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Plastics Prevail at MD&M West: New Medical Polymers Show Promise

Antistatic compounds by Sabic allow for consistent, effective dosing in spacers and other inhalation devices.

Antistatic compounds by Sabic allow for consistent, effective dosing in asthma spacers and other inhalation devices.

The prevalence of polymers at this year's MD&M West and its co-located trade shows was unmistakable. Not only did plastics suppliers have a strong presence throughout Tuesday's presentation schedule at the Innovation Briefs Theater, they also seemed to dominate the trade show floor. In a smart strategy, plastics providers took advantage of the grand stage that is the largest medical device design and manufacturing event in the world by launching new products. And they meant business. From the show floor, MPMN reported on the expansion of NanoMed compounds for use in Pebax for minimally invasive catheters by PolyMedex Discovery Group (Putnam, CT). We also highlighted Teknor Apex Co.'s (Pawtucket, RI) launch of the Medalist MD-500-series compounds to replace PVC in various medical tubing applications. Also among the companies launching new products at the trade show, however, was Sabic Innovative Plastics (Pittsfield, MA). The supplier of engineering thermoplastics unveiled its high-performance antistatic LNP Stat-Loy compounds. Designed for use in inhalation devices, the compounds are engineered to improve drug dispensing and consistency of  delivery. If incorporated, the compounds ensure that the complete dose is delivered to patients and is not reduced or lost owing to the presence of static electricity in the device. In addition to their antistatic properties, the compounds boast clarity and are avilable in ABS, PMMA/acrylic, and the company's Xylex resin, which is a polycarbonate-polyester alloy. They also offer impact strength and cleanability. While Sabic was addressing drug-delivery needs with its antistatic material, Solvay Advanced Polymers (Alpharetta, GA) was touting its new gamma-stabilized color options for its Ixef-brand polyarylamide (PARA). Allowing OEMs to replace metal single-use instruments and devices with plastics, the colorful line also promotes the development of distinct, aesthetically pleasing products. Featuring high stiffness and a smooth finish comparable to that achieved with painted metal, the Ixef GS-1022 is a 50% glass-fiber-reinforced compound. It is offered in white, dark gray, medium gray, light gray, blue, brown, green, and black options. Causing its own buzz on and off the trade show floor was Eastman Chemical Co. (Kingsport, TN). The company was eager to spread the word about the latest addition to its portfolio of medical polymers. Optimized for rigid medical packaging, the Tritan MP100 copolyester builds on the attractive attributes of its copolyester 6763 for rigid packaging, including chemical resistance, clarity, and toughness. However, the company has improved upon the material to offer higher heat resistance, greater toughness, and good poststerilization clarity compared with competing polymers, according to the company. It maintains that these characteristics translate to faster EtO cycle times, reduced warping and sticking, faster validation, and longer shelf life than other polymers.

Scientists Deploy Lasers and Nanoparticles to Pop Cancer Cells

By using lasers and nanoparticles, Jason Hafner and Dmitri Lapotko have discovered how to single out individual diseased cells and destroy them with tiny explosions.

By using lasers and nanoparticles, Jason Hafner and Dmitri Lapotko have discovered how to single out individual diseased cells and destroy them with tiny explosions.

Using lasers and nanoparticles, scientists at Rice University (Houston) have discovered a new technique for singling out individual diseased cells and destroying them with tiny explosions. As presented in the journal Nanotechnology, the method uses lasers to make "nanobubbles" by zapping gold nanoparticles inside cells. In tests on cancer cells, they found that they could tune the lasers to create either small, bright bubbles that were visible but harmless or large bubbles that burst the cells. "Single-cell targeting is one of the most touted advantages of nanomedicine, and our approach delivers on that promise with a localized effect inside an individual cell," remarks physicist Dmitri Lapotko, the lead researcher on the project. "The idea is to spot and treat unhealthy cells early, before a disease progresses to the point of making people extremely ill." Nanobubbles are created when gold nanoparticles are struck by short laser pulses. The short-lived bubbles are very bright and can be made smaller or larger by varying the power of the laser. Because they are visible under a microscope, nanobubbles can be used to either diagnose sick cells or to track the explosions that are destroying them. In laboratory studies published last year, Lapotko and colleagues at the Laboratory for Laser Cytotechnologies at the A.V. Lykov Heat and Mass Transfer Institute in Minsk, Belarus, applied nanobubbles to arterial plaque. They found that they could blast right through the deposits that block arteries. "The bubbles work like a jackhammer," Lapotko said. In the video below from that study, rapidly expanding nanobubbles blasted through arterial plaque. Gold nanoparticles were sprayed on the plaque (from the left) and illuminated with a laser from above. With the backlighting turned off, each bubble shows up as a brilliant flash. In the current study, Lapotko and Rice colleague Jason Hafner, associate professor of physics and astronomy and of chemistry, tested the approach on leukemia cells and cells from head and neck cancers. They attached antibodies to the nanoparticles so they would target only the cancer cells, discovering that the technique was effective at locating and killing them. "The mechanical and optical properties of the bubbles offer unique advantages in localizing the biomedical applications to the individual cell level, or perhaps even to work within cells," explains Hafner. Resulting from collaboration between Rice University and the Lykov Institute of the Academy of Science of Belarus, the nanobubble technology could be used for theranostics, a single process that combines diagnosis and therapy. In addition, because the cell-bursting nanobubbles also show up on microscopes in real time, the technique could be used for posttherapeutic assessment, according to Lapotko. For additional Medtech Pulse posts on the use of nanotechnology for treating disease, see "Scientists Enlist Nanoburrs to Unclog Arteries," "Scientists Examine How Nanoparticles Interact with Blood," and "Nanoparticles Wage War on Cancer."

