Medical Device Pioneer David Auth Seethes Over $40 Billion Industry Tax Idea, FDA Delays

9/15/09Follow @xconomy

One of Seattle’s medical device industry pioneers has a beautiful view of Lake Washington from his home office in Kirkland, but a few minutes after I arrived, he was steaming mad.

“Our government rewards dummies and punishes geniuses,” says David Auth, the inventor of a less-invasive way to clear out blockages in arteries, called Rotablator. “GM is a dumb company, and has been for 35 years, and yet they get a bailout. The medical device industry in this country is one of the absolutely most competitive industries we have. All the great medical devices have come from U.S. companies. And so we tax them $4 billion a year?”

I had kicked this hornet’s nest by asking Auth straight-up about his thoughts on the recently proposed $40 billion tax increase on medical device companies. The industry was horrified last week by a proposal from Montana Democrat Max Baucus, the influential chairman of the U.S. Senate Finance Committee, that calls for taxing medical device companies for $40 billion over the next decade.

Boston Scientific’s CEO, Ray Elliott, called it “nonsensical,” and joked that he planned to throw tea bags into Boston Harbor in protest. Bernstein Research analyst Derrick Sung estimates that the proposal could cut the industry’s earnings per share by 5 to 10 percent a year.

Auth,68, has an influential point of view, because he’s something of a godfather in the Seattle medical device industry, as an inventor and an angel investor. He’s a former University of Washington professor who founded Redmond, WA-based Heart Technology, took it public, and sold it to Boston Scientific for $500 million in 1995. Since then, he’s donated millions to the UW, and put more of his own money into other local device companies, like Kirkland, WA-based Pathway Medical Technologies and Redmond, WA-based CoAptus Medical. He was elected to the National Academy of Engineering earlier this year, and serves on the boards of nine different medical device companies along the West Coast.

The proposal by Sen. Baucus compounds what has been an agonizing year for medical device companies, both locally and nationally. The FDA has been gradually becoming more demanding that device companies do larger, more expensive clinical trials than in the past, Auth says. More and more often, he’s seeing examples of the FDA saying one thing to a company about requirements for FDA approval, waiting for the desired data to roll in, and then telling companies it’s not enough.

This means that it is taking longer, and costing more money, to get a medical device approved in the U.S., Auth says. It’s causing venture capitalists to quit making new investments in the sector and to pull the plug on once-promising companies. One company took in more than $60 million in venture capital before recently closing its doors—Redmond, WA-based Archus Orthopedics. “That’s just the start” of a trend, Auth says.

Another example: A company (that he didn’t want to name) developed technology to seal off puncture wounds made by catheters when they are inserted in the femoral artery—the common route physicians take for many cardiac procedures. The wounds are pretty simple to monitor, and the FDA initially agreed to a 30-day follow-up of patients to see how well they did with the new device. That seemed to make sense because puncture wounds ought to heal by then. But when the data came in, the FDA changed its mind and said it wanted six months of follow-up. The company couldn’t do that with the original patients, because they had signed up to be monitored only 30 days, so the directive meant it would have to start all over.

“Who pays for that kind of thing? Not the FDA. It will come out of the hides of the people who invested in that company,” Auth says. “They just keep asking us to do silly stuff because they’re so risk-averse.”

What about other consequences if the Baucus proposal becomes law?

—The big device companies, like Johnson & Johnson and Medtronic, will absorb the cost and pass it on to customers, and will probably cut their R&D budgets to maintain their margins, Auth says.

—The little companies that do most of the innovating, like Archus, will be forced to cut staff or even shut down, he says.

—Consumers in Europe will continue to get first access to most leading-edge medical devices, because regulatory authorities haven’t created what he says are unrealistic barriers to entry.

    “Venture capitalists aren’t stupid. They look at this industry now and see that they can’t make any money,” Auth says. “I have almost stopped investing myself. Now when I invest, it’s really more like a charitable kind of event. I don’t see how any of them can generate returns.”

    He went on to call the FDA an “irresponsible organization,” and said it reflects the worst impulses of lawyers, members of Congress, and the public at large, who have taken the position that almost nothing should be approved until it is deemed risk-free. That’s impossible, and not desirable, Auth says. He pointed to aspirin, which can cause stomach bleeding, but also offers benefits for pain relief and may help prevent heart disease.

    “There is no such thing as 100 percent safe,” he says. “There’s a certain amount of risk that we all assume every day when we go out into society.”

    What are aspiring medical device entrepreneurs to do? I noted that at least one device company I’ve profiled recently, Bellevue, WA-based Clarisonic, has been having breakout success with its cosmetic tool that uses sonic wave technology for skin cleansing. Auth agreed that has been a bright spot. Clarisonic never needed to get FDA approval for its device, and never needed to get Medicare to pay for it.

    When asked what advice he’d offer to entrepreneurs, Auth said: “Try to invent something that doesn’t require FDA approval.” Of course, he notes, “most of the really good stuff requires FDA approval.”

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