company is assume that you're going to stand alone forever," said Sullivan. "That implies that you're going to have your act together in every department, even the boring ones that you're not interested in."
He noted that if a company wants Johnson & Johnson (New Brunswick, New Jersey), Medtronic (Minneapolis) or Boston Scientific (Natick, Massachusetts) to acquire them "things have to be perfect." If a company wants to pursue the IPO route, "you're going to have all that stuff up to speed anyway."
Lunsford said not to let the current economic situation discourage exploration in the medical field if you have a good idea. "[There are] plenty of people out there that want to improve medicine and this is group of people that want to get this done, let's rock 'n' roll."
Investment bankers look at challenges
It is a challenging time to be out looking for funding if you are involved in the medical technology sector, but companies aren't the only ones having trouble raising money. Venture capitalists are also struggling to put together funding rounds in some instances, particularly trying to raise money from gun shy institutional investors who are the lifeblood of their business.
Speaking on this topic and the general state of the public and private device market was a panel led by Eric Tardif, senior VP-corporate strategy at Gen Probe (San Diego). Tardif queried a panel of seasoned investment bankers on the probability of later, tougher funding deals in the foreseeable future in the med tech sector.
"I think the VCs are probably going through a lot of the same challenges that healthcare companies and the financing communities are going through," said Jeff Hoffman, managing director and head of West Coast Healthcare for the investment banking arm of J.P. Morgan Securities (New York). "I think the fundraising has been a challenge. Just as in the banking industry. I think you're going to see consolidation in the private equity and the venture community too because there's going to be less capital allocated to it, so it's going to be a smaller universe. It's challenging out there."
Kevin Davies, managing director, co-head of healthcare investment banking at RBC Capital Markets (Toronto), said that he doesn't think there will be a broad window of IPOs as an exit strategy anytime soon in the med-tech industry. He said he was "fairly positive that there will be some IPO activity in med-tech in the next couple of quarters, but it's going to be companies that are real businesses and have significant amounts of revenue." By significant revenue, he said he meant north of $75 million. He added that the possibility of an IPO resurgence depends on what happens in Washington with healthcare reform.
The days of early stage company IPOs are a thing of the past, according to Robert DeSutter, managing director and co-head of healthcare at Piper Jaffray (Minneapolis). "I don't see that kind of profile coming back, period," he said.
Hoffman said he doesn't see the IPO window really opening up until the economy turns around. "It's going to be more than two to three years at a minimum."
DeSutter said he believes that in the next 10 years, "you'll see large buyout groups displace the initial public offering in many instances."
Luke Sarsfield, managing director at Goldman Sachs (New York), noted that M&A activity "has fallen off a cliff," though he noted that the healthcare industry still "has been the most active by far" to continue to pursue that pathway.
Sarsfield said healthcare M&A has been utilized most notably of late by big companies looking to buy growth and technology, "and accessing it through startups and smaller companies." He said that while smaller companies are struggling to raise money, larger companies with good credit ratings have access to funds at "very attractive rates," which is helping to spur the mini buying spree for these bigger companies.
Hoffman noted that just as in housing, "it is a buyer's market," when it comes to M&A. He said he has seen "multiple, multiple big-cap companies walk away and be very disciplined to a lot of deals" if they think that the valuation the seller is requesting is too high. He noted that there's currently no real threat of an IPO and in the med-tech world, there are only a handful of really big companies with the means to make some of these deals.
His advice to a seller is to "think more reasonably about valuation."
In response to a query by Tardiff about potential new pockets of capital, Hoffman said companies shouldn't be shy about looking into getting some of the grants offered in the new federal stimulus package. "They're ways to offset trials and R&D costs," he said.
While not a new pocket of capital, DeSutter noted that venture-backed debt has become a much more popular tool of the private equity community. He said that it used to be a $2 million to $3 million tranche in a private company's capital structure, but it's now anywhere between $15 million and $18 million. "It's a very viable bridge or equity enhancer to a VC and I think that's here to stay."
Tardif asked the panel what a company needs to do to maximize its chances of raising money in this challenging financial environment.
Hoffman said it is critical to start looking for money up to a year before you need it, since it's going to take three to six months to get it and to "take more money than you think you need, not less."
