Is the U.S. Losing its Medical Device Innovation Mojo? PwC Report Says Yes

1/20/11Follow @xconomy

The United States has been the undisputed leader in medical device innovation for the past 50 years. But there are some out there who insist that title is in jeopardy.

It would certainly take a breathtaking free fall, if you look at the standings today. The U.S. is where most of the R&D gets done, and the most money gets made, on workhorse tools of modern medicine like diagnostic ultrasound, stents that prop open clogged coronary arteries, or clever new insulin pumps for diabetes. A whopping 32 of the 46 medical technology companies with $1 billion or more in annual sales are based here in the U.S., according to a new report this week from PwC. Many new medical devices are regional economic drivers in the geographies we cover—Boston, San Francisco, Seattle, San Diego, and Michigan.

Yet if you talk to medical device entrepreneurs in the U.S. today, they are frustrated. They tell horror stories about dealing with an FDA that’s constantly moving the goalposts around before granting product approvals, and about insurers driving ever-tougher bargains. They seethe in private—and sometimes in public—about a new 10-year tax increase on medical device companies (originally proposed at $40 billion, later reduced to $20 billion) that was incorporated into the new healthcare reform law. Venture capitalists are doing the math and wondering whether to steer clear.

Josh Makower, a prominent med device entrepreneur with ExploraMed and a consulting professor at Stanford University School of Medicine (and Xconomist), said in the PwC report that there are so many costs and regulatory hassles that he now looks outside the U.S. first to do clinical trials, because high quality clinical trials can be done overseas cheaper and faster.

While the U.S. is still the undisputed leader, the foundation for much of its med-tech strength is weakening, according to PwC. The firm’s report, written by a team led by former med device entrepreneur Chris Wasden, sought to put together a five-point list of essential ingredients for med-tech innovation, and then grade the U.S. on it against other countries over the past five years. The idea was that med device entrepreneurs and investors needed to stop passing along anecdotal stories, and start coming up with some convincing data to support their arguments, if they want to really persuade lawmakers, insurers, and citizens to provide more support for med-tech innovation.

Chris Wasden

“When we’d talk to regulators, policy people, they’d hear our anecdotes, but many of them were not impressed,” Wasden says.

The PwC formula factors in how much insurers in the country are willing to pay for med-tech innovation; the underlying strength of academic research; the regulatory approval process for new products; demand from patients for the best possible healthcare; and the base of support from venture capital. When PwC crunched the numbers and created a scorecard ranking countries from 1 to 9, with 9 being the best, the U.S. was head and shoulders above everyone else. The U.S. had a 7.4 score in 2005, which dipped to 7.1 over the next five years. Germany was second, seeing its score drop from 5.6 in 2005 to 5.4 last year—a decline that was similarly seen with other major European countries.

China, Brazil, and India all saw gains in that same five-year period, but they still aren’t even within hailing distance of the top—which you can see in the PwC bar charts if you click here on the Innovation Scorecard report go to page 5.

Still, there are reasons to worry that the U.S. leadership will continue to erode over time, Wasden says. The FDA has been seeking to revamp its 510k regulatory approval process, which essentially allows med device innovators to piggyback on existing data from prior inventions to speed delivery of new technologies to the market. The FDA has been burned when long-term studies show new technologies fail to live up to their original promise, or sometimes are shown to be dangerous—after billions of dollars have been spent and sometimes millions of patients are affected. That means evidence requirements are going up, meaning more time, more money, and less predictability from regulators.

Once a new device wins FDA approval, it doesn’t mean money starts to flow automatically from doctors and patients who fall for a compelling sales pitch. Insurers—who used to pay a premium for a new product when it had more innovative bells and whistles—suddenly are pushing back hard in negotiations before they will reimburse.

“In the old world, the FDA was reasonable to deal with, and as long as you followed the rules, you could get an approval,” Wasden says. “Then if you brought it to market, insurance companies would pay for it based on a reasonable assessment of the value you would bring, and the cost it took to bring it to the market. That whole calculus has been thrown out the door.”

Now, insurers want to see how much a new medical device can actually save the insurer, by, say, reducing hospitalization rates. Just because something is innovative doesn’t mean insurers are willing to pay more for it anymore, Wasden says.

