The Affordable Care Act (ACA) of 2010 has triggered the beginning of significant changes in the health care system. Aside from the stated objective of expanding health care coverage and improved quality and affordability, instituting reforms to reduce costs and improve patient outcomes dramatically impacts accountability for the industry. The buzz word is meaningful use: health care cost-benefit measured as reported patient outcomes and cost. Meaningful use not only applies to health care treatment, but impacts upstream development of new medical devices, adding an additional component in evaluating risk. Does the new device reduce health care costs and improve patient outcomes?
Meaningful use effectively inserts an additional criterion for regulatory oversight and shifts innovation towards quality over quantity at an affordable cost; and, it further complicates getting new reimbursement codes if none exist for a procedure and potentially could dampen innovation. As a rule of thumb, new devices and technology-enabling interventions must not only demonstrate improved patient outcomes, but also be priced at current market or lower than existing standards of care.
The impact is the same whether for entrepreneurial or established companies in moving concepts from the clinic or the lab into product development. Then there is the question of whether there are predicate devices or the innovation is disruptive and creates an improved treatment modality. For example, in its early years, San Antonio-based Kinetic Concepts Inc. (KCI) partnered with Fort Worth-based Avail Medical Products both for design and manufacturing. KCI’s V.A.C.® Negative Pressure Wound Technology at the time it was a game changer in wound management with no comparable predicate device. What additional regulatory challenges would KCI have faced today in proving meaningful use to obtain reimbursement codes and regulatory approval that increased the price of wound management? A likely tactic might have been demonstrating improved quality and patient outcomes with measurably lower total cost of care. However, this would broaden the scope of the clinical data and lengthen the time required for FDA submission.
Upfront “de-risking” analytics, assembled from best practices, help to evaluate and sort innovation along multiple axes. The vast majority of ideas for clinical devices originate with clinicians, in contrast to medical technologies often developed in labs and adapted in partnership with clinicians to medical applications. New products and technology from both can be similarly analyzed to manage uncertainty, including improved quality care and affordability, by drilling down along five axes of risks.
Defining the customer and market-need is the first major hurdle and requires clear understanding of the problem being solved from the customers’ perspective. Feedback from the customer is essential in combination with technical feasibility and evaluation confirmed by subject matter experts. Falling in love with a product or technology, without sufficient validation from independent stakeholders of both the problem and the need, is the classic mistake of entrepreneurs.
Technical feasibility demonstrated in a prototype is often the first requirement. Clinical understanding of the applications and alternatives minimizes the potential for going down a dead end. Does technology provide an incremental improvement or change significantly how procedures are done? However, keep in mind that even with each of these boxes checked, prototype stage is only five percent of the development process and less in the evaluation of total risk for launching a successful product.
Clearly validating the need and problem solved defines the market – its size, competitive landscape, economics, and matrix of possibilities for getting a product to market. For entrepreneurial medical device companies, access to markets is a challenge because established companies dominate the sales channels. This makes OEM, B2B deals very attractive and less risky for entrepreneurial companies, but makes their future completely dependent on partners. The timing for executing a partnership is dependent on the type of product and its state of market readiness.
Established companies often are slow to innovate and have bureaucratic barriers reducing agility and making them risk averse. Whether considering new products from internal or external innovation, internal hurdle rates for new products often kill innovation in general, making the B2B sale more difficult. For the entrepreneur, getting a product through pilot production, FDA cleared, and ready for market launch creates a compelling strategy to attract distribution or acquisition partners.
For an engineering company, like Austin-based DLI, Inc., partnership at an earlier stage affords the possibility of co-development and offsetting some market risk in return for a reduced upside. Results from prototypes for measuring oxygenation levels in wound management have demonstrated feasibility and the IP and clinical data have reduced inherent technology risk. Partnering provides bundled value-add for therapy or surgical interventions, thereby benefitting from a sell-through arrangement, instead of as a standalone hardware sale. The B2B sale requires anticipating competitive advantage and market drivers for the partner, including additional revenue opportunities and the fit for workflow and reimbursement. This creates lengthy engagements to reach agreement as the partner does its internal risk analysis and determines whether the new product meets its internal hurdle rate. Add to this the need to demonstrate meaningful use and cost-benefit, corporate calendars and internal politics – entrepreneurs need to be prepared for lengthy timelines.