Sarsfield said that capital is no longer viewed as a simple commodity. Instead, he suggested that a company ask itself the question, "What's the all in cost of that capital?"
He said this involves looking at the people that you will be working with and the board members that a company inherits with a fund-raise. "It's got to be more than just the spot economics of the trade and you have to look at it as a financial relationship that's as important as any strategic or corporate relationship."
Past trends boost optimism on sector
The tone of the talks at this year's conference was generally upbeat, considering the consistently gloomy state of the economy.
The general take-away was that there is a glimmer of positive financial light at the end of the tunnel. That optimism was further bolstered by Federal Reserve Chairman Ben Bernanke's remarks just prior to the gathering that he expects the recession to end later this year.
Providing data that both affirmed and refuted some of that financial optimism as it relates to the med tech field was Ralph Weinberger, a partner in the Technology Industry Group at PriceWaterhouseCoopers (PWC; New York). He discussed the state of med tech venture capital trends and used data from PWC's MoneyTree survey of quarterly venture capital activity.
In 1Q09, the life sciences sector (biotechnology and medical devices combined) experienced a 40% decline in terms of dollars and a 31% drop in deals with $989 million going into 133 rounds. Investment in biotechnology fell 46% to $577 million in the quarter, while medical device investments fell 27% to $412 million.
Investments in life sciences companies, Weinberger noted, represented 33% of all investment dollars and 24% of all deals in the first quarter, which is in line with historical norms.
Weinberger called the drop in medical device investments a "precipitous decline," but said that despite that drop, medical devices have "come back into favor" with investors, and that about 13.7% of all venture capital investment dollars went into device deals in 1Q09.
If historical indications are indicative of future opportunity, Weinberger said that the most recent decline in medical device investment maypresage a rally for the industry in the near term as it did after the most recent downturn in the sector in 2000.
"Perhaps this speaks well of some opportunities for the sector and maybe foretells of another disproportionate run up for medical devices from here, we'll have to see," he said. That being said, Weinberger pointed out that valuations are down right now "and they're going to stay down for awhile."
While Weinberger said that the trend has been upward for the amount of money provided in med-tech funding deals, much of that money is going to existing deals and not seed and early-stage companies, the lifeblood of the industry.
Between 2003 and 2006, Weinberger said the trend had been for ever-increasing amounts of money going to those early-stage companies. That all changed in 2007 and the decline has continued into 1Q09. "This is telling us that the available dollars that these venture capital funds have, many of them have to be committed to existing deals, so for the first time in quite awhile we're seeing a decline in the percentage of deals that are being funded that are seed and start-up.
Another way to look at that data is to see what funding rounds or tranches that the money is going into in the sector. In 2008, Weinberger said that more than 49% of all VC money went to deals that were in their fifth round or higher. Contrast that with 1997, a good year for IPOs in the sector, in which only 21% of the money was going to funding deals in the fifth round or later.
"It's going to be tough for awhile for the earlier-stage deals to achieve venture capital funding," Weinberger said, but there is "cause for optimism" that the device industry will rebound in the not-too-distant future."
FDA goal is to bring products to market
In what conference organizers billed as a fireside chat – complete with a virtual log fire on two big screens – Don St. Pierre, associate director for policy and operations at the Center for Devices and Radiologic Health's (CDRH) Office of In Vitro Diagnostic Device Evaluation and Safety (OVID), discussed potential heightened barriers to the use of the 510(k), including the need for more scientific data for this regulatory pathway.
Mark Duval, president of DuVal & Associates (Minneapolis), asked St. Pierre, if all the changes coming about with the new administration are having any sort of negative impact on staff at FDA. St. Pierre, who has extensive experience at the FDA first as a field engineer testing medical devices at CDRH laboratories and then as a branch chief and deputy director of the division of clinical laboratory devices and deputy director for new device evaluation in the office of OVID, said "nobody likes you anyway" when you're a regulator, and while changes are coming because of new policy priorities by the Obama administration, "most of the changes will, I think, reinforce what's already there."
Duval asked St. Pierre if his staff appreciates the FDA credo to protect and promote, and interestingly, he said most staff would say their mission is to promote and protect. "We wanted to emphasize the promotion of public health. It's getting good product out into the market quickly."
