FDA Shake Up Could Undercut Returns on 510(k)s

Full article reprinted from Start Up - November/December 2009

The ongoing review of the Food and Drug Administration's 510(k) program for medical devices promises to clamp down on a regulatory path that device investors generally have regarded as a lower-cost, faster-paced path to commercialization for portfolio companies. The self-analysis by the agency--combined with an external review by the Institute of Medicine--likely might lead to the FDA requiring more detailed--and costly--analysis for product approval. Read more...

FDA Shake Up Could Undercut Returns on 510(k)s

Full article reprinted from Start Up - November/December 2009

The ongoing review of the Food & Drug Administration's 510(k) program for medical devices promises to clamp down on a regulatory path that device investors generally have regarded as a lower-cost, faster-paced path to commercialization for portfolio companies. The self-analysis by the agency—combined with an external review by the Institute of Medicine—likely will steer some future 510(k) devices over to the more stringent and costly Premarket Approval (PMA) path.

But can venture capital investors and their companies afford the switch? Historically, companies with 510(k)-oriented devices have been able to get by with less clinical testing than those requiring PMA approval. For example, a review of 47 venture-backed medical device companies that have been acquired over the past five years shows that, on average, PMA-oriented companies raised $50 million before being acquired while 510(k) companies needed just $32 million. Because 510(k) devices were deemed similar enough to existing devices, they needed less validation than those companies with novel enough technologies to require extensive clinical testing. The ease of getting onto the market, while enabling the company to generate revenue more quickly, understandably cut into the overall value of the company.

While the bar continues to be higher for companies requiring PMAs from the FDA, those companies clearly command the higher prices from strategic acquirers.  Just over the past year, we've seen the acquisitions of Ablation Frontiers LLC, CoreValve LLC, and Ventor Technologies Ltd. by Medtronic Inc. as well as Visiogen Inc. and Evalve Inc. by Abbott Laboratories Inc. The five companies all have unapproved products on the PMA track, but they still drew more than $2 billion.

In addition to paying more, strategic buyers generally acquire PMA-oriented companies a lot sooner in their life cycle. Of the 14 PMA-oriented companies that we tracked, only two of them had their products approved by the FDA at the time of acquisition. In contrast, 27 of the 33 510(k)-oriented companies had FDA-approved products at the time of acquisition. Many of the PMA companies, such as atrial fibrillation company Ablation Frontiers, CoreValve and Ventor, both heart valve companies, still faced huge clinical costs in the US, so venture investors would have had to raise significantly more capital to get their products to market. But exiting early in the development life of PMA companies doesn't hurt returns. On average, venture investors earned more than four-times their capital when they invested in the PMA companies in our analysis while the 510(k) companies failed to double the capital invested. This clearly doesn't present VCs with a lot of breathing room if the FDA decides to increase the clinical demands—and therefore the costs—for 510(k) applications.

- Tom Salemi

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Companies mentioned in this article:

Abbott Laboratories Inc.

Abbott Medical Optics Inc.

Visiogen Inc.

Medtronic Inc.

Medtronic Ablation Frontiers LLC

Medtronic CoreValve LLC

Ventor Technologies Ltd.


About Start Up

No publication reviews leading edge companies and technology better than START-UP. Each issue of START-UP profiles the most important new product companies, identifies the hottest technology areas, reviews funds flowing into private companies and investment trends, and reports on university tech transfer licensing. Industries covered: pharmaceuticals, biotechnology, medical equipment & devices, and in vitro diagnostics.