Counting the Costs, and Opportunities, of Medical Tech Regulation
Studying 30 years of data from the U.S. Food and Drug Administration, Ariel Stern of Harvard Business School found that novel medical devices spend approximately 34 percent longer in the approval process than the first follow-on innovator. This represents 16 to 21 percent of the total period of market exclusivity a pioneer device innovator can expect to experience, Stern says, and an opportunity cost of 7 percent of expected lifetime product revenues. Because of this delay, smaller medical device developers are less likely to act as first-mover innovators. Stern suggests that some of the uncertainty around the regulation of medical technologies can be cleared up through the timely release of guidance documents and better communications. Stern presented her findings at the Economics of Entrepreneurship and Innovation Conference at Smith School of Business.
Within the high-stakes world of medical innovation, government regulation is a wild card that can present both challenges and opportunities. It can also shape innovation behaviour itself.
When an onerous regulatory process extends the time it takes to commercialize an innovation, it can dampen the incentive to innovate; evidence of this has been seen in cancer R&D in the U.S.
Then again, regulation can offer first-mover advantages by giving firms the protection, through patents, to build market share before competitors can ride on their coattails. Studies of medical innovation under the U.S. Food and Drug Administration’s purview have shown that pharmaceutical drug makers do indeed earn first-mover advantages.
Most studies of medical innovation under regulation, however, focus on the approval process for pharmaceutical drugs, notes Ariel Stern, assistant professor of business administration at Harvard Business School.
Does FDA regulation offer first-mover advantages to medical device innovators as it does drug makers? Apparently not. Stern dug deep into 30 years of data and found that the FDA’s regulatory process is, in fact, costly for pioneer medical device firms. She presented her findings at the Economics of Entrepreneurship and Innovation Conference at Smith School of Business.
A Steep Opportunity Cost
Stern studied FDA data relating to the approval of pioneer medical devices such as coronary stents, mitral valve repair devices, and silicone breast implants, and combined that with firm-level financial and ownership information for the medical device firms represented in the FDA sample.
Stern found that “pioneer entrants” spend approximately 34 percent longer (a little more than seven months) in the approval process than the first follow-on innovator. This represents 16 to 21 percent of the total period of market exclusivity a pioneer device innovator can expect to experience, Stern says. “Back-of-the-envelope calculations suggest that the opportunity cost of a delay of this length is upward of 7 percent of expected lifetime product revenues.”
Given these costs, you would expect smaller medical device developers to be less likely to act as first-mover innovators, which is what Stern found. According to her study, “the fraction of financially constrained firms among pioneer entrants into new device markets is between 25 and 52 percent lower than among follow-on entrants.”
Regulatory Uncertainty, Not Product Novelty, Causes Delays
What would explain the longer regulatory process for first-mover medical devices? According to Stern’s evidence, it’s not because the FDA struggles to understand the device’s technological novelty. It’s more due to confusion: uncertainty on the part of the FDA on how to assess the results from different types of clinical studies and related tests, and uncertainty on the part of the innovator regarding the types of data to collect and present to regulators.
It’s understandable: in contrast to chemical-based drugs, medical devices come in many different forms (from pacemakers to silicone breast implants) and delivery methods, which makes it hard for regulators to develop general rules or guidelines for clinical trials for medical devices.
When objective guidelines for evaluation are published, she says, approval times quicken for subsequent entrants. Stern looked at the release of FDA guidance on nine unique medical devices and found that approval times for subsequent entrants fell by approximately 40 percent (6.1 months) after application content and evaluation procedures were made explicit through formal guidance.
Stern suggests that some of the uncertainty around the regulation of medical technologies could be cleared up through the timely release of guidance documents and better communications. This would allow firms to work with the FDA “very early in the new product development process in order to help the FDA develop evaluation standards or formal guidelines for a new medical technology before a regulatory approval application is officially submitted.”
— Alan Morantz