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A Shift in the Regulatory Winds for Medical Devices

A raft of issues could set the tone for the medical device industry going forward.

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Although the complexities and large cast of characters involved with health-care reform have captured the spotlight for the last few months, there has been a raft of regulatory issues that could substantially set the tone for the medical device industry going forward. Unlike the pharmaceutical companies that have become targets, medical device firms have often been able to fly underneath the radar of both legislators and populist sentiment thanks to the smaller size of the industry, complete lack of price transparency, and the triangulated relationship between the payers, customers, and device manufacturers. However, we expect that medical device companies will garner more attention as regulators address several issues that have bubbled up recently.

Independent of Obama's push for health-care reform, the medical device industry has been buffeted by a few large-scale product recalls, a series of Department of Justice investigations into improper marketing practices by device manufacturers, and embarrassing incidents that highlight the potential conflicts of interest with physician thought leaders. All of these factors have been spurring discussion for the need to tighten regulations around how device firms do business. Here we outline which changes we expect will come about.

More Rigorous Clinical Data Necessary
 Medtronic's (MDT) recall of its Sprint Fidelis lead in the fall of 2007 underscored the need for more extensive clinical research on devices prior to approval. Thanks to the way the original legislation for approving medical devices was written, any new products that are substantially equivalent to any previous product marketed before mid-1976 can follow the less rigorous 510(k) approval process for devices. This allows manufacturers to apply for approval without having actually tested the product in patients. Device companies often submit data from laboratory testing to establish that durability and reliability are similar to currently marketed products. Medtronic's Sprint Fidelis lead was somewhat narrower than the previous generation lead, Sprint Quattro, and the Fidelis appeared to be as durable in the laboratory. However, once implanted for a period of time the Fidelis lead demonstrated a higher propensity to crack. These fractures were associated with a handful of deaths.

Currently, approximately 90% of medical devices go down the 510(k) pathway. For many of the devices, such as catheters with slightly differently angled hooks, this level of regulatory oversight is probably appropriate. However, for more invasive devices that are designed to remain in the body for years--heart valves, artificial hip joints, pacemakers, breast implants--we wouldn't be surprised if the Food and Drug Administration raises the bar and requires more clinical data. This will likely mean slightly higher research and development costs for device companies. It will also potentially slow down the product life cycle, because the trials as well as the FDA's review process will take longer than the 90-day window that is typical of 510(k) reviews now.

Aftermarket Registry Data
Considering that many defects or problems don't emerge until several years after a device is first marketed, we expect that the current buzz around setting up aftermarket device registries will come to fruition. This would allow the Department of Health and Human Services to collect and aggregate safety and efficacy data on devices. Most recently, one proposal for a registry made its way into Representative John Dingell's wider-ranging health-care reform bill, which was approved by the House Committee on Energy and Commerce at the end of July. Not surprisingly, the medical device industry interest groups have opposed this idea, as it would mean the manufacturers would lose control over how and when information on postmarket safety and efficacy is disseminated. It would also mean that other interest groups and the public would be able to link devices with health outcomes data. Any movement toward a registry would likely affect the cardiac and orthopedic companies--such as  Boston Scientific (BSX),  Stryker (SYK), and  Zimmer (ZMH)--most directly, as many of the products they make are intended to be implanted in patients for long periods of time.

Comparative Effectiveness Research
We expect to see device companies put more thought into designing clinical trials with various alternative treatments--both medical as well as surgical--to address comparative effectiveness issues. Politicians are hankering for more clinical data to guide practitioners toward the most effective treatments, in the hopes of eliminating some of our spending on unnecessary (or at worst, unnecessary and potentially harmful) treatments. This will likely mean larger and longer pivotal trials that will raise development expenses.

However, compared with most pharmaceutical companies, cardiac device manufacturers are relatively more experienced with this type of study.  Edwards Lifesciences (EW) is close to completing enrollment for its complex PARTNER study that will compare its minimally invasive transcatheter aortic valve replacements with traditional surgical heart valves as well as optimal drug therapy.  St. Jude Medical (STJ) has just begun enrolling the pivotal CABANA trial in conjunction with the Mayo Clinic to compare catheter ablation for atrial fibrillation with optimal medical treatment. Medtronic, Guidant (now part of Boston Scientific), and St. Jude all benefited greatly from earlier landmark studies comparing implantable cardioverter defibrillators with medical therapy. Further, continued long-term monitoring of those original studies has also provided very strong evidence of the cost-effectiveness of ICD therapy.

On the other hand, the orthopedic companies have not been on the forefront of comparative effectiveness research, and we expect the chickens will eventually come home to roost, especially in the spinal area. Current data from relatively poorly designed studies are mixed on whether spinal fusion holds any advantage over physical therapy coupled with pain relievers. The Institute of Medicine recently categorized different treatments for lower back pain in the top quartile of its 100 priority topics for comparative effectiveness research, which means this area of study will likely receive federal dollars to support the research. Spinal interventions have been an attractive area of consistent double-digit growth over the last five years, and Stryker, Zimmer,  Johnson & Johnson (JNJ), and Medtronic have all set their sights on developing that market further. If unfavorable data emerge from this research push, these firms could see the spinal market dry up.

Net Net: Higher R&D Expenses
All of the changes above would ratchet up the bar on the length, size, and complexity of premarket randomized clinical trials as well as the addition of prospective postmarket studies, and we think higher R&D costs will simply be a fact of life for device companies in the future. However, this isn't the end of the world for this industry, which manages to generate healthy free cash flows even under recessionary economic conditions. Further, it will likely take another four to five years before we actually see R&D costs rise to a new level, thanks to the lead time involved with designing and conducting trials. The more critical implications for device manufacturers will hinge upon what safety and efficacy data come out of these more rigorous studies. We will be keeping a close eye on lower back pain and atrial fibrillation as guinea pigs for near-term comparative effectiveness research.

Debbie Wang does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.