June 23, 2011


Medical Device VCs Link FDA Dysfunction With Company Shutdowns

The Food and Drug Administration has long drawn the ire of medical-technology start-ups and their investors, frustrated by a product approval process they say is confusing and daunting at best.

But with patience wearing thin, nine prominent venture capitalists are preparing to wage war against the FDA, bringing to light damning evidence that directly blames a dysfunctional agency for the failure of multiple start-ups.

In a detailed 35-page report reviewed exclusively by VentureWire, these investors allege that FDA regulators are inconsistent and unpredictable, keeping promising treatments in limbo for months or years. As a result, the report says, a number of companies are teetering on the edge of shutting down, closed their doors altogether, or are making a permanent move to Europe, where the regulatory landscape is easier to navigate.

The report mentions at least four companies that recently shut down due in part to a daunting FDA process--including most recently Acorn Cardiovascular Inc., which has raised $110 million from investors including New Enterprise Associates; and Luminous Medical Inc., backed by more than $50 million from investors including De Novo Ventures and Draper Fisher Jurvetson. Both companies say that investors finally lost patience and pulled the plug after the companies spent years going back and forth with the FDA in a futile bid to commercialize their technology.

The investors' disclosures represent the latest development in an ongoing saga of tension and acrimony between the agency and start-up device companies, which are required to obtain approvals before commercially launching their products in the U.S.

The FDA, for its part, has acknowledged some shortcomings, but it has also pointed to the recession and to the increasing sophistication of medical devices to explain difficulties in the approval process for new technologies.

The agency also claimed in conversations with VentureWire that flawed products, more than a flawed system, are to blame for the difficulties companies experience in some cases. And it says evolving FDA standards and guidelines, as frustrating as they might be for companies going through the regulatory process, are often the result of new information discovered by the agency that impacts safety and efficacy.

Companies and investors say that may be true in some cases, but that the sheer number of companies experiencing problems--and the growing number of companies shutting down after running through the FDA gauntlet--are indicative of a serious problem.

'Investors Lost Confidence In Ever Reaching The End'

When entrepreneur Rick Thompson founded Luminous Medical in 2005, he knew full well the complexity of building a medical-device company and ushering it through the daunting regulatory process.

During his 40-year career, he sold his first company, LifeScan Inc., to Johnson & Johnson in 1986, and then steered Aradigm Inc. as chief executive to an initial public offering 10 years later.

But those experiences didn't prepare him for what he'd encounter with Luminous Medical, created to make glucose monitors that could be used for emergency-room patients.

Thompson says his company spent years trying to get out of the gate, burning through $500,000 per month to stay afloat before succumbing to an FDA process marked by confusion and delays. Albuquerque, N.M.-based Luminous has now laid off its entire staff and is in the process of selling its assets to a larger company.

Much of the problem stemmed from difficulties dealing with the FDA, according to the report prepared by the Medical Device Venture Council, a group of medical-device investors led by Mike Carusi, general partner of Advanced Technology Ventures, and Mark Wan, founding partner of Three Arch Partners. The council also includes Rich Ferrari, managing director of Luminous backer De Novo Ventures.

Luminous met with the FDA for the first time in September 2008 and learned that the agency was leaning toward a Pre-Market Approval, or PMA, requirement, for Luminous' proposed glucose-monitoring device--a longer, more painstaking process intended for disruptive or "novel" technologies--rather than the less-rigorous 510(k) process aimed at technologies that closely resemble other products already on the market. After that meeting the company abandoned its novel glucose-measurement method and opted for a more traditional approach using technology already approved by the FDA.

Over the next two years, Luminous met with the FDA several times, making changes to the product to position it for the 510(k) process but concluding that the agency had a "preconceived idea" that the product should go through the more stringent PMA path. By the fourth meeting in December 2010, members of the FDA team "seemed confused about the product and how it operates even though very detailed explanations had been previously reviewed," the report stated.

A fifth and final meeting was held in January at which several new issues were raised by the agency that the report said "indicated an agency with a strong pre-disposition toward more studies, more subjects, more arduous conditions, all under the name of patient safety with no regard for the burden placed on the company."

Most significantly, the agency told the company at the meeting that a planned clinical study focused on patients in an intensive care unit could not be submitted because there was no standard of performance that could be used to calculate an appropriate sample size. The report called this revelation--that there was no standard of performance for the ICU study, and no guidance on when it would be available--"devastating."

After that meeting, "investors lost confidence in ever reaching the end," Thompson said.

An FDA official familiar with Luminous but not authorized to speak on the record said it was true that performance targets for an ICU trial had not been identified. However, this was because reviewers found the Luminous device to be truly novel, and the agency needed time to gauge the risks to ICU patients enrolled in a clinical trial, the official said.

In recent testimony before the U.S. House of Representatives' Committee on Oversight and Government Reform, Jeffrey Shuren, director of the FDA's Center for Devices and Radiological Health, which oversees device approval, acknowledged that problems at the FDA have contributed to the frustrations and expenses borne by applicants.