Mack Molding Ramps Up Its Capabilities

The FDM technology at Mack Prototype Inc. enables the printing of large parts (14 x 16 x 14 in.) in resolutions between 0.005 and 0.13-in. thick layers. The company says this is one of the largest build envelopes available through a custom manufacturer in New England. The machine can print parts in either ABS 30i or PC-ABS.

Managing Compliance-Based Valuation of Start-Ups

B. Patrick LynchWith the advent of IRS Section 409A and the introduction of certain fair value accounting rules, valuation issues have become increasingly important for start-up companies. In the past, industry specific start-up “rules of thumb” may have been sufficient to serve as reasonable basis for any valuation concern. For example, the “Silicon Valley Rule” holds that the value of a common share is equal to 1/10 of the value of the preferred share pricing in the most recent capital round. While the simplicity of such rules can be appealing, the scrutiny of the IRS, SEC, and your auditors in combination with the potential liability associated with misreporting financial performance make it critical that value be determined and articulated in a credible fashion.
Valuation opinions of common stock are necessary to defend strike prices set for stock options and stock appreciation rights from the IRS (see Section 409A) and to measure the cost of equity compensation for financial reporting (see Standards of Financial Accounting Statement [SFAS] 123R). Valuation opinions of other equity investments are also necessary for the reporting of interim investment performance in investment fund financial statements (see SFAS 157). Whether you plan to satisfy your valuation compliance needs in-house or to seek outside services from a specialist, you need to have an informed understanding of basic valuation fundamentals related to medical device start-ups.
Getting the Value Right
Getting value “right” is important. Attorneys and accountants occasionally throw around the terms 409A and 123R connected to some vague call to action, but here is why value really matters for medical device start-ups:
• Issuing stock options with a strike price below the fair market value of the underlying stock carries significant tax penalties for the recipient, which can create distractions for start-up managers at a time when focus on the business is most important.
• Issuing stock options with a strike price significantly higher than the present value of the underlying stock undermines their usefulness as an incentive. Underwater options are less likely to provide a reward to recipients for value-creating efforts than those issued at the money, when the option strike price and the value of the underlying stock are equal.
• The IPO process is not the time to uncover problems with accounting for prior equity compensation grants.
Compliance-driven valuation, which requires consideration of common stock value from a hypothetical “value today” perspective, often requires participants in the venture capital world to consider value from a different angle. Unlike a mature, cash flow-positive business, medical device start-ups are valuable based on the prospect of proceeds from some future successful exit event, generally an IPO or strategic acquisition. Accordingly, venture capital firms and start-up company executives tend to frame their perception of common stock value from the potential date of successful exit. Historically, the concept of “value today” for common stock in a medical device start-up has been largely meaningless, because the exit date is the only date that matters to such an investor. (The investment date would also matter, but common stock generally belongs to founders and managers.)
The valuation of early-stage medical device companies is complicated by several factors:
• Investments in medical device start-up companies are largely illiquid, and there are no relevant public comparable companies to provide reasonable benchmarks in measuring value.
• There is often significant uncertainty related to the ultimate success of a medical device start-up (in terms of both product development and commercialization). Such uncertainty is inherently difficult to quantify.
• The underlying economic asset base of most medical device start-ups consists primarily of unique intellectual property and other intangible assets for which there is no active market.
• Medical device start-ups often raise capital to fund product development and commercialization through several rounds of preferred stock issuance, which creates a complex capital structure consisting of a variety of equity classes with different rights and preferences. As a result, determining the value per common share is rarely as simple as dividing total equity value by shares outstanding.
Below, we will discuss common circumstances that give rise to the need for a valuation, basic valuation concepts, and specific valuation considerations relevant to medical device start-up companies.
Defining Value
For start-ups, valuations are most often needed for employee stock option grants and related equity compensation compliance. Financial reporting rules require employers to record compensation expense equal to the fair value of the option grant as of the grant date. IRS Section 409A imposes additional income tax burdens for participants of nonqualified deferred compensation plans, (which includes stock options and stock appreciation rights issued to employees “in the money.”)