This isn’t a bad thing for consumers, and isn’t necessarily all bad for innovators either, Wasden says. He made the analogy to his new iPhone 4, which has twice the speed and twice the functionality as his old iPhone, yet costs about the same. Medical device companies are going to have to get used to consumers having more pricing power, yet still make profits. “The med device industry is becoming more like consumer electronics,” Wasden says.

If med device innovation shifts more toward a model of rewarding better/faster/cheaper stuff, that will leave out companies fixated on developing more bells and whistles.

To illustrate his point, Wasden used the example of industrial giant General Electric. The company markets a 400-pound cart-bound ultrasound machine that costs about $100,000. It provides great resolution for doctors looking to monitor beating hearts, developing fetuses, and more activity inside the body. The tool is a hit with hospitals in the U.S. and Europe. But it’s a dud in India, where they don’t have the budgets or the space to deal with that sort of thing, Wasden says.

So, GE created an innovative new product for the developing world, an ultrasound technology that was more portable—a 10 to 15 pound machine that cost $10,000 to $15,000. It doesn’t have all the features of the expensive machine, but it can do most of what a doctor needs in a more practical package.

Where Wasden lost me was his next point. This kind of model, in which developing countries value the better/faster/cheaper technology, means they could have a new edge in the innovation ecosystem.

The smaller GE ultrasound machine “never would have been invented in US because we don’t have the pain points they do,” Wasden says. “But then U.S. doctors wanted it once it was made in India.” So India, then became a breeding ground for a new innovative device, he says.

That didn’t make much sense to me—and I told Wasden so. Here in the U.S., the U.S. government’s Defense Advanced Research Projects Agency (DARPA)—the same people whose work gave rise to the Internet—invested heavily in portable ultrasound machines for the battlefield way back in the 1990s. That base of support led to the creation of a company in Bothell, WA, in 1998, SonoSite (NASDAQ: SONO). SonoSite generated $227 million in revenue last year with a whole array of lightweight ultrasound machines it sells around the world. The company has a market value of $462 million and 730 employees at last count. The company was years ahead of GE in the lightweight ultrasound business.

And here in Seattle, I regularly hear about interesting new med device ideas getting started, like one at Redmond, WA-based Mobisante. This is a startup founded by an ultrasound researcher at Washington University in St. Louis, and a former senior director in Microsoft’s Windows Mobile group, who are seeking to put some basic ultrasound capability into the average smartphone that a doctor in India can carry everywhere. Last month, it raised some seed financing from WRF Capital.

It could be that a whole lot of ideas like this are emerging in places like China and India, that I am not as familiar with, and they are about to bury companies like SonoSite, GE, Boston Scientific, Medtronic, etc. And this is not to say that there aren’t some things going wrong in the current innovation ecosystem in the U.S. But looking at the standings in the PwC report, it sure looks like a couple of policy moves could be enough to keep the U.S. in the lead of med-tech innovation for a long time.

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  • John Schaefer

    No doubt one will continue to hear that US medical regulation should be “simplified and eased” from individual companies and investors who have a short-term profit motive. It’s shortsighted, though, for those with a strategic view of US economic strength and our overall medical innovation lead to join such an argument.

    The US’s medical innovation lead to a significant extent is related to US companies’ market strength internationally. That international market strength is directly associated with international end users’ recognition that US medical devices are developed and market-approved in the most rigorous of all regulatory oversight environments. That recognition, and thus the US medical innovation environment, is strengthened by FDA regulation tightening.

    Those of us who benefit generally by US medical innovation and strength in the international medical device market, and who want the US to maintain that lead, would do well to support efforts to make FDA regulation more rigorous and more pointedly structured so as to allow those products for which there is strong evidence of safety and effectiveness, while blocking those products for which there isn’t.

  • Rogan

    Luke,

    I think that the view of India as a source of innovation was meant in the sense that the problems there and the cost constraints provide room for innovative products to succeed, then filter back to the US. I don’t think that this was meant to say that companies from India were necessarily going to outpace US companies.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    Rogan—I think that is the point that Wasden was making, and it’s a reasonable one about low-cost environments giving rise to clever new kinds of med device innovation that might not pop up here in the U.S. I just felt it was necessary to point out that the U.S. was already way ahead with supporting this particular type of lower-cost, lightweight ultrasound. DARPA and Sonosite worked on this for years before GE heard from doctors in India, and decided to make another lightweight ultrasound machine. It just struck me as an example where the fundamental pillars of med device innovation in the U.S. remain intact.

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