Investing in Medtech's Future

To keep venture capital dollars flowing, the U.S. medical device industry must address key areas of investor concern.

Kelly Slone

July 1, 2007

11 Min Read
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Kelly Slone is director of the National Venture Capital Association Medical Industry Group (Arlington, VA).

Over the past 30 years, few industries have fueled as many medical breakthroughs as the venture capital industry. The life sciences companies brought to market by billions of dollars of venture capital investment—including Amgen, Genentech, Genzyme, Gilead Sciences, Kyphon, Intuitive Surgical, and Scimed Life Systems—have delivered highly tangible and valuable improvements to the U.S. economy and to ordinary people's lives.

Within the life sciences arena, the medical device industry has grown explosively in recent years. In fact, venture capital investment in medical devices during the first quarter of 2007 reached an all-time high of $1.08 billion. While that is certainly an impressive number, a substantial portion of these funds will go toward navigating the complex regulatory and reimbursement processes that characterize the medical device industry.

In order to support venture firms and medical device start-ups during such processes, the National Venture Capital Association (NVCA), which serves as the venture capital industry's public policy voice, has formed the NVCA Medical Industry Group (MIG). As part of its mission, MIG identifies and prioritizes key health policy issues that affect healthcare innovation and investment. The group then serves as an advocate for these priorities before Congress and government regulators and agencies, including FDA, the Centers for Medicare and Medicaid Services (CMS; Baltimore), the U.S. Department of Health and Human Services, and the National Institutes of Health.

Lately, two significant issues have ascended to the top of MIG's priority list: the need to establish a clearer path to CMS coverage for innovative medical devices, and the need for patent reform that protects innovative technologies. A brief overview of NVCA's involvement with each issue follows.

CMS Coverage

Challenges associated with truly novel innovations getting bogged down during the CMS reimbursement process have grown increasingly common among product developers. For this reason, MIG has made studying the reimbursement barriers to medical innovation a top priority. The group has determined that the creation of a transparent and streamlined reimbursement process for novel technologies would mitigate unpredictable market risks for medtech manufacturers and would bring more revolutionary technologies and therapies to the public faster. Not only could many of these therapies and technologies save millions of lives, but they could also simultaneously drive down ever-escalating healthcare costs nationwide.

Toward this end, MIG has outlined several potential strategies for making the CMS reimbursement process more predictable and transparent. The group recently released a white paper that provides recommendations to CMS for the creation of a reimbursement critical path for novel technologies. The term was chosen to highlight the common goals shared by this effort and FDA's existing critical path initiative, which is focused on facilitating medical product development and commercialization. MIG's recommendations are as follows.

Expand the Role of CTI. As a cross-component entity, the CMS Council on Technology and Innovation (CTI) is ideally positioned to support the reimbursement process, which often requires coordination across several CMS components and, in some cases, coordination with other government agencies. CTI could expand its current role by holding stakeholder meetings to collect input regarding helpful elements of a reimbursement critical path; by developing a written, prioritized plan for instituting suggested reforms and then presenting the plan to CMS administration; and by designating an ombudsman to assist product developers who are having difficulty resolving specific reimbursement problems despite reasonable diligence in working through existing decision-making mechanisms within CMS.

Develop Process Descriptions. CMS could resolve many basic questions and problems through modest efforts to make its various reimbursement policy-making pathways and their interconnections more transparent. As a first step, CMS should issue a road map for investors and life sciences companies—a document that CMS reports is under development—that describes the primary coverage, coding, and payment processes at the agency.

Establish Explicit Time Frames. CMS should commit to reasonable decision-making time frames for reimbursement policy processes. Such a commitment would help product developers manage resources and risk, as well as cut down on the amount of time that young companies must subsist on their venture capital by carefully controlling and often reducing their burn rates. A town hall meeting of stakeholders may help identify priority processes for time-frame development.

Reimburse Expedited-Review Devices. CMS and FDA have coordinated well in the past when it came to technologies such as coronary stents and ventricular-assist devices. The agencies need to follow such examples moving forward. As a start, MIG proposes that medical devices undergoing expedited review by FDA be simultaneously reviewed by CMS to ensure that potential coverage, coding, and payment policy issues have been identified well before final FDA approval. Once CMS has established the mechanism for expedited reimbursement review for medical devices undergoing expedited FDA review, CMS could expand such an approach to other technologies determined to meet the criteria established for novel and high-value technologies.

Clarify Evidence Requirements. CMS should accelerate its work on developing guidance documents that clarify the scientific evidence requirements for both national and local coverage decisions, as well as coding and payment decisions. CMS could improve the efficiency and transparency of its processes by meeting directly with early-stage companies to provide feedback on and expectations for the design of clinical trials that would satisfy coverage requirements for the technologies they are developing.

Clarify New-Technology Add-On Payments. The application and review process for new-technology add-on payments—particularly the administration of the substantial clinical improvement requirement—is inconsistent and opaque. To clarify it, CMS should convene a panel of researchers, clinicians, industry representatives, and patient groups to develop specific, generally applicable criteria determining whether a new product represents a substantial clinical improvement. Such criteria should include the creation of objective standards for using external data.

Explore Improved Coding Processes. Coding problems are a major source of uncertainty and frustration for product developers, and the degree of friction in resolving these problems is often inconsistent with the potential health benefits of a product. There is likely no easy way to address such challenges, as the coding process involves a number of complex concerns and input from numerous specialty societies. However, many processes remain opaquely defined, which undermines the interests of all stakeholders. Therefore, a forum focused on discussing current problems and potential solutions may be the best first step toward resolving coding problems.

