Q: What is the current state of the medical device marketplace?
John Engelhardt: We’ve really had to readjust our idea of the device marketplace and its future based on two things. The bigger picture is that there are increased regulatory activities and increased scrutiny from the DOJ that began several years ago and is continuing. As a result, companies really are having to redesign how they’re doing business, and this is redefining the market at large. The FDA has also recently become very slow to approve new devices and appears to have changed it requirements for submission. The FDA is requiring more data than they’ve ever required in the past, even for routine 510(k) clearance. They’re looking for more extensive documentation of mechanical testing and more design information, and this is creating a situation where innovation is slowing to the marketplace. There is a much longer standard approval time for innovation.
Additionally, the global economic situation has exaggerated the impact of uncertainty surrounding the healthcare reform debate. Venture capital has dried up dramatically, and new endeavors are finding it very difficult to get funding.
Q: What is the impact of increased regulation and limited funding on the industry?
JE: We are seeing innovative products not hitting the market as quickly as they typically would, and this creates a burden on device companies. [The companies] made an investment in R&D and may not be able to recoup that investment.
The lack of venture capital is going to mean that in 3-5 years we will see significantly fewer innovations arriving in the marketplace. I can virtually guarantee there will be less innovation in five years based on the drying up of venture capital money today. This lag in innovation is directly going to affect device makers’ ability to return money to their shareholders as well. We also believe that as a result of all of this there are going to be fewer companies in the space, and this could be a good or a bad thing.
Q: How will this lag in innovation affect surgeons, and ultimately, patients?
JE: If we accept that these innovations are aimed at improving patient care, and they should be if they’re going to have an economic impact for a company, then we have to accept that the ability to provide improved patient care will diminish. Surgeons will not have available to them technology that might have provided improved patient care and outcomes in a more straightforward economical manner. If we accept that, then we have to accept that patients will have less new resources available to them.
With the increased attention for the DOJ, we also anticipate the government moving toward more restrictive laws on surgeon ownership of technology and device makers. Many devices are developed by surgeons, and the government is now restricting how those physicians can be compensated. It’s all a bit unclear at this point, but I think some types of compensation will be allowed, though many others, such as outright ownership, may not.
Q: When you consider investing in a device company, what type of criteria do you use to evaluate the company?
JE: We are looking for technology that addresses the issues I previously mentioned —technology that will improve patient care and is truly trying to drive the cost of care down. We’re particularly excited about new technologies that move surgery from a higher cost-of-care site, such as the hospital, to a lower cost-of-care site, such as the ASC, or more extremely, the physician office. In light of healthcare reform, technologies that drive down the cost of care become very attractive. What we see for the future is a more significant movement toward true minimally-invasive surgery for reasons different from what we used to think. We believe that the cost of the procedure is directly proportional to the length of the incision. The larger the incision, the more blood loss, the longer the OR time, the greater the potential for infection and the longer time needed for rehab. The desire to reduce these will continue to drive innovation.
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