Age of Uncertainty

While one would expect the sweeping proposed changes to the U.S. healthcare system to have a significant drag on investments to device companies, the industry continues to show strength. Medical device and biotech companies received 34 percent of the total capital invested in 2009, and mergers and acquisitions increased by 154 percent in the third quarter of 2009.² While many other industries continue to struggle, growth in the device industry is predicted to be stable (albeit not up to pre-recession levels).³

Despite legislative proposals to reshape healthcare in the U.S., investors continue to view the medical device industry as strong. Given the difficulties faced by other industries, orthopedic device companies have a clear opportunity to tap into investor confidence in order to expand business and branch into new markets. Securing investments, however, is only one of the challenges facing orthopedic device manufacturers. Orthopedic companies must continue to innovate and build upon their existing product offerings.

As part of the process of building innovative orthopedic products, companies must ultimately obtain marketing authorization from the U.S. Food and Drug Administration (FDA). This authorization is most commonly obtained through the premarket notification process under section 510(k) of the Federal Food, Drug and Cosmetic Act. While the 510(k) system has been viewed by many in industry as fostering innovation, some non-industry groups consider it a flawed system that allows devices to be marketed without the necessary clinical data.

The considerable attention paid to reforming the 510(k) system has confounded many in the device industry who view the clearance process as instrumental in helping to make the United States a leader in device technology. If there has been a complaint from industry about the 510(k) system, it is that FDA’s device reviewers have been asking increasingly ambiguous and, from the basis of FDA’s laws and regulations, inappropriate questions regarding devices under review. Despite a congressional mandate to take the “least burdensome” approach, the 510(k) system has continued to evolve into a more involved and time consuming process.

The concern among many in industry is that any reforms made to the 510(k) system will not be in the interest of streamlining the clearance process, or to ensure that the review covers only what is required to establish substantial equivalence. Much of the discussion about reform has been centered on the October 2008 accusations by CDRH reviewers that management “corrupted and interfered with the scientific review of medical devices,”⁴ and the clearance of ReGen Biologics’ Menaflex meniscus collagen scaffold device.

Compounding the concern of some in the device industry is the appointment of Peter Lurie, M.D., to a position at the agency’s Office of Policy.⁵ The FDA press release regarding the appointment, said Lurie will “help develop strategies to facilitate medical product availability to meet critical public health needs.”⁶

Prior to his appointment to the FDA, Lurie served as deputy director of Public Citizen’s Health Research Group in Washington, D.C., and has been critical of the 510(k) system. In one of his more frequently reprinted quotes, Lurie has said that the 510(k) process is “a loophole that has swallowed the law.”⁷

Calls within the FDA to review the 510(k) system came to a head in the aftermath of the investigation into the clearance of Menaflex. According to the FDA, the clearance of that device involved “numerous departures from processes, procedures and practices,” that implicated “the integrity of FDA’s decision making.”⁸ As a result, the FDA promised to reconsider its decision to clear Menaflex and committed to make changes to the 510(k) process.

The review of the 510(k) system likely will continue through next year and beyond, leaving open the threat of significant changes. The Institute of Medicine is not expected to issue its report before March 2011, while the FDA will be conducting its internal review apace. Throughout this period, anecdotal reports suggest that reviews have already become more stringent as FDA reviewers are placed under a microscope.

Notwithstanding the promise by the FDA to review the clearance of Menaflex, the ongoing focus on the 510(k) system makes existing 510(k) clearances more valuable. This gives a decided advantage to orthopedic companies that already are on the market. In order to maintain this advantage, companies may want to consider modifying their product development programs to segregate out minor incremental modifications to devices that would not require making a 510(k) submission, from more significant design changes. This will allow companies to make periodic improvements to marketed devices, while simplifying the issues presented in those 510(k) submissions that need to be reviewed. Orthopedic companies should carefully review FDA’s guidance on design changes, 510(k) Memorandum No. K97-1, “Deciding When to Submit a 510(k) for a Change to an Existing Device” (preferably with knowledgeable outside counsel) when making these decisions.⁹

While companies looking to invest in existing 510(k) clearances should be confident that they are making a wise investment in this regulatory environment, the transaction should be conducted with the appropriate amount of due diligence. As noted during the recent hearing held by the FDA, there is no formal process by which the FDA tracks the transfer of 510(k) clearances. Companies looking to acquire a 510(k) clearance should carefully trace back the ownership of the clearance and the marketing history of the device.

Further, the FDA has found instances in which 510(k) clearances were obtained through fraudulent information. Heather Rosecrans, chief of the 510(k) section at the Office of Device Evaluation, relayed an instance where a company acquired the rights to more than a dozen 510(k) clearances that were found to be fraudulent upon review and had to be removed from the market.¹⁰

Companies looking to acquire a 510(k) clearance should negotiate with the seller for an independent review of the 510(k) submission and supporting data prior to completing the transaction.

In spite of these challenges, there are tremendous opportunities for orthopedic companies in these tumultuous times. Investments continue to flow to medical device and biotech companies, even in the weak national economy. Furthermore, FDA’s review of its 510(k) system makes existing 510(k) clearances more valuable and puts companies with products on the market in a stronger competitive position. With the right approach, orthopedic companies can continue to succeed.

Seth A. Mailhot is a counsel at Nixon Peabody LLP, and leads the firm’s FDA regulatory practice.

References

1. White House, The President’s Pro posal (Feb. 22, 2010), available at www.whitehouse.gov/sites/default/files/summary-presidents-proposal.pdf; David Filmore, “Firms Budget For Device Tax In 2011, But Push For Further Delay,” The Gray Sheet (Jan. 18, 2010).

2. QualityStocks, “Flex Fuels Energy, Inc. (FXFL.OB) Grows into Booming Point-of-Care Market with Bio-AMD Acquisition” (March 4, 2010), available at www.qualitystocks.net/ar ticledetail.php?ID=21560&gosearch=1&term= Flex.

3. Associated Press, “Moody’s Sees Stable Outlook for Medical Devices” (March 2, 2010), available at www. google.com/hostednews/ap/article/ALeqM5h6rLB8-8yZ_ cEaXvWebPK1bcN vTgD9E6NL2G0.

4. Letter from Anonymous Physicians and Scientists, CDRH, to Rep. John D. Dingell (Oct. 14, 2008), available at http://energycommerce.house. gov/Press_110/110-ltr-101408. C D R H scientists.pdf.

5. “Public Citizen’s Lurie Appoint-ment at FDA Worrisome for Industry,” Dickinson’s FDA Webview (Oct. 19, 2009).

6. FDA, press release “FDA Announces New Appointments in Office of the Commissioner” (Oct. 16, 2009), available at www.fda.gov/AboutFDA/CommissionersPage/ucm187086.htm.

7. Ingrid Mezo, “Anxiety Over Prospects For Legislative 510(k) Reform Appears To Be Growing,” The Gray Sheet (March 31, 2008).

8. Statement of Dr. Joshua Sharfstein, Transcript for FDA’s Media Briefing on the FDA’s Review of the ReGen Menaflex (Sep. 24, 2009), available at www.fda.gov/downloads/ NewsEvents/Newsroom/MediaTranscripts/UCM184027.pdf.

9. This guidance is available on FDA’s Web site at http://www.fda. gov/downloads/MedicalDevices/DeviceRegulationandGuidance/GuidanceDocuments/ucm080243.pdf.

10. Jared A. Favole, “FDA Details Holes In Authority Over Medical Devices,” The Wall Street Journal (Feb. 18, 2010), available at http://online.wsj.com/ article/BT-CO-20100218-718585.html? mod=WSJ_latestheadlines.