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Chandra Duggirala, maker of an experimental device for type two diabetes, is on the verge of giving up.
Duggirala’s company, Novobionics, raised a small amount of funding for a noninvasive technology that mimics the effects of gastric bypass surgery. The device tricks the gastro-intestinal tract into thinking it is full, which slows the rate of nutrient absorption, thereby easing suffering for diabetes patients.
Despite promising early results, the entrepreneur and physician at San Mateo Medical Center has struggled to procure a second funding round that would bring it to market.
“We’re living in a time of total uncertainty,” Duggirala explained. “When it comes to medical innovation, investors essentially have to pay the government to invest in tech, which is scaring them off.”
Is the FDA killing medical innovation?
“Uncertainty” is not a word that Silicon Valley’s investors — or their limited partners — like to hear, so Duggirala’s story is far from unique.
Medical device entrepreneurs and entrepreneurs have complained vociferously for years that funding is drying up. And a confluence of factors have made the situation steadily worse.
A 2.3 percent excise tax on medical devices enacted as part of the Affordable Care Act, the rising cost to get a device to market, and a lack of regulatory clarity from the Food and Drug Administration (FDA) are cause for concern.
The tax may not seem like much, but it’s on revenues, not profits — and since most medical device companies are far from profitability, that takes an especially deep bite. It’s still unclear which entrepreneurs will be required to pay the tax. For instance, will the government levy it on mobile medical devices — or smartphone apps — that are sometimes used in clinical settings, like this urine analysis app?
Other health-tech experts point to the current patent system that, as Practice Fusion’s senior policy strategist Lauren Fifield puts it, is “confusing and a real mess.” Because the Patent Office is slow to approve applications, inventors must work in secrecy to protect their ideas, sometimes for years. One entrepreneur might have a tremendously good idea for a device and be unaware that four other groups are working on a similar model.
A spokesperson from the FDA said the agency is aware of these concerns.
“We’re reaching out to venture capitalists and entrepreneurs to include them in our discussions and have used the feedback to develop smart regulations that balance patient safety and innovation,” an FDA spokesperson noted in an email interview, and provided a link to a new program where entrepreneurs work in concert with FDA employees.
(Note: It took the FDA took two weeks to assign a spokesperson, and cancelled interviews on multiple occasions, after VentureBeat requested comments — indirectly confirming criticisms about its glacial pace.)
The FDA may be partially responsible, but it points out that it’s not the only organization that has a role to play in bringing a new medical device to market. Entrepreneurs will also have to contend with institutional review boards, third party payers, and they have to front the cost of a clinical trial.
Venture funding is dwindling
Malay Gandhi, the chief strategy officer for digital health incubator Rock Health, estimates that medical device funding is down 13 percent year over year. He noted that class 3 medical devices are the most affected, as it’s taking longer than ever before to get these high-risk (and potentially high-reward) products to market.
Further research from PricewaterhouseCoopers and the National Venture Capital Association found that the $700 million in 84 deals that went to medical device companies in 2012 represented a 17 percent drop in dollars and an 11 percent decrease in the number of deals year over year.
Above: Mike Carusi, medical device investor at ATV Capital
“We have been pushing the FDA on how difficult it is to get products approved,” said Michael Carusi, a general partner at ATV Capital who specializes in life sciences and medical devices.
Alongside many venture investors, Carusi believes that the uncertain approval process for new medical devices is stunting innovation and killing jobs. In 2011, the New York Times reported that Carusi donated $1,000 to a Minnesota congressman who lobbied Washington D.C. to support a bill that would make it easier to bring new medical products to market.
Carusi’s relationship with the FDA has fractured over the years. His firm has grown all too familiar with abrupt regulatory changes midway through an investment.
Most recently, a spate of new mitral repair devices hit the FDA speed bump, prompting Carusi to question the high bar for efficacy of early-stage devices that are far less invasive than the alternatives.
This follows one of his most high-profile investments, XTENT, which went public in 2007 during the glory days for medical devices. But the Sun Valley medical device manufacturer saw its path to market prolonged by two or three years due to new regulation. The company was later sold at a “massively discounted value,” Carusi recalled, and was eventually shut down.
Worse still, portfolio companies have been stunted by regulation from Washington D.C., only to see success elsewhere. Just a few months after the FDA voted against approving Emphasys Medical’s lead device to treat emphysema, the company’s assets were put up for sale. Silicon Valley-based Pulmonx would later acquire the technology and begin marketing it in Europe.
Carusi expects to see this potentially life-saving (or prolonging) device return to the U.S. market in five or six years.
The FDA is currently under pressure to determine which mobile medical applications fall under its purview — and will face higher taxes. The agency has yet to issue the final guidance it promised in 2011, and so many entrepreneurs are waiting on the sidelines.
“Developers are mystified by the rules in this highly regulated industry,” said Ben Chodor, the chief executive of mobile health app store Happtique, who we spoke with after he testified alongside a handful of medical experts in Congress.
