Washington buzz that the United States Food and Drug Administration may tighten scrutiny of new medical devices has been greeted with sadness, if not surprise, by many device manufacturers. These firms have long thrived under a streamlined “510(k)” regulatory process allowing FDA to grant simple approval for devices that are substantially equivalent to devices currently marketed. FDA insisted on a tougher approval process for more novel devices.
With FDA likely requiring higher standards for clinical trials prior to approval, the current R&D model – in which hundreds of devices may be in firms’ development pipelines – cannot be sustained. It would be far too costly to undertake clinicals for products that fill very small market niches, such as for peculiar surgeon preferences. In the past, manufacturers have thrived through offering a profusion of devices to suit every surgeon’s tastes, even though the devices had to be similar to those already in-market to qualify for the 510(k) pathway. Device makers won market share through having the R&D muscle to offer broad selection while simultaneously having a large salesforce that could get close to surgeons and understand their particular wants. This strategy now needs to change.
In the future, device R&D will need to focus more on a handful of key growth platforms, where the payoff for success can justify the substantial costs for clinicals. Given that many classes of devices are under fierce pricing pressure due to commoditization, the platforms will need to create "disruptive innovations" along new dimensions of performance. They might also cater more to the economic and operational needs of the facilities that purchase these devices – hospitals, outpatient clinics and the like – and less to the tastes of surgeons who have historically recommended which device to buy. Perhaps, for instance, devices will start to integrate with hospital IT systems to better monitor usage, which would both improve patient safety and ensure accurate billing.
In the past it was easy to bias a development pipeline toward small “quick wins” that could qualify for 510(k). Now manufacturers will need to make hard choices about what platforms really have the legs for growth. Product – and service – prioritization will be about making bets over several years, versus making tactical decisions about one-off improvements. Portfolio planning meetings will look vastly different than in years past.
An analogy comes from an unlikely place: paint. In the 1980s this was an ugly industry. A host of manufacturers made little money through selling commoditized products with high marketing costs. Two decades ago, government introduced environmental regulations on solvents which vastly raised the bar for new products. The winning firms had the resources to meet the challenge, and the new products largely sold themselves. While there were fewer new products in the marketplace, they earned their manufacturers a good return. Innovation also moved in new directions, for instance through commercializing powder coating technology to replace liquid paints. The industry bloomed.
Companies typically greet stiffening regulations with trepidation. Yet under certain conditions, these changes can catalyze much needed shifts in strategy and business model. The medical device industry seems primed for just such a move.
This post was written by Steve Wunker. For more on New Markets Advisors' thinking on healthcare, click here.