The Silicon Valley Bank Collapse and Its Impact on Compliance

The collapse of Silicon Valley Bank’s (SVB) healthcare investment arm, which provided funding to medical device startups, is likely to have a significant impact on startup funding in the medical device industry. Directly, the collapse of SVB’s healthcare investment arm will result in decreased funding availability for medical device startups due to a reduction in the overall available funding pool. Additionally, this event has made investors generally take notice and be more thoughtful about their investments. Obviously supply and demand play a role here. With decreased funding availability, medical device startups face increased competition for funding from other investors. If the technology is sound, this collapse does not eliminate funding opportunities, but it will lengthen fundraising timelines, exacerbate due diligence, and increase pressure to demonstrate a strong business case. In servicing startup medical device companies, I’ve noticed the fundraising timeframe become much longer than in recent years. Companies that let their operating funds drop too low before beginning fundraising risk burning through cash before finishing a project.

The burden is high for medical device companies to justify investability. The collapse of SVB’s healthcare investment arm has reduced overall investor confidence in the medtech industry. There will be increased scrutiny of startup valuations, greater reluctance for early-stage investment, and a more cautious financing environment. Investors will be more frugal and opt to fund safer opportunities. The key to reducing investor risk is to develop a technology with a clear market need and maintain compliance via a least burdensome approach.

Whether distributing an FDA-cleared product, running a clinical trial for a future FDA submission, or validating and verifying activities for an FDA submission, small medtech firms should focus on the must-haves rather than the nice-to-haves to ensure success. I’ve seen cash-strapped companies take short cuts on compliance issues. In my experience, cutting back on compliance activities is a short-term band-aid with very expensive future implications. Although there are clever, streamlined compliance maintenance strategies, compliance should not be a low priority for a startup.

Best Practices for Maintaining Compliance in a Cash-Conserving Mode

In the current funding environment, medical device companies must weigh several important factors about quality system compliance to ensure they abide by regulatory requirements and can successfully secure funding. Some key considerations follow.

Stay up-to-date with regulatory requirements: It’s critical companies remain abreast of regulatory requirements, including FDA regulations, to ensure their quality system is compliant. This includes being aware of regulatory changes/updates and understanding their potential impact on operations. Case in point: For changing CE marking rules, the central question is the steps necessary to become compliant. Creating an execution plan with flexible human resource assets is critical to maintaining compliance in a financially responsible way.

Establish a robust quality management system (QMS): A robust QMS does not have to be overly burdensome. It’s critical for companies—especially startups—to take a least burdensome approach to quality procedures. The law specifies what is expected but it is up to the company to determine a compliant yet minimalist approach. While companies must follow the law, they must avoid layering in additional unnecessary burdens. The key to this approach is to hire seasoned quality support, either as an employee or as a consultant who has audit experience. Often, an individual with little audit experience will delve too deep in some places and not deep enough in others. Rather than tasking a full-time employee with running a quality system, medtech companies should hire a seasoned outside quality expert to devise a least burdensome and compliant quality system. Creating such a system entails establishing standard operating procedures, performing risk assessments, and implementing appropriate controls to mitigate risks. It takes experience to know what is and is not sufficient.

Do not neglect internal or supplier audits: Regular audits and assessments can help identify areas of improvement within a QMS and ensure companies remain in compliance with regulatory requirements. This can include internal audits, supplier audits, and third-party assessments. Many startup medical device companies, particularly on the tail end of COVID-19, did not perform the same level of supplier control due diligence. Manufacturing is typically one of the largest corporate line items and a lack of control in this area can negatively impact product quality, whether it is in-house or outsourced.

Train employees on quality systems: Training employees on quality systems and regulatory requirements is essential for maintaining compliance and ensuring all workers understand their roles and responsibilities within the QMS. This can include training on documentation, quality control, and regulatory requirements. The more an employee understands the regulatory expectations, the more he or she can help protect the company’s best interests.

Maintain accurate and complete documentation: Accurate and complete documentation is essential for demonstrating compliance with regulatory requirements and ensuring that all necessary information is readily available. This includes maintaining records of all design, development, testing, and manufacturing activities. Take the time to ensure documents and records are complete, tell the entire story (stand-alone), and have the right approvals. It is faster and less expensive to get it right the first time than to conduct future remediation work.

Long-Term Impact of Non-Compliance

Reducing compliance activities is a viable option for conserving cash, but it’s not the smartest strategy (take my word on this). Not only is it management’s responsibility to supply adequate resources for regulatory compliance (per the law), non-compliance can have a long-term impact. Taking shortcuts on compliance can have significant costs for medtech companies. Compliance is critical, as evidenced by the following potential consequences of non-compliance.

Legal and regulatory fines: Medical device companies that fail to comply with regulatory requirements may face substantial legal ramifications and fines that can significantly impact a company's bottom line. Shortcuts taken today can have compliance ramifications years from now. Medtech firms should not take shortcuts on the quality aspects that show their products are safe and effective for their intended use. This is very likely to be discovered in an inspection and could beget a product recall years later.

Delayed product launch: Non-compliance can result in product launch delays, which can significantly impact revenue and market share. Delayed product launches can also damage a company's reputation and erode investor confidence. It is critical that organizations understand the development and commercialization process prior to making timeline commitments to investors.

Products that do not meet specifications: Cutting quality—including product release testing and validation activities—can lead to product defects and safety issues, which can trigger product recalls. Certainly, recalls can tarnish a company's reputation and jeopardize profits.

Loss of market share from questionable product quality: Patients, clinicians, and healthcare consumers will not use poor quality products, even if that device or piece of medical equipment has been a past staple. The medical device industry is a very competitive sector; consequently, healthcare providers will not waste their time or risk their reputations on questionable products. Non-compliance can cost companies market share, as customers may switch to competitors that offer high-quality, regulatory compliant products.

Damage to brand reputation: Startup firms have only one opportunity to make a good first impression. Shortcuts and non-compliance can damage a company's brand reputation, which can have irrevocable long-term consequences for emerging entities.

Employee morale: Besides the direct costs, compliance shortcuts also have indirect expenses—i.e., increased operational costs, decreased employee morale, and reduced innovation. Quality and regulatory support can be a thankless job. Conscientious employees will not hesitate to leave companies that fail to prioritize product quality. A skilled medical device compliance professional is always in high demand; thus, medtech firms should avoid asking them to perform impossible tasks with insufficient budgets.

Conclusion

Overall, the collapse of SVB’s healthcare investment arm is likely to significantly impact the medical device industry, particularly for startups seeking financing. Startups must be proactive in seeking out alternative funding sources and demonstrating a strong business case to attract investors in an increasingly competitive fiscal environment. Companies that understand the value of quality while simultaneously using cash-saving resources to maintain compliance are more likely to bring their products to market faster and ensure future funding is available. 

---

Dr. Linda Braddon works with emerging and established companies to provide regulatory, quality, and technical support to the medical device and biologics industries. She has a BS degree in engineering and MS doctorate degrees in mechanical engineering with a bioengineering specialization. She was a National Science Foundation fellow at Duke University and Georgia Tech, and won the 2009 Women in Technology Small Company “Woman of the Year” award. Dr. Braddon’s work experience encompasses devices in orthopedics, ophthalmology, respiratory, urology, hydrogels, dura mater substitutes, wound coverings, orthotics, and antimicrobial agents as well as dental implants and additively manufactured patient-specific implants. Dr. Braddon founded Secure BioMed Evaluations to provide strategic support to the medical device community.