"We agree that, in many areas, insufficient clarity, consistency and predictability on our part contributes to those expenses," Shuren said in his June 2 testimony.

However, he said, the workload at CDRH has grown substantially in recent times, with applications for new devices more than doubling in the past couple of years. The applications--which Shuren said are often incomplete or otherwise not up to scratch--are for devices that feature high-tech components, an additional consideration that can lead to longer review times.

Some industry analysts agree that companies should bear some of the blame.

"The FDA has become more risk-averse, but to blame them for company shutdowns, to me, doesn't quite ring true," said Les Funtleyder, portfolio manager at brokerage firm Miller Tabak, who has health-care companies in his portfolio. "I wonder if some of these people just don't have the goods...Yes, there are problems at the FDA. But to pin everything on a slow FDA seems a little far-fetched to me."

FDA Personnel Changes Problematic

Other companies have similar stories to Luminous Medical. St. Paul, Minn.-based Acorn Cardiovascular, which shut down late last year, finally called it quits after it says it ran through an ever-shifting gauntlet of regulators and guidelines.

"Nine years into the process, the FDA told us to start all over again," said Steve Anderson, CEO of the company, which made a device to protect against heart failure. "When we asked how they could do this to us, they just said that their position had 'evolved.'"

Acorn attributes much of the problem to the fact that it had to plead its case to an ever-changing cast of FDA reviewers, including six different primary reviewers, four different device evaluators, and four separate medical officers, all of whom worked under three different directors of the CDRH, who in turn worked for five different FDA commissioners.

"I would say turnover is a problem," Anderson said. "It's a highly unpredictable process."

In response, the agency says the company's struggles were not the fault of the agency, but its own product. "Acorn was unable to demonstrate a reasonable assurance of safety and effectiveness for [their device], as evidenced by a fairly consistent record of rejection by FDA reviewers and two separate independent advisory panels," said CDRH spokeswoman Karen Riley in a statement.

Anderson sees it differently. "I have all the documentation. I would debate anyone at FDA about this, any time. It was the human factors, not the data, that caused us to write off more than $100 million in investments."

While Riley acknowledged that a number of different CDRH personnel looked into Acorn's case, there were only three lead reviewers, she said, and this was because one of them was promoted to a higher position, where he continued to work on Acorn's application.

The agency disputes the charge that it makes arbitrary changes. After considering public comment--and taking into account any new scientific information, especially safety concerns--the agency sometimes must change the criteria by which it deems a technology safe or unsafe, Riley said.

Still Reeling From The ReGen Case

As the FDA takes heat for being trapped in bureaucratic gridlock, the agency has often been faulted for being too lenient, and too quick to approve new treatments or devices without thorough review, Riley said.

"There's a constant tension," she said. "We get it from both sides."

While the pressures can come from both sides of the debate, FDA approvals of medical devices have dropped steadily in the last decade. According to the report, citing FDA data, 510(k) approvals have fallen more than 20% in that span, while PMAs have declined nearly 70%. At the same time, the length of approval time continues to grow, according to the report.

David Hoffmeister, a partner at law firm Wilson Sonsini Goodrich & Rosati who has specialized in FDA regulation for the past 20 years, says the aversion to risk stems from a case several years ago, when CDRH was lambasted for approving a device from Hackensack, N.J.-based ReGen Biologics Inc., maker of a device for knee repair. The Wall Street Journal reported in 2008 that the agency's approval of the device was related to intense lobbying and pressure on the agency from outside.

The approval was later withdrawn. ReGen is now suing the FDA over the withdrawn approval.

Hoffmeister said the CDRH is still reeling from accusations of being too lax, and tightening up the rules in response. "That was the impetus," Hoffmeister said. "As soon as allegations came out, the whole mindset of the agency flipped on a dime."

The former CDRH director resigned in the wake of the turmoil, and two years ago Shuren took over the office.

While saying the Shuren era has been "marked by a lack of transparency, significant staff turnover, and more starts and stops [for applicants]," Hoffmeister praised some of the reforms that have begun in Shuren's time, including a program called CDRH Medical Device Innovation Initiative, where the agency works hand in hand with several entrepreneurs each year to shepherd good medical products through the regulatory process.

Hoffmeister said he would like to see the agency treat each applicant this way, as European regulators do. But CDRH alone receives 4,000 device applications per year, a number that could make such an approach unrealistic.

The agency is working steadily to clarify its guidelines and improve communication among reviewers, CDRH said in a statement.

Along with a number of other measures, the agency aims to send "notice to industry letters" to clarify and more quickly inform stakeholders when CDRH has changed its regulatory expectations on the basis of new scientific information, the agency said.

FDA will issue guidance on its criteria for determining clinical trials, and will have a draft available for public comment by the end of October, the agency said.

Ultimately, said Carusi, the Advanced Technology Ventures investor, the agency's troubles impact the national economy by stifling innovation.

"This is about jobs," Carusi said. "This is an industry where the U.S. leads, and where we are losing our lead."