To avoid such concerns, the company must not issue options with strike prices equal to or less than the value of the underlying common stock and be able to credibly defend the stated stock value after the fact. Given the severity of the tax implications, the rule effectively requires nonpublic companies that issue stock options or other forms of equity as compensation to obtain an independent, contemporaneous valuation of the relevant securities.
Other common valuation circumstances for start-ups involve advisory services and fairness opinions related to additional fundraising or exit events. These services are on behalf of company management for both planning purposes and fulfilling a fiduciary duty to shareholders. There is also a growing trend of venture capital funds obtaining independent valuation opinions or reviews of internal valuations related to compliance in reporting fund investments at fair value. Since equity compensation issues are the most common valuation issues that face medical device start-up executives, we will frame our discussion primarily from this perspective.
Through casual observation, value seems like an easy concept with a single straightforward definition. In the context of medical device start-ups, however, the clarity of the concept of value quickly diminishes with the question: Value according to whom?
To confront this question, valuation specialists use the concept of standard of value to establish the particular definition when it’s used in a specific situation. Identification of the appropriate standard is the first step of every valuation. So, what are the most common standards for start-up companies?
Fair market value is historically the most common standard of value used in business appraisals and is the standard used for 409A compliance related to equity compensation. Fair market value is defined by Revenue Ruling 59-60 as “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” Note that the willing buyer and willing seller are hypothetical parties—they are not necessarily the same as the existing investors in a particular equity interest.
Accounting standards require that certain investments and equity compensation expense be measured at fair value. Similar to fair market value, fair value reflects a price in a hypothetical transaction between hypothetical parties. Start-up executives and venture fund managers often pragmatically observe that fair market value and fair value are different from the real world, where buyers and sellers are specific people who are individually motivated, uniquely informed, and are using something other than 100% cash to transact business.
Investment value is the value to a specific investor based on that person’s particular investment requirements and opportunities. This value reflects the knowledge, expectations, synergies, and economies of scale of the particular investor. Investment value is generally used when valuation or investment banking professionals are advising their clients about the merits of executing a specific transaction, such as raising additional equity capital, selling the business, or completing an IPO. Investment value answers the questions: What’s it worth to them? Or what’s it worth to me?
Potential Exit Prospects
As we have discussed previously, valuation of an interest in a medical device start-up is effectively the analytical conversion of potential exit prospects into value today. Accordingly, the value of a start-up company is ultimately a function of:
• The range of potential exit values for the company if successfully developed, or “what we will get?
• The probability of achieving a successful exit, or the odds of getting it.
• The expected time period necessary to achieve a successful exit, or the time it will take to get there.
• The expectations of future capital needs, or “what we will need to get there?”
For medical device start-ups, exit events generally take the form of a strategic acquisition or an IPO. In either case, exit value will be driven by the relevant market characteristics combined with the expected impact the company will have on that market. At any given point, the probability of achieving a successful exit—and the expected time period necessary to achieve a successful exit—will be a function of the development stage of the company and certain key indicators such as management quality.
Market Characteristics. Characteristics of the relevant market, including size, expected growth, and competitive dynamics, are perhaps collectively the most significant factor in the exit valuation of a medical device start-up. Even if a start-up has everything else in place, 100% market share of nothing is still nothing. Relevant measures in evaluating a particular medical device market often include the number of physicians performing procedures, the number of procedures performed in a given year, and the reimbursement rate per procedure.
Most new medical devices tend to be improvements on devices used in existing procedures, and thus have a readily defined market at the start of the device development process. Less frequently, new devices offer revolutionary solutions for which there are no existing markets. Developing expectations of market characteristics in this situation is more difficult, but such products typically command far greater market impact.
Market Impact. Market impact can be defined as the market share that a medical start-up would likely command if development efforts succeed. Market impact is driven by the disruptive potential of the new technology and management’s ability to develop the technology, execute the business plan, and fully realize the new technology’s disruptive potential.