”The gap between D.C. and Silicon Valley is 3,000 miles, but it feels like 20 years in terms of understanding,” said Fifield, echoing the sentiment felt by scores of health entrepreneurs.
Our pets have better access to new medical treatments
Class II medical devices, indicating only a mid-level risk, are the most common. Among the latest batch, a company known as Alivecor has punctuated the popular imagination.
Imagine being able to press your iPhone against your chest to measure a heart rate. This is the vision for Alivecor, which raised significant venture funding and secured FDA approval. In August 2011, Alivecor succeeded in closing an $13.5 million funding round led by Burrill & Company, along with Qualcomm, acting through its investment arm Qualcomm Ventures.
But Alivecor is beset by challenges in selling to U.S.-based physicians, which raises another potential hurdle. Distribution channels are saturated by large and established players, so getting behind the doors of hospital decision-makers can be difficult.
Rumors are flying in the industry that the company has had far better luck selling to veterinarians than cardiologists. One source joked that our pets are getting better treatment options and access to the most innovative medical devices.
Above: Vets are the early adopters of Alivecor’s low-budget heart-monitoring device.
“We didn’t expect to see so much success in the veterinary space,” Joel Light, Alivecor’s business development lead admitted. “But there is far less regulation, so we could get to market quickly.”
Alivecor is launching its low-cost electrocardiogram in the U.K. this month.
“Uncertainty has been a big challenge, and in the medical industry — we see a big gulf between a great idea and a profitable business,” said Light.
Likewise, the executive team behind Visualant, a company with a spectral matching technology, considered the health care industry, decided to take their technology elsewhere.
CEO Ron Erickson said it could potentially be used as an inexpensive medical diagnostic device, but the regulation and “time and money involved” caused them to focus on “more immediate market opportunities.” Visualant’s ChromaID product can “see” what the human eye cannot by discerning minute variations in color.
The innovative technology will not be used by doctors to treat disease. Instead, Visualant will be selling it to defense agencies and jewelers to certify gemstones.
Is the U.S. losing its competitive edge?
In the meantime, “ordinary Americans are missing out,” said Fifield, who works for Practice Fusion, a venture-funded health startup based in San Francisco.
At a recent health care meetup at Rock Health’s offices, Fifield noticed that many of the medical device entrepreneurs were more excited by opportunities in India than by opportunities with the most prestigious U.S. hospitals. Likewise, Duggirala will try to secure strategic partnerships in India and China, before giving up and shutting the Novobionics project down.
Carusi said that patients in Europe are already three or four years ahead of the U.S. when it comes to access to medical devices. A new device for aortic valve replacements from Percutaneous Valve Technologies was offered to approximately forty-thousand patients in Europe before it was approved in the U.S.
The breakthrough device offers an alternative to open heart surgery.
“I think the sad reality is that medical device innovation is being driven out of the U.S. because of too much regulation,” Carusi observed. The situation is so precarious that almost all of the firm’s portfolio companies are in discussions about whether to try to pursue a domestic launch at all.
The future for medical device entrepreneurship
The FDA announced in May that it would launch new initiatives to expedite the development of new medical technology. During that time, the Medical Device Innovation Consortium was established by LifeScience Alley, a Minnesota-based group that includes Medtronic Inc., the world’s largest medical device company. The mission is to find more cost-effective ways to test medical devices before they reach the FDA.
In response to criticism from medical device manufacturers, FDA commissioners promised to slash red tape and accelerate review times.
However, it’s still a tough economic climate, and Silicon Valley’s medical entrepreneurs are counting their pennies. The hope is they can survive long enough and that venture funding will pickup.
Above: Divya Nag, founder of StartX Med.
Divya Nag, the founder of StartXMed, a Stanford-affiliated health accelerator, said the medical device entrepreneurs in the program are struggling to raise money. Many of them were able to raise a series A round, but they are finding it tricky to close further investment.
“We’re banding together to find solutions to reduce costs,” she said. Animal testing is expensive, but usually necessary for FDA approval, so entrepreneurs with devices intended for different parts of the body are partnering up to share the costs.
Some have achieved success marketing their devices overseas. The most fortunate have succeeded in procuring small grants from new funds that would support medical innovation, like Johnson & Johnson’s. Others have approached physicians and medical device entrepreneurs who made their money in the dotcom boom.
“Investors may be dubious but entrepreneurs are getting scrappier,” said Nag.
Nag is optimistic for the next five years. Johnson & Johnson and large pharmaceutical companies are on the hunt for innovation and growth opportunities, and they regularly meet with firms like ATV Capital.
Medical device entrepreneurs may reap the benefits; Carusi is convinced that medical device companies will get acquired earlier, perhaps even before they go-to-market.
“If you are successful in getting capital or raising a fund, you’ll face less competition,” said Carusi. “I think that bodes well further down the road.”
Facing dwindling resources, medical device entrepreneurs may not be willing to wait that long.
“If we had the same environment we do now, the catheters that can dilate your heart vessels would probably never have got funded,” speculated Duggirala. “It’s hard not to become disillusioned.”
Top image courtesy of FDA.gov