The greatest challenge in instituting MIG's proposed measures will likely be cost. In the same way that FDA depended on revenue from user fees to generate improvements in the product review process, CMS may need to explore creative mechanisms to support proposed changes in the reimbursement process. In this spirit, NVCA and its members have volunteered to play a role in developing such solutions.

Patent Reform

Efforts to revise the U.S. patent system have been a perennial part of the agendas of the House and Senate Judiciary Committees for years. But so far, little change has been seen. Meanwhile, the system grows increasingly cumbersome, slow, and difficult for small companies to navigate. Therefore, Congress must act to address the pressing need for updates, revisions, and improvements to the U.S. patent system.

However, legislators must do so carefully and thoughtfully. Finding common ground among the many divergent groups involved in the patent debate will be a difficult task, but by insisting that all interested parties participate in the process, the goal of reaching a compromise is more likely to be reached.

In general, NVCA believes that any patent reform measures must protect small, emerging companies, which are key components of U.S. economic growth and innovation—particularly in the medical device industry. For many small companies, patents are their only assets of value in the early stages of formation. Small companies often do not have the financial or managerial resources to defend their intellectual property indefinitely, and their dollars and time are more useful when directed at research and development. Congress must be careful not to enact reforms that allow large companies to infringe on small companies' patents for a small cost. Penalties for infringement must be substantial enough to serve as a deterrent to larger organizations.

Reforms directed at improving patent quality would be a step in the right direction. NVCA supports innovative means of improving the patent quality process, including peer reviews, the addition of more patent agents, and increased funding for the U.S. Patent and Trademark Office. Improved patent quality will eliminate many of the problems that the medical device industry and others now face in regard to rampant patent challenges and litigation.

Within this broader context, the two patent reform issues of most significance to venture capitalists—and, thus, to medical device companies hoping to attract their investment dollars—are postgrant opposition and apportionment of damages.

Postgrant Opposition. Under current law, those who wish to challenge a patent's validity have a fairly limited opportunity to do so using a reexamination process. Many companies and organizations pushing for a more-extensive postgrant review process have argued that such a process would ultimately enhance patent quality by providing a means to challenge patents without resorting to the court system. Creating some sort of open system for patent review has been endorsed by the National Academy of Sciences and the Federal Trade Commission in two seminal reports that members of Congress have used as the basis for legislation.

The ultimate goal of postgrant opposition—invalidating flawed patents—is one that NVCA shares. However, adding an open-ended second process weakens the presumption of validity. A company that has a legitimate patent may not be able to get venture funding if that patent is going to be challenged again and again. Thus, an open-ended postgrant review process clearly favors large companies with deep pockets that could use such proceedings to delay patent issuances to venture-backed companies.

If a postgrant opposition procedure is to be adopted, it should allow only a single window of time for challenges, preferably with a short, predictable duration of approximately six months. Petitioners for patent cancellation should be required to identify themselves and to file all issues regarding patentability. If a party elects to challenge a patent issuance through this process, it should not be permitted to again raise the same issues in any subsequent proceeding. Such steps would protect the patentee from having to repeatedly defend its patent against the same arguments.

Apportionment of Damages. The issue of apportionment of damages concerns how remuneration will be calculated once a patent holder wins an infringement case. Many large high-tech companies have argued that courts should not focus on the full value of the entire product, but rather be required to focus on a proportionate share of the value of the product component that is attributable to the patentee's contributions. Opponents to that position—including many mainstream multinational companies as well as smaller technology and life sciences companies—argue that the value of patented features is often difficult to separate from the value of a product as a whole.

Protecting U.S. Competitiveness

The common thread between the issues of uncertain device reimbursement and the need for appropriate patent reform is their ability to highlight potential threats to U.S. global competitiveness. For example, if the most novel technologies and therapies developed in the United States continue to get bogged down in the reimbursement process, investment dollars may begin to flow elsewhere. Without increased transparency in such processes, venture firms could begin to look for opportunities in other countries that offer more-clearly quantifiable market risks.

In regard to patent reform, improving the quality of the patent system is critical to U.S. innovation leadership. The United States must continue to be a leader in promoting and insisting on sound, strong, and consistent intellectual property protections for those that need it most. If the process becomes too uncertain or too weighted in favor of large companies, venture capitalists will stop investing in intellectual property because its value will be significantly diluted.

In both cases, CMS coverage and patent reform, if appropriate actions are not taken, one of the major drivers of U.S. global competitive advantage—venture capital investment—may be driven elsewhere. And in light of the significant role that such investment plays in driving medical technology innovation, the physical and economic health of ordinary Americans will likely feel the negative effects of such diminished funding.

NVCA is working hard to prevent such a trend by educating legislators and testifying before Congress on these and other critical matters. However, these activities are most effective when NVCA can draw upon real-life examples and case studies, and when industry stakeholders testify in person on Capitol Hill. Medical device executives with concerns about these critical industry issues are urged to contact NVCA MIG with examples of how these and other issues have affected their businesses. Case studies and industry members' insights into how medtech's most pressing problems can be solved are valuable tools in the quest to educate Washington's decision makers.

The level of innovation taking place in the United States remains strong. By working to include all stakeholders in the ongoing dialogue on critical competitiveness issues, NVCA hopes to ensure that the nation maintains its leading global position.

To read the full white paper submitted by NVCA to CMS, look for the article "A Reimbursement Critical Path" in the official conference guide to BIOMEDevice Forum. Published as a supplement to the July/August issue of MX, the guide provides an overview of the main topics that will be discussed at the two-day conference, being held October 3–4 in San Jose, CA. Sponsored by MX in partnership with the biotech trade association BayBio, the event will bring together key players involved in investing, partnering, licensing, and developing business opportunities in the rapidly growing market for innovative healthcare products.

Copyright ©2007 MX

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