Other than the disruptive potential of the new technology itself, strategic acquirers in the medical device space commonly consider a variety of factors in evaluating the potential market impact of a new device:
• Strength of intellectual property.
• Stability of design.
• Technical performance data.
• Support from animal studies.
• Support from human clinical studies.
• Completion of regulatory approvals.
• Reputation of “early-adopter” surgeons using device.
• Reliability of supply chain.
• Reliability of distribution partners.
• Availability of technical expertise (to facilitate transition after acquisition.)
Stages of Development. The value of a given start-up is largely related to its level of operational development. Most medical device start-ups tend to follow similar patterns in operational development regardless of industry segment. Loosely speaking, medical device start-ups often follow this developmental sequence:
1. Conceptual Design.
2. Market Verification.
3. Device Design Verification.
4. Regulatory Approval.
5. Human Clinical Trials.
6. Initial Product Launch.
Since the development of start-up enterprises is measured by the passing of various milestones, the meeting of milestones (or the lack thereof) contributes significantly to the valuation of a start-up. With the passing of each milestone, the level of uncertainty associated with the start-up decreases and thus drives value upwards.
Passing certain milestones creates a bigger impact on value than passing others. Examples of such milestones include the completion of the initial round of financing, proof of concept, regulatory approval, delivery of product to customers, and profitability. Also, meeting later-stage milestones generally drives greater increases in value than that of earlier-stage milestones.
Key Indicators. Compared with mature enterprises, financial information for start-up companies is less frequently available and typically of lower quality. Due to this relative lack of information, factors such as the quality of the management team, clinical advisory team, and venture capital investor group become an important consideration, especially in the valuation of early-stage start-ups.
Valuation of Equity Classes
At this point, it may be helpful to clarify the difference between valuation of an enterprise and valuation of a particular equity class. Enterprise value of a medical device start-up, i.e. the value of the overall business, is a function of, one, expectations related to total proceeds from the range of possible exit events and, two, the amount of additional capital necessary to achieve a successful exit. On the other hand, the value of a particular equity class is a function of not only expectations related to both exit proceeds and necessary capital but also of the allocation of exit proceeds across the range of possible outcomes.
In other words, the value of a particular equity class is driven by the same factors that drive enterprise value, combined with consideration of the differences in rights and preferences across classes of stock in the company’s capital structure. Accordingly, even when the subject interest of a valuation is a particular equity class, determination of enterprise value often serves as a starting point to get there.
When considering the value of a particular equity class, it is important to maintain a forward-looking perspective. A common misconception is that enterprise value should be distributed under the pay-off waterfall, as if cash proceeds equal to the indicated enterprise value were allocated today. Underwater stock options have value because of the potential for stock price appreciation before the option expires. In the same way, the common stock in a medical device start-up has “option value” when the total liquidation preference of outstanding preferred stock is greater than enterprise value (as long as the potential exit event is still some time away).
There are a variety of methods for allocating the total enterprise value to the various classes of equity. When there are no imminent prospects of a sale or IPO, the two most commonly accepted equity allocation techniques are the probability-weighted expected return method and the option-pricing method. An in-depth discussion of the application of these two methods is beyond the scope of this article, but we mention them for you to know what third-party reviewers of a valuation will be looking for.
Minimize Potential for Surprises
As you lead your medical device company, be aware of events that can potentially create the need for compliance-based valuation. Include them in discussions with your attorneys, accountants, and directors to minimize the potential for surprises. When addressing compliance-based valuation issues, maintain a “total cost” perspective over time. Shortcuts taken in the present can become expensive in terms of time, money, and distraction down the line, particularly when the IRS or SEC get involved. Take the necessary steps so that you are sure that valuation is done right the first time. Keep these things in mind and you will be well on your way to effective management of compliance-based valuation issues.
Patrick Lynch is a senior member of Mercer Capital’s Financial Reporting Valuation Group, which provides public and private clients with fair value opinions and related assistance pertaining to goodwill and other intangible assets, stock-based compensation, and illiquid financial assets. He also leads Mercer Capital’s medical device industry practice group, and is active in valuation related to start-up enterprises and early stage technology assets. Lynch can be reached via e-mail at [email protected] and can be found on Twitter at @lynchbp0.