Israeli co, Carevature mpany, developer of the disposable, DReal™ high speed, curved spinal shaver for lumbar and cervical decompression, is another product development example for an entrepreneurial company. Engineering and clinical partnership has led to a product platform that improves patient outcomes in current procedures at an attractive price point and avoids the need for spinal fusion in future procedures. Technology risk has been minimized with a design that is patent pending, CE marked and in limited production. Improved patient outcomes at a competitive market price confirm meaningful use and focuses FDA regulatory risk on safety and efficacy. All of the elements are in place for creating a winning ‘go-to-market’ strategy.
However, getting product to market consistent with a longer-term exit strategy is another challenge for a company like Carevature. In parallel, the company has the opportunity to consider marketing partners in B2B relationships or direct sales to increase its inherent market value. With FDA cleared predicate devices selling at a higher price point, the company’s highest risk is optimizing market strategy to maximize the value of its IP.
In both entrepreneurial examples, as well as for established medical device companies, taking product concepts to a manufacturable product is 95 percent of development – prototypes are five percent of the journey; the balance is execution in design, product iteration from alpha and beta testing to final product, design for manufacturing, safety, and cost. This requires a structured, documented design process able to pass FDA audits with all of the required documents to trace the product from concept to alpha and beta prototypes, including change control, Failure Mode Effects Analysis, and production readiness.
With the assumption that the device improves patient outcomes and is value-added for the clinic, the economic analysis of manufacturing and marketing costs are essential for developing pricing strategies, thereby validating meaningful use. Since FDA review will include cost-benefit, having an estimated price and reimbursement strategy is necessary concurrent with submission. This requires preliminary roadmaps and project plans sooner, not only for estimating the cost of production, but also for a costed marketing and sales plan to evaluate total pricing. For developing stage companies, these requirements are significant and may make marketing partnerships more desirable for less experienced entrepreneurs.
On the production side, there is the decision on manufacturing strategy – outsource or build internally? With the breadth of GMP compliant manufacturers, outsourcing is a lower cost, faster path to market. Outsourcing reduces the overhead inherent in setting up a standalone manufacturing and supply chain operation, and often can be a faster, lower cost path to market. This gets to fundamental questions of core competences and desired levels of control.
Providing data on safety and efficacy for medical devices in comparison with predicate devices has been the standard, with the degree of proof and requirements for clinical data depending on the type of device. Whereas the added dimension of a cost–benefit analysis is not necessarily new, in the context of improved patient outcomes and reduced overall cost, it takes on greater scrutiny. Devices that improve existing procedures have a much easier hurdle since predicate devices of similar function are available for evaluating both efficacy and economics. Technologies and products for which thereis no predicate or basis for comparison historically had additional hurdles. Although it is still not clear how meaningful use will impact the approval process, overall it will be secondary relative to whether new products that have no predicates receive reimbursement codes. In this regard, meaningful use is likely to be the primary driver.
Like any new product, developing and manufacturing medical devices require creativity, market awareness, and innovative thinking. Having resourceful talent with good track records increases the probability of success and is perhaps the most important risk factor to manage. The added component of regulatory compliance requires execution within well-defined boundaries; it’s a rule of the game. To be fast to market simply requires precision, speed, and discipline to “dot the i’s and cross the t’s.” There are no short cuts. Although great ideas and inventions come from people, the idea is only the “anti to play the game.” True success in developing medical products and bringing them to market is coordinated teamwork and alignment to common goals and shared values.
Deciding how to win with what products requires managing risk on the front end. People-driven execution on the backend is key for driving customer focus with operational excellence – the winning combination.
Doug Brenner, Ph.D., M.B.A. is a Principal at Ancor Capital Partners and the Managing Partner of BVA Solutions Group, a Dallas-based consulting group. BVA specializes in developing, licensing, financing, and commercializing ‘de-risked’ technologies for investors and corporate product portfolios for acquisition.