What’s Ripping Medtech Out From Under Our Feet?

What’s making Chris Velis mad? Many things, not the least of which is the gorilla in the room that everyone’s missing. The chairman and CEO of Medcap Advisors LLC, a Cambridge, Mass.-based medtech investment firm, kicked off the MPO Summit on June 5 with a discussion on the forces killing medtech innovation. His keynote made it clear that his beef is not solely with what companies are or are not doing, but also outside pressures that are contributing to the hurdles medtech companies have to navigate.

According to Velis, psychology plus macroeconomics equals pressure. Being an economist, Velis used a useful video to illustrate people’s general tendency to get caught up in the minutiae and miss obvious issues. The video showed a group of people passing two basketballs between them, and Velis asked the audience to count how many times the ball was released between the people wearing white shirts. Most people were so focused on counting that they missed the person in a gorilla costume wander into the shot.

“We observe things all day long,” said Velis. “We’re so busy counting that we miss important factors.”

Velis also discussed the delayed gratification effect, exemplified by the Stanford Marshmallow Experiment begun in the 1960s. A group of children between the ages of 3 and 6 were offered a treat such as a marshmallow, and told that if they could wait 15 minutes without eating the treat, they would get more treats. Approximately one third of the children successfully completed the task. During follow up studies, researchers found that children who resisted temptation were more competent as adolescents, did better in school, and scored higher on the SAT exam.

“Delayed gratification has great deal to do with how we manage our business and our lives,” Velis said. “For example, [the U.S. government] pulls money from China like it’s a bank. That’s impulsive behavior.”

Velis connected this behavior to the recent trend in venture capital (VC) investors, who now are far less likely to invest in new innovation and more likely to invest in later stage technology. This strategy is less risky, but leads to less rewards in the future. According to Velis, there also has been a $3 billion reduction in available funds for innovation in the United States.

The United States medtech environment is not doing enough to foster innovation in the country, Velis said. China, for example, has created a 2,237 square-mile city built solely for the purpose of fostering medical innovation. Called China Medical City, it is a center for research and manufacturing in the pharmaceutical, biochemical and bio-tech fields. The city also incubates pioneer projects including some on stem cell research.

Another major pressure point on the medtech nerve in the United States is the regulatory system.

“The U.S. Food and Drug Administration is trying,” Velis said, “but it has an unclear and reactive policy around cellular technologies, biologics, and nanotechnology.”

Velis used the example of Parcell Laboratories LLC, a Natick, Mass.-based regenerative cell company that developed the ELA cell discovered by researchers at Brigham and Women’s Hospital in Boston, Mass., and Harvard Medical School. The cell is an early lineage progenitor cell with therapeutic potential due to its ability to support and facilitate the local repair of tissue. Because it comes out of the knee and goes back into the body, the company was certain the cell would qualify with the U.S. Food and Drug Administratiion for a human tissue exemption. However, after building a 20,000- square-foot facility and investing a significant amount of money into the development of the cell technology, the FDA said that the cell “might have metabolic activity,” and required Parcell to prove it did not in order to gain a human tissue exemption. This type of reactive policy discourages investment, because the risk of the FDA foiling a company’s research and development at the end stage is too great.

Irrationality also angers Velis. Sometimes, said Velis, the way the FDA operates is counterintuitive, and puts the United States at a disadvantage to the CE Mark approval system in the European Union in terms of time to market for technology.

Velis recalled Novadaq Technologies Inc., which makes the Spy Elite machine that assesses tissue perfusion intraoperatively. The device costs $250,000; the imaging attachment costs $1,200; and each time the procedure is performed, the device requires a kit that costs $1,000. Meanwhile, Aimago SA developed EasyLDI Microcirculation Camera, which performs the same function as the Spy Elite. The EasyLDI costs just $66,000, with no additional kits needed to perform its function. However, this device does not receive any reimbursement, which discourages hospitals and physicians from using it. With no reimbursement, there is no way for the OEM to make its money back. This lack of logic builds cost into the medical device product development system, and is destructive to the industry.

“We fund the world’s healthcare,” Velis pointed out, referring to a recent article in The New York Times that caught the nation’s attention. In the United States, the average price for a hip replacement is $40,000, while in Spain its $7,000—for the same implant from the same company. In the United States, an angiogram costs $914, while in Canada it’s $35. A colonoscopy in the United States costs $1,185, and in Switzerland, $655.

In order to regain ground on the world stage for medtech, Velis concluded, the United States needs to take a look inwards at logical regulatory and reimbursement practices; refocus on building VC excitement and willingness to invest in young technology; and pay attention to in-company practices, remembering to pay attention to the bigger picture and not just micro-level minutiae.