News from MD&M West: Helix Opens Molding and Extrusion Plant in Germany

Helix Medical LLC (Carpinteria, CA) reports that it is opening Helix Medical Europe KG. Located in Kaiserslautern, Germany, the new 55,000-sq-ft facility will initially provide custom molding of silicone components for medical devices. Within the next 12 months the company plans to add custom molding of thermoplastics and thermoplastic elastomers (TPEs), multicomponent molding, and close-tolerance single- and multilumen extrusion of silicone and TPEs. "Our objective is to move our operations closer to our customers so that we can serve their manufacturing and distribution needs on a global level," remarks Jorg Schneewind, president and CEO of Helix Medical LLC. "The fact that we were able to build on the infrastructure of an existing facility owned by our parent company, Freudenberg, created a tremendous opportunity for European expansion."

FDA Continues Probe into Radiation Overdoses

Thermal Printer For Coding

Four printhead models facilitate integration into packaging lines by enabling printing from above or laterally, with print heights ranging from ½ inch to 2 in. Available software packages increase functionality and productivity of the Wolke m600 advanced. With m600 advanced Label Designer, line operators can quickly and easily create and edit complex print labels with logos. The m600 advanced Ethernet Manager helps users manage and back up print data and perform software updates.

"Leveraging tecnology that people are comfortable with and combining it with industrial strength processes, enables flexibbility and simplicity of operation," says Prechaska.

Medalist Compounds Replace PVC in Medical Tubing

medalist-coiled-tubingTeknor Apex Co. (Pawtucket, RI) introduced a series of medical-grade elastomers today at MD&M West. Responding to market demand for DEHP-free materials, the company developed the Medalist MD-500-series compounds to replace PVC in medical tubing applications. Boasting clarity and mechanical strength comparable to those of PVC, the Medalist compounds also exhibit a similar look and feel. They feature resistance to kinking and necking as well. In addition, the materials have enhanced bondability to connectors, according to new business development specialist Elliott Pritikin. "Medalist MD-500-series products outperform traditional PVC-alternative technologies by mirroring many of the performance and handling characteristics of flexible PVC tubing compounds, while providing distinct advantages in some key capabilities," Pritikin says. Distinct advantages offered by the Medalist materials include more flexibility and a less-dense product than with PVC, according to the company. Furthermore, the company jumped at the chance to improve upon some of the less-desirable characteristics of PVC, Pritikin notes. For example, PVC is compatible with EtO sterilization, but has not been especially gamma stable, he adds. The company claims that the Medalist series, on the other hand, exhibits 70% less heat-aged color shift than a gamma-stabilized PVC compound of comparable hardness. The material is provided with Shore A hardness ranging from 55 to 90. Medical applications for the series include IV and infusion tubing as well as tubes for respiratory and feeding devices.

Following the Road to Regulation

In response to some public health concerns over the largely unregulated laboratory services industry, Congress passed the Clinical Laboratory Improvement Amendments (CLIA) in 1988 to establish standards for laboratory testing and ensure the accuracy and reliability of patient test results regardless of where the test was performed. Under this law, a laboratory is defined as any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease, or impairment of, or assessment of, health.3

FDA has asserted its jurisdiction over laboratory-developed tests (LDTs) by way of guidance documents concerning in vitro diagnostic multivariate index assays (IVDMIAs), a subset of LDTs. This move has sparked much discussion and debate among stakeholders because it represents a major shift in the agency’s approach to LDTs. This article examines FDA’s legal authority to regulate IVDMIAs and its decision to implement this new policy through the use of guidance documents rather than through the public rulemaking process.

Draft Guidance: IVDMIAs

Until recently, LDTs had not been subject to FDA 510(k) premarket notification or premarket approval (PMA) requirements. FDA’s regulatory focus was on genetic tests sold as kits and the analyte-specific reagents (ASRs) used to make genetic LDTs. FDA has generally exercised enforcement discretion over LDTs and has not actively regulated them. 

On September 7, 2006, FDA released Draft Guidance for Industry, Clinical Laboratories, and FDA Staff: In Vitro Diagnostic Multivariate Index Assays with a 90-day public comment period.4 Reasoning that “clinical laboratories that develop [in-house] tests are acting as manufacturers of medical devices and are subject to FDA jurisdiction under the act,” the draft guidance sets out the regulatory rules for companies and laboratories that manufacture IVDMIAs.

On July 26, 2007, FDA issued a second version of the IVDMIA guidance document with an additional 30-day comment period. In the revised version, FDA narrowed the scope of and more clearly defined IVDMIA products that would be subject to the approach defined in the guidance. An IVDMIA is a device that:

?    Combines the values of multiple variables using an interpretation function to yield a single, patient-specific result (e.g., a classification, score, index, etc.), that is intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease.
?    Provides a result whose derivation is nontransparent and cannot be independently derived or verified by the end-

The draft guidance gives examples of tests that are and are not IVDMIAs to further clarify its definition. Examples of existing IVDMIAs that lack premarket clearance or approval to date include gene expression profiling assays for breast cancer prognosis; products that predict disease risk by integrating results from multiple immunoassays; and those that predict risk or diagnose disease by integrating age, sex, and genotype of multiple genes. The revised guidance also provides multiple examples of devices that are not considered IVDMIAs.