Duval said while he was encouraged to hear St. Pierre's take on the mission of FDA, he said that recently when he has gone before staff from the agency on behalf of clients, he felt he was constantly reminding them of their responsibilities. He said that when he brings in confirmatory clinical data on behalf of a client for a potential 510(k), he invariably finds that the staff starts with a commentary of the clinical trial data as if it's a pivotal clinical trial for a PMA. I find that problematic."
St. Pierre asserted that it's not a given that all 510(k)s have to have data. "Last time I checked, more than 85% of 510(k)s don't have clinical data," though he allowed that in vitro diagnostics(IVD), for which his office is responsible for, do mostly have clinical data, but in that industry there are many repositories for banked specimens "so it's a little bit easier."
One of the biggest problems that St. Pierre said he sees with 510(k) submissions is a sponsor's lack of willingness to be completely honest about the company's true intent for a product up front. He said he can sense it when they come into the room. The sense he gets is "I don't want to tell you exactly what I want to use this for because if I do then you're going to start to ask all sorts of questions."
Starting with less than complete candor can be quite detrimental to the company in this position said St. Pierre. He suggested that companies should enter into discussions with FDA before they even make their 510(k) submission so that everyone is on the same page and the agency can do a better job of understanding what the product patient population is going to be. It's better to work on those issues on the front end than waiting until one gets before a panel and getting shot down then on their application.
St. Pierre said his organization is often unfairly looked at as the boogeyman by the industry, when in fact FDA is only a "first step" in the process of getting a product to market. "The products still have to demonstrate their use in the clinical practice and if they do, hopefully they'll get reimbursed better."
When asked by Duval about a staff member's response to getting outranked in a decision process, via a company seeking an opinion from someone higher up the chain of command, St. Pierre said that staff are trained to expect that and not to deal with it in a petty vengeful way. Where problems can occur, he said, is when a staff member feels that a company is telling a different story to his or her superior to what they were told by the same group.
The best time to make that decision to talk to a superior, he said is during the review process "because you can impact" the decisions as far a product is concerned much more effectively. "If you're going to go up the line, just be transparent and honest. Don't go behind the back" of the staff.
St. Pierre that contrary to what some people might think, the agency does not take delight in issuing Not Substantially Equivalent (NSE) letters on proposed 501(k)s. "An NSE decision is just a total waste of time," he said. "All the energy put in by the company and by the FDA staff. When you get to an NSE, nobody benefits at all."
He said that there is only a 3% to 5% NSE issuance rate at the agency, and some companies are able to go the de novo route. A De Novo provides a possible route to market low risk device types. The de novo process is intended to apply to low-risk products that have been classified as class III because they were found NSE to any identifiable predicate device. An applicant of a 510(k) who receives a NSE determination placing the device into a Class III category can request a de novo classification of the product into Class I or II
On the issue of the least-burdensome pathway of the FDA Modernization Act of 1997 (FADAMA), St. Pierre said that he's had companies come in with no data and say that's least burdensome. "You're right, he joked, "You got me there."
He said that this really means providing a reasonable least burdensome approach that gets good products to market as quickly as possible. He said that's he's sorry if a clinical trial costs to much when it's warranted to get a device to market, but that doesn't fit into the least burdensome mandate either.
While St. Pierre said that 510(k)s are getting harder to expedite, he blamed that more on the complexity of the devices than anything else. He also noted that because the devices have become more complex in nature, they require more than one reviewer to work on a product, which he said never happened in the 1990s. "So are getting a broader perspective on 510(k)s. There's a perception that the evidence creep is increasing and I think it is and I'm not sure if that's a bad thing, it kind of preserves the program."
St. Pierre said he doesn't buy the argument that because something requires a PMA that it shouldn't be funded by venture capitalists. "I don't know what to do about that," he said.
He said that if one wants the FDA to look favorably on their product "don't talk about how much it's going to cost you to study or how burdensome the study is, come in start your conversation with 'this product is going to add this to patient care, this is how the patient is going to be impacted.'"
St. Pierre said that if the staff comes in and sees what you are saying about the significance of a product "then they are going to work with you to see that happens and that product comes to fruition."