The other day at UMass Boston, MassMEDIC (the trade organization of Massachusetts medical device companies) held its 16th Annual Conference. It was well attended, and my prior blog post reported Covidien CEO Jose Almeida’s comments for the advancement of the United States medical device industry.
Another speaker, Yair Holtzman, is a director at WTP Advisers of White Plains, New York, where he focuses on business advisory services to the life science industry. A CPA and MBA, Yair ambitiously traced the current and future states of R&D in device development. Let me take a stab at summarizing the high points.
In the past, the United States has been dominant in the medical device market through a combination of its head start with a large number people working within the field, deep expertise, entrepreneurial investment, a robust middle class that drove medical device advances, and a group of patients who could afford to be price-insensitive when it came to buying medical services. A large number of hospitals, and the leadership of the FDA in device safety, didn’t hurt.
International R&D, as many have noted, is greatly increasing. Reimbursement has become an issue in the United States, creating concern for ROI that can be derived from R&D efforts. Added pressure was placed on U.S. ROI for many other reasons, as outlined by Covidien’s Almeida (see the May 1st post). China and India have growing middle classes and growing expertise; they may well develop medical device products and not even bother to have them cleared in the United States. Approval of devices in Europe takes half the time of FDA review; Brazil, India and China are becoming very entrepreneurial and are attracting substantial investment. Germany and Israel have substantial medical device expertise.
For these reasons the United States, historically a leader in the production and consumption of medical device advances, may find itself left behind the rest of the world.
Joining the cacophony in criticizing the Affordable Care Act, which in 2013 will assess a 2.3% excise on the gross income of medical device companies regardless of whether or not a profit has been made, Holtzman anticipated that the effect would be “devastating” and urged that the excise be repealed. Also in order is a reinstatement of the R&D tax credit, which expired at the end of 2011.
What else must be done in the future? First, greater speed and predictability must become part of the FDA approval process. Second, a continuation in the trend to reduce R&D costs through joint ventures and through “farming out” R&D functions must continue. Third, the industry must recognize certain trends in healthcare: mobile health, personalized medicine, economic efficiency demanded by patients and their reimbursers, and the need for disruptive technologies which will create a paradigm shift in costs and outcomes. Analytics to demonstrate both health and financial outcomes must become part of device development.
Holtzman observed a trend in the United States to develop incremental products, as opposed to developing disruptive technologies through R&D expenditure, with the “disruptive” perhaps more likely to be generated offshore. This development is not beneficial to U.S. industry, to say the least.
Holtzman also noted that many VCs are establishing offshore presences, including in Israel and Singapore. Hopefully some of his recommended changes (at the FDA and in tax policy) will again make domestic United States venture investment in medical device companies attractive, but Holtzman added that his firm has success in identifying grants, state credits and local incentives, as well as joint venturing approaches, in order to drive down R&D costs, speed development and thereby improve ROI.
Interestingly, Holtzman’s remarks also reflected an anomaly which was apparent upon analysis of several recent life science conferences (not just medical devices). On the one hand, the FDA is praised as setting the standard for review of medical technology which is emulated around the world, and which is one basis for historical American primacy in these markets; on the other hand, the FDA now also is criticized as one of the primary causes of the United States slipping behind the rest of the world.