The regulatory situation can be even more complex in emerging markets such as China and India.
China divides the regulation of medical devices among municipal, provincial and state agencies, depending on the health risk involved, said Katherine Wang, a specialist on the Chinese medical market with international law firm Sidley Austin. Riskier devices like implants are reviewed at the national level, where variables such as open-ended deliberations by expert panels under China’s State Food and Drug Administration mean approval timelines now extend to 18 months, she said at the EE Times summit.
“The market in China is not homogeneous,” Wang noted, so U.S. companies need a Chinese partner, either a manufacturer or a distributor with a broad product portfolio. Local manufacturing would also give U.S. companies a leg up in gaining all-important government insurance reimbursements, she added.
For its part, India is in the process of adopting classifications for regulating medical devices that mirror those used in Europe, said Evangeline Loh of health care consultancy Emergo Group Inc. Among other large or emerging markets, Japan has a unique classification scheme, and Brazil can require high inspection fees.
Once a company gets regulatory approval for a product, it must start another process to get approved for insurance reimbursement for the product’s use. “Reimbursement is an important commercialization hurdle for medical devices,” said Dean Geraci, director of health economics and reimbursement for surgical devices at Covidien, speaking at the EE Times event.
The health care reform act of 2010 will drive a shift toward new mechanisms—similar to those currently in use in the United Kingdom—for measuring the comparative effectiveness of devices and procedures. Such measures are “not necessarily a separate hurdle, [but they] can certainly increase the height of the [reimbursement] hurdle,” Geraci said.
The reimbursement process in China is about as challenging as those in the Unites States and Japan, said Peter Ehrhardt, who oversees reimbursement consulting at Simon-Kucher & Partners. Japan sometimes requires up to four licenses.
Following the money
Venture capital, under pressure in all sectors, has tightened up in health care of late. Three Arch Partners principal Wan said the pace of 10 deals a year at his firm had slowed to six or seven since the recession.
In addition, a lot of VC capital is now tied up in late-stage companies seeking limited opportunities for going public or being acquired. And the sluggish regulatory process is forcing increasing numbers of middle rounds—a “dead zone” where company valuations can fall and investors risk seeing the value of their investments diluted.
“You see companies doing Series E, F and G rounds and not getting rewarded for taking that risk,” Wan said at the summit. “At best, it’s a flat round; flat is the new up. So you have to ask, why even do a new round?”
The reason is often to get a first product through the FDA. Wan noted one of his startups had already raised a whopping $180 million but would need another $60 million to get its product approved for U.S. use.
The good news is many large U.S. medical electronics companies are flush with cash and are under “tremendous pressure” from shareholders either to put those huge reserves to work or pay shareholders dividends, said Tracy Lefteroff, a partner at PriceWaterhouseCoopers.
Large companies are often geared toward shepherding incremental advances through the global regulatory machine. They’ve developed an appetite for startups as a way to fuel their growth. “Innovation happens in small companies,” Lefteroff said.
But startups must be nimble to get themselves to a stage where they are ripe for acquisition. “You’ve got to be creative about what you have and how it can be used in other markets,” J. Casey McGlynn, who heads the Life Sciences Group at Silicon Valley legal firm Wilson Sonsini Goodrich & Rosati, told the EE Times summit.
For example, the Department of Defense and the Department of Veterans Affairs have millions of dollars to spend on rehabilitation techniques for soldiers. Companies that go after those dollars can later turn their technologies to broader markets. Startups not only are increasingly focusing on European and Asian markets, McGlynn and others said; they are also looking beyond the United States for funding.
One target is Singapore, which sees medtech on its horizon. Wan said he had hired an executive team for a startup in San Diego that soon packed the company off to Singapore, where it found both new funding sources and faster access to markets.
In the final analysis, most executives are confident digital technology will drive new opportunities in medical electronics for many years to come. They are less sure whether those opportunities will be realized in the States.
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