Medical Device Daily Washington Editor
WASHINGTON — The annual meeting of the Medical Device Manufacturers Association (MDMA; Washington) does not always produce bombshells, but the first day of this year's edition offered one of the more intriguing overviews of the device industry heard in recent times.
While patent reform has gobbled up the attention of many in industry, one observer at least thinks that device makers need to rethink their approach to the market thanks largely to more intense scrutiny by regulators and Congress or run the risk of disappearing into medical device history.
David Cassak, managing partner of publisher FDC-Windhover Information (Rockville, Maryland), offered an overview of the health of the device industry, questioning whether the model under which industry currently operates is sustainable.
He called the late 1990s "a pretty dire time in the industry" because of financing problems, and some firms that had gone public around that time "had virtually crashed within a couple of years."
Cassak said that despite the fact that an investment purse of $100,000 in a device company would have done better than a similar investment in a drugmaker, venture money dried up toward the end of the last decade due to lack of predictable revenue streams, and described the late 1990s as the industry's "nuclear winter."
Even in the first couple of years of this decade, there was little activity in initial public offerings (IPOs) from device makers, and increasingly, bigger device companies had to snap up small firms in order to grow. "We began to see the beginning of a new model" with this development, he said.
Around this time, the paradigm of incremental technological change became more conspicuous, which is a business model that "investors really like," Cassak said, while big pharma was running into problems in efforts to produce new molecular entities.
Despite all the success and investor interest, he said, "there are some signs on the horizon that ... at least raise some concerns about the sustainability of that model."
Since 2003, "device public offerings have been doing extremely well," Cassak said, and devices are doing better for investors than biotechnology, which he attributed to the influence of iterative technology on ROI. This new device model was built around quick and predictable technological development, with physician involvement playing a prominent role, as well as "a relatively straightforward regulatory path.
"By any measure, the industry has never been richer," he said. "In virtually every category, dollars [invested] are going up."
A lot of VC firms are up to 50% or more of their folios invested in device start-ups, "but there are some concerns," Cassak said. "Veteran investors are beginning to worry about a frothy market" because Series A, B and C monies are way up in amounts that "are like biotech financing" to the extent that these sums demand promises of larger returns.
"We're seeing more money going in," but "the reality is that there are very few blockbuster exits in the device market," he said, making the case that clinical trials and evidence-based medicine promise more hurdles, as do physicians with a case of the jitters. The May 2006 flap at the EuroPCR meeting in Barcelona over drug-eluting stents sent "shock waves through the investment community" even though "the same researchers came back the next year and said oops,'" Cassak said.
"Clinical trials are getting larger and more burdensome" and physicians want more and more data – and regulatory bodies are looking for trials even for 510(k) products. "Reimbursement is facing the same kind of thing," he said, which is "undermining one of the key premises" of the device company model.
As for conflicts of interest, Cassak said the Justice Department's settlement regarding device makers' relationships with physicians was not as bad as it could have been, but while it addressed a real problem, "the medical device industry is getting a bad rap" that is disproportionate to these violations.
The problem is that physician participation is essential to the device-development process. "You don't need a doctor to help develop a drug," he pointed out, so the incentive for doctors "is completely appropriate" for devices.
"Regardless of what happens in the public market, there will always be a robust market" for venture capital, Cassak said. Still, "it becomes harder to do deals," partly because "it becomes easier to say no' than to say yes' because there is no deal big enough to move the needle [on a company's share price], but if you screw up, it's career death."
He said that the cardiovascular sector's dominance of transactions this decade is due largely to the purchase of Guidant (Indianapolis) by Boston Scientific (Natick, Massachusetts), but orthopedic deals would have been more conspicuous but for the Guidant sale.
Of the line between winners and losers, Cassak said it's usually a case of "who gets to the market with the right technology at the right time," but he also pointed out that first-to-market firms are usually snapped up by bigger fish.
As for whether disruptive technology can succeed, he said that drug-device convergence provides a good case study. Combo products can be moneymakers, "but development is difficult because of significant differences beyond" the properties of drugs and devices per se. One of these other factors is the typical path of development.
"Cordis screened more than 800 drugs" before hitting on sirolimus as a DES coating, Cassak said, adding that the cost of getting a new DES to market can run in excess of $200 million. But while the short cycle of device iteration does not mesh well with the longer cycle inherent in drug development, "[t]he big issue is really about adoption. It's an unheralded issue," he said.
Device development has followed doctors because doctors push the need for new devices, but doctors are not necessarily fans of disruption. "Product companies will increasingly lead, not follow, their customers," namely the doctors, Cassak said. And that relationship is under strain.
"These are great times, but there are things to look at," he added.