FDA will classify an IVDMIA based on its intended use and on the level of control necessary to ensure the safety and effectiveness of the device. Commercially marketed IVD test systems will be assigned to one of three categories based on their potential risk to public health. These categories are waived tests, tests of moderate complexity, and tests of high complexity. Each specific laboratory test system, assay, and examination is graded for level of complexity by assigning scores to each of seven criteria. These categorization criteria are knowledge, training and experience; reagents and materials preparation; characteristics of operational steps; calibration and quality control; proficiency testing materials; test system troubleshooting and equipment maintenance; and interpretation and judgment. CLIA categorization will be announced in a Federal Register notice that will provide opportunity for comment on the decision. On May 7, 2008, FDA released the Draft Guidance on Administrative Procedures for CLIA Categorization. Notice was published in the Federal Register to provide the opportunity for comment, but no comments were received. FDA continues to address IVDMIAs and LDTs where risks are perceived, even while draft IVDMIA guidance is pending. FDA believes most IVDMIAs fall under the moderate-risk (Class II) or high-risk (Class III) device categories.4

Federal Rulemaking versus Guidance Documents

It is easy to understand the practical pressures on FDA given the agency’s limited resources. But many legal observers question FDA’s compliance with the Administrative Procedures Act (APA), which governs when and how agencies must go through the formal rulemaking process (see the sidebar, “The Rulemaking Process”).

In September 2006, the Washington Legal Foundation filed a petition with the agency saying that FDA “lacked the statutory authority to regulate tests developed by laboratories for their own use and offered only to healthcare professionals.” The foundation further said that “clinical labs have long been subject to regulation by another federal agency—CMS and its predecessors—pursuant to [CLIA].” Codifying FDA’s proposal “could undermine effective healthcare by crippling these labs’ ability to quickly develop tests…” the foundation said.5

The American Clinical Laboratory Association (ACLA) recommended that FDA issue a proposed rule to address this topic through the formal notice-and-comment rulemaking process rather than through subregulatory guidance, according to ACLA president Alan Mertz. He said that FDA should work with CMS to enhance CLIA regulations. Such an approach could address the concerns that prompted FDA to issue the draft guidance in the context of the regulatory framework specifically designed for clinical laboratories and the services they provide. He said that systematic and rigorous enforcement of these requirements by CMS could approximate the independent validation of clinical relevance that FDA seeks to achieve for IVDMIAs through its draft guidance.

Others have said that even if FDA has the statutory authority to regulate IVDMIAs, the agency would be misguided to do so. In its proposal, FDA said that it is troubled about how IVDMIAs rely on algorithms to calculate specific results, and then report those results in a way that would make it difficult for doctors to understand them without prior knowledge of the test. And confounding this situation is the observation that FDA has recently taken a piecemeal approach toward regulating IVDMIAs by sending letters to some test developers, including Genomic Health, Correlogic, LabCorp, Agendia, and InterGenetics, suggesting that CLIA certification may not be enough to bring their products to market.

Today, although FDA continues to rely on its substantive rulemaking authority, the efficiency of rulemaking as a regulatory tool has been reduced. The internal process of issuing regulations is far more cumbersome. Although the essential elements of informal notice and comment remain the same, there are now layers of review in the Office of the Commissioner, the Office of the Secretary of the Department of Health and Human Services, and the Office of Management and Budget. Moreover, concerns about economic burdens and paperwork reduction must now be taken into account in every major new regulatory proposal. For these reasons, FDA has, with increasing frequency, resorted to issuing less-formal guidance documents to manufacturers on matters of mutual interest and concern.

Although guidance documents cannot legally bind FDA or the public, the agency recognizes the value of guidance documents in providing consistency and predictability. In 1997, Congress specifically addressed the practice of using guidance documents by adding section 702(h) to the Federal Food, Drug, and Cosmetic Act (Good Guidance Practices), which now generally governs their use. The purposes of guidance documents are to provide assistance to the regulated industry by clarifying requirements that have been imposed by Congress or issued in regulations by FDA and by explaining how industry may comply with those requirements and provide specific review and enforcement approaches to help ensure that FDA’s employees implement the agency’s mandate in an effective, fair, and consistent manner. An important element of the Good Guidance Practices section is its inclusion of the public in the formulation of guidance documents. 

