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Medical Device Makers Brace for Change


What's good for public health isn't always good for stocks.

The next year will be a roller-coaster ride for medical-device stocks as the FDA and the Institute of Medicine take a closer look at the approval process for these medical tools -- a process that's made the FDA look irresponsible more than once.

Medical devices – including everything from condoms to catheters -- are subject to approval by the FDA, but that process is a bit different from the lengthy, costly approval process that drug manufacturers are subjected to. Medical devices are divided into three categories depending on the level of risk associated with the device. Class III devices -- virtually anything that gets implanted into the body -- are at the highest risk level and must undergo a more stringent approval process called premarket approval, but class I and II devices (every other medical device) -- and even some Class III devices -- can forgo that process and file a premarket notification, or 510(k) (named after a section in the Federal Food, Drug, and Cosmetic Act). The makers of these products must prove that they're "at least as safe and effective" as products already on the market.

The FDA's Center for Devices and Radiological Health will host a public meeting on Thursday that will be a major contributing factor to whether the 510(k) process becomes more rigorous. The process currently takes about three months, compared to the year-long evaluation for devices subject to premarket approval. It also costs significantly less. The agency receives more than 3,000 of these 510(k) applications annually.

"Good government conducts periodic reviews and evaluations of its programs," said Jeffrey Shuren, MD, acting director of CDRH. "Our working group and the IOM's independent evaluation will help us determine how the 510(k) process can be improved to better support FDA's mission to protect and promote the public health."

One of the FDA's biggest embarrassments came in 2007 when Medtronic (MDT) voluntarily pulled its Sprint Fidelis defibrillation lead -- a device that connects a defibrillator or pacemaker to the heart -- from the market because it had caused five deaths and was likely to fracture in other patients. The company had said that there were about 235,000 patients with the device implanted in them at the time.

Another blight on the agency's reputation came when Bausch & Lomb was forced to recall its ReNu eyecare solution with MoistureLoc due to it causing an outbreak of a fungal eye infection. The eye solution had been approved through the 510(k) process a year earlier. But this is just the tip of the iceberg when it comes to recalled products that were approved through the shortened route.

One of the biggest problems with the 510(k) process is that the FDA doesn't require clinical testing. This all stems from the fact that medical devices weren't even regulated until 1976. "In 1976, Congress envisioned that FDA would eventually approve all class III devices through the more stringent PMA process, but this process remains incomplete," said a Government Accountability Office report from June 2009. The report added that between 2003 and 2007, the FDA allowed 228 submissions of class III devices through the 510(k) process, instead of requiring these riskier products to face the more stringent approval process.

Yet, the FDA's problems with medical devices don't stop there -- the agency has admitted that it doesn't have the ability to consistently review all of the postmarket reports submitted by medical device manufacturers because of the sheer volume. According to the GAO, the number of adverse events associated with medical devices "increased substantially" between 2000 and 2006.

The FDA is finally making an effort to correct its mistakes -- in large part because of new leadership at the agency and at CDRH. Expect to see a report out in March on what needs to be done and a slew of steps to correct the problem over the next year.

So what does this mean for medical device stocks like Johnson & Johnson (JNJ) or St. Jude Medical (STJ)?

"Significant changes to the process will lead to increased timelines, greater expenses, and possible non-approval of medical technology. I do not think the changes will take place immediately, but are inevitable, given the growing concern over testing in medical devices," wrote Miller Tabak analyst Les Funtleyder in a recent note.

He added in an interview with Minyanville, "None of this is good for shares, but it is probably best for public health."
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