Medical Device Daily Washington Editor
WASHINGTON — The jittery financial markets might reasonably be expected to trim the availability of venture capital for medical device start-ups, but a session held by the Medical Device Manufacturers Association (MDMA; Washington) last week made clear that venture capitalists (VCs) are more than a little concerned that investment will be profoundly blunted by a convergence of economic and regulatory trends along with recent legislative developments on Capitol Hill, especially patent legislation and comparative effectiveness.
However, another concern is what many perceive as an increasingly unpredictable device approval process at FDA, which many VCs believe is becoming a huge disincentive for investors to get into and stay in med-tech.
MDMA's executive director, Mark Leahy, said the association will co-publish a white paper on the topic of venture capital and new device firms shortly, but he also remarked on "how fragile the venture [capital] ecosystem is." Leahy noted that the device industry is "one of the few industries with a net trade surplus" for the U.S., so Congress and the White House would do well to ensure that policies "should not impede innovation."
According to a statement authored jointly by MDMA and the National Venture Capital Association (NVCA; Arlington), which co-hosted the session and will co-author the white paper, med-tech firms exported roughly $123 billion in products in 2006, "equivalent to 5.5% of the healthcare industry total and representing 2.7%" of the nation's gross domestic product.
The industry is said to directly and indirectly employ about 2 million and despite the fact that the U.S. market consumes more medical devices than any other, "the U.S. is the only net exporter among industrialized nations globally," the statement noted.
Leahy observed that patent issues are back on the VC radar screen yet again, after several recent attempts at patent reform died before ever making it to the Oval Office. Patent reform bills have been introduced into one or both houses of Congress in each of the past four years, and Leahy said a new patent reform bill is likely to have surfaced by the end of this week or the beginning of next week in the House of Representatives. While Leahy expressed concern about provisions in previous iterations of patent reform legislation dealing with apportionment, he asserted that "we're not against apportionment" per se.
In discussing the apportionment debate, Leahy made reference to the 1970 decision in a lawsuit between Georgia Pacific (Atlanta) and U.S. Plywood (now Champion International; Stamford, Connecticut), a case which established a set of 15 standards for determining damages, but some observers are of the view that those standards are too broad, which is part of the impetus behind the apportionment argument.
Leahy also made the case that the political environment makes it difficult for FDA reviewers to deal with new drug and device applications because of worries that those decisions will be second-guessed by members of Congress in the event that an approved product prove to be less than utterly safe.
(The VCs who spoke at the meeting did so on condition of anonymity unless their remarks were subject to review by the speaker. Medical Device Daily has opted to present their remarks without attribution.)
A former physician who now serves as the CEO of a California-based, venture-backed med-tech incubator said "a strong IP (intellectual property) system is essential to our success," but added that he found it "very scary" to ponder some of the holes in the current system.
"The thing that's really scary ... is that our industry is facing a near-perfect storm of issues that threatens the entire process of creating new medical technologies for patients," he said, citing the opacity of the FDA approval process, increasingly stringent reimbursement polices at the Centers for Medicare & Medicaid Services, the general state of the economy, and the prospect that Congress will pass patent reform legislation that mandates apportionment of damages.
This speaker pointed out that novel devices are "created by small groups of individuals who have to convince other people that their technology can change the world." He said that med-tech start-ups "need some help and some understanding in government to appreciate that subtle changes in policy can impact our ability to deliver therapies for patients." He remarked that descriptions of the 510(k) process as a fast-track system "do not mesh with our experience," and noted that many 510(k) applications require clinical studies. "It is easer in some ways [than a PMA]," he said, but argued that the device clearance process hardly constitutes a blank check from FDA.
The president/CEO of another VC-backed, California-based incubator company said "without a strong IP system and strong protections and clear penalties, we won't be able to get our companies funded." He said that start-up device makers and their financial backers are "willing to do extensive trials," but he seconded concerns expressed by Leahy and the first speaker that the prospect of a higher bar for PMAs and 510(k)s and the possibility of degradation of patent protection are "a concern."
Among the other comments heard during the meeting were that industry is in need of "a means of educating the public about risk/benefit trade-offs," so that "Congress does not have to put on a show" to demonstrate that legislators are looking out for the public welfare. However, another participant stated that the med-tech industry has done a poor job of making its case to the American people, pointing out that oil industry giant Mobil (now ExxonMobil; Irving, Texas) paid for space in the editorial pages of the New York Times in the 1970s to make the company's case about oil prices and energy.
Another comment was that comparative effectiveness studies that track outcomes for only two to three years will fail to capture long-term outcomes, which may prove to be essential data for legitimate comparisons. However, it also was noted that inasmuch as innovative devices often have a product cycle life of only three years before the next iteration of that device, the outcomes of such longitudinal studies will be of little relevance for many medical devices.