For example, a petition for rulemaking was filed on September 26, 2006 by Kathy Hudson, PhD, director of the Genetics and Public Policy Center for Johns Hopkins University; Peter Lurie, MD, deputy director of Public Citizen’s Health Research Group; and Sharon Terry, president and CEO of Genetic Alliance. It requested that CMS create a genetics specialty and establish standards for proficiency testing. CMS stated that it is required to conduct a number of analyses in determining whether the public rulemaking process should be implemented.

In its analyses, CMS referred to Executive Order (EO) 12866, which limits agency rulemaking to instances in which regulations “are required by law, are necessary to interpret the law, or are made necessary by compelling public need.” Furthermore, in deciding “whether and how to regulate,” EO 12866 requires agencies to assess all “costs and benefits of available regulatory alternatives, including the alternative of not regulating.” The agency is obligated to select from available alternatives “that maximize new benefits.” In the end, “the agency must adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs,” and then tailor its regulations to impose the least burden on society…consistent with obtaining the regulatory objectives…”6

FDA states in its guidance that it has applied the “least burdensome approach.” Section 205 of the FDA Modernization Act of 1997 is premised on the principle that regulatory requirements should not exceed what is required to protect and promote the public health. This provision requires FDA, in consultation with the product sponsor, to consider the least burdensome means to enable appropriate premarket development and review of a device without unnecessary delays and expense to manufacturers.

FDA’s Assertion of Authority

The revised guidance document clearly articulates two reasons for FDA’s assertion that IVDMIAs pose more risks than other LDTs. First, IVDMIAs “are developed based on observed correlations between multivariate data and clinical outcome, such that the clinical validity of the claims is not transparent to patients, laboratorians, and clinicians who order the tests.” Second, some IVDMIAs have “high-risk intended uses” and patients rely on them to “make critical healthcare decisions.” These factors, taken together, led to the conclusion that “there is a need for FDA to regulate these devices to ensure that the IVDMIA is safe and effective for its intended use.”4

FDA has recognized the skill and expertise of CLIA-regulated, high-complexity laboratories to use reagents in test procedures and analyses of their own development, and the agency generally has not regulated laboratory-developed testing services. This determination has been based in part on the need to manage the agency’s limited review resources. Nonetheless, because IVDMIAs incorporate articles of software “intended for use in the diagnosis of disease,” they are considered devices under 21 USC 321(h)(2). Relevant parts include the following:

?    Section 513(f)(1) of the act, 21 USC 360c(f)(1), which states that “[a]ny device intended for human use which was not introduced or delivered for introduction into interstate commerce for commercial distribution before the date of enactment of this section is classified into Class III” unless it has been found substantially equivalent to a Class I or Class II device, or unless it has been reclassified into Class I or Class II.
?    Under section 515 of the act, 21 USC 360e (f)(1), a device that is classified into Class III by operation of section 513(f)(1) “is required to have, unless exempt under section 520(g), an approval under this section of an application for premarket approval.”
?    Software is a device for which premarket approval is required to establish safety and effectiveness. The appropriate vehicle for such approval is the submission and FDA review of a premarket approval application (PMA). PMA requirements are set forth in FDA’s regulations (21 CFR part 814).

Table I
Table I. (Click to enlarge) A comparison of FDA and CLIA regulatory elements for certain IVDs.

The government plays a role in regulating the quality of genetic tests, but observers note that there are some important gaps (see Table I). Even Janet Woodcock, director of FDA’s Center for Drug Evaluation and Research, agrees that the current structure of genetic test regulation is “not optimal.”

Significant Gaps in CLIA Regulatory Oversight

CLIA regulations are based (as required by statute) on the complexity of the test method; thus, the more complicated the test, the more stringent the compliance and oversight requirements. Under CLIA, three categories of tests have been established: waived, moderate complexity, and high complexity. Most genetic tests fall into the high-complexity category. However, as pointed out earlier in the Report of the Secretary Advisory Report on Genetics, Health, and Society, oversight of genetic testing is limited in several critical areas.8 These areas include the following:

?    Current CLIA regulations do not specify particular procedures or protocols. Although CLIA requires all clinical laboratories, including genetic testing laboratories, to undergo inspections to assess their compliance with established standards, current regulations do not specify particular procedures or protocols. Rather, they require laboratories to ensure that their test results are accurate, reliable, timely, and confidential, and that they do not present the risk of harm to patients.
?    Most genetic testing laboratories are not required by CLIA to perform proficiency testing. Such testing is an external assessment of laboratory competence, yet CMS only enforces the formal proficiency testing performance requirement for laboratories offering any of the 83 regulated analytes.
?    Only analytical validity is fully enforced under CLIA, because CMS does not have authority under CLIA to enforce clinical validity. Analytical validity of a genetic laboratory test is a measure of how well the test detects what it is designed to detect. Clinical validity measures the extent to which an analytically valid test result can diagnose a disease or predict future disease.
?    CLIA has no authority or mechanism for external review of the clinical validity and clinical utility of tests. Utility of a test is a measure of how useful test results are to the person tested.
?    CMS has no authority to perform postmarket review or adverse-event reporting, safeguards provided in FDA’s medical device regulations. CLIA provides for biennial inspections of laboratories, but these inspections do not focus on the clinical performance records of the LDTs themselves.


Few human genes had been identified at the time CLIA was enacted. However, in the 20 years since, genetic testing has moved from the sidelines into mainstream medicine. Although initial research focused on rare diseases caused by a mutation in a single gene, more recent research has focused on the identification of genetic contributions to complex, multifactorial conditions such as cancer, diabetes, and heart disease. Identifying the genetic underpinnings for individual variation in response to treatment has sparked interest in targeted drug design (pharmacogenomics) and in identifying those genetic variants that may predispose an individual to an adverse or, conversely, to a particularly good therapeutic response.

The common denominator in all of these current and future applications of genetic research to human health is the tests used to identify genetic variations. As the complexities of genetic research emerge, new insight into the necessity to ensure safety and efficacy has become apparent. Significant gaps in regulatory oversight exist in CLIA’s regulation of IVDMIAs, and they must be addressed.   

FDA’s decision to issue a guidance document pursuant to the “least burdensome” provisions appropriately considered the costs and benefits of available regulatory alternatives and complied with good guidance practices. Indeed, FDA extended the comment period twice and held a public meeting, and the revised draft guidance addressed many of the concerns raised by stakeholders. FDA’s assertion of regulatory authority is not an attempt to create a new rule or to change an existing rule and therefore is not subject to the public rulemaking process under the APA. Rather, FDA’s goal is to address the gaps in regulatory oversight of IVDMIAs to ensure the safety and efficacy of these tests in the most cost-efficient and least burdensome way possible. 


1.    B Malone, “Healthcare Reform: What’s At Stake for Labs?” Clinical Laboratory News 35, no. 7 (July 2009).
2.    “Clinical Laboratory Improvement Amendments of 1988: How to Assure Quality Laboratory Services,” Center for Medicare Advocacy. Available from Internet:
3.    Federal Register, 57 FR:7002, February 28, 1992; 68 FR:64350, November 13, 2003.
4.    Draft Guidance for Industry, Clinical Laboratories, and FDA Staff—Multivariate Index Assays (Rockville, MD: FDA, Center for Devices and Radiological Health, 2007).
5.    Washington Legal Foundation’s Citizens Petition. September 26, 2006. Available from Internet:
6.    Federal Register, 58 FR:51,735, September 30, 1998.
7.    Administrative Procedures Act, Title 5, USC Chapter 5, Sections 511–599. Available from Internet:
8.    U.S. System of Oversight of Genetic Testing: A Response to the Charge of the Secretary of Health and Human Services Report of the Secretary’s Advisory Committee on Genetics, Health, and Society, April 2008. Available from Internet:

Neurostimulation System Architecture

Pulse generator. This system is shaped much like a cardiac pacemaker, a device comprised of a thin titanium shell housing batteries and capacitors, microelectronics, and mechanical framework. Most neurostimulation products borrowed technology from pacemakers and defibrillators, which enabled neurostimulation pioneers to develop clinical therapies from already-established platform technology.

Lead and Electrodes. The lead is a thin, shielded wire that stems from the pulse generator’s header, which is a polyurethane molded connector on the device. An electrode is located on the distal tip of the lead. This system applies low-level electrical current from the pulse generator to a targeted nerve or a specific location in the brain. 

Physician programmer. This nonimplanted handheld device communicates with the implanted pulse generator via telemetry. The physician uses the programmer to set the initial device parameters that drive therapy, such as signal output current, frequency, pulse width, and on-off time. The programmer is also used for follow-up visits as the physician optimizes the device parameters, tailoring therapy to the individual patient. 

Patient controller. The patient interface, also a nonimplanted handheld device, allows patients to modulate their own therapy as needed. It can record and send data from the patient to a central database for an off-site physician to review. 

In addition to these four subsystems, SCS devices specifically include an external power source to recharge the implanted pulse generator’s battery, necessitated by the continuous output of higher energy.

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