The State and Future of the Orthopaedic Industry: A High Altitude View – FDA: The Fly in the Ointment?

The following is a transcript from the OMTEC 2012 Opening Panel Discussion, FDA – The Fly in the Ointment.

Moderator: David Floyd, Chief Executive Officer, OrthoWorx

Panelists: Bill Plovanic, Managing Director – Medical Devices Analyst, Canaccord Genuity, Inc.; Bill Kolter, Corporate Vice President of Government Affairs and Corporate Communication, Biomet Orthopedics, Inc.; Brian Moore, Former Chief Executive Officer, Symmetry Medical, Inc. and current CEO of A Day With A CEO

David Floyd: If there’s anything that’s been beat up more in the past two years than the device tax—and that’s been beaten up pretty good—it’s FDA.

To some folks, it seems like we’re in an era where the agency is in the product denial business, particularly PMA products—and quite frankly, the statistics there are pretty solid that that may be the case—it has increased enforcement action significantly, and is increasing the cost and hurdles to regulatory compliance.

Bill Kolter, is that our imagination, or do you see it that way also?

Bill Kolter: I don’t know that I’d go so far as to say they’re in the denial business. But certainly, we’ve seen an increase in the amount of time it takes to receive clearance or approval for products since 2007, when we tracked this stuff for the purpose of the Medical Device User Fees.

We’ve seen, in some cases, inconsistent application of guidance; in other cases, a lack of clear guidance. Some turnover in the reviewers, which could contribute to that inconsistency.

We’ve seen a relatively aggressive posture on the part of FDA as far as proposing new rules that could lengthen the time required to gain clearance or approval of product. Additional requests for clinical data for products, where in the past it may not have been required. Certainly the environment has become more stringent, with FDA.

That said, we have found Dr. Jeff Shuren who runs the device center to be accessible and willing to listen to industry. We continue to work with FDA and with Dr. Shuren, who actually came to Indiana at the behest of industry.

We’re committed to making sure that they understand the proper balance between managing risk for innovative new products and allowing patient access to these products. It is a balance; it’s a tough job, and we need to work together to make sure FDA gets it right.

David Floyd: Bill Plovanic, you’ve been observing this space for a long time. Is this just a pendulum shift back and forth: FDA seems to be fairly pro-industry, then anti-industry, and we’re just in an anti-industry phase, and will come out of it?

Or do you think that things have fundamentally changed for the long term in terms of public policy and how the agency thinks about industry, and engages it?

Bill Plovanic: That’s a very good question. Definitely the pendulum’s swinging to a very conservative stance.

I was at a medical meeting for the diabetes industry, and it was interesting that the commentary from some of the management teams I met with was such that, at the end of 2010/early 2011, FDA came to them and asked, “How can we help you get these products approved? What do you need?”

So it seems like we went all the way to the edge, and nothing was getting approved—I’ve had companies under coverage that hit clinical endpoints, submitted to FDA and they said, “Well, we’re going to move the bar; we want this instead.”

Now it seems like in 2012, we’re actually going to see some of these products get through…is this a trend back towards the center, or is this the fact that it’s election year and we need to get some stuff out to show that we’re doing something, then we’ll go back to conservatism?

We don’t know, but there’s been a lot of discussion from industry with FDA in trying to educate FDA on the ground rules that we need.

Something we didn’t touch on, from my standpoint as an analyst, I look at public and private companies and the ones in development, and I can tell you that the venture capital community has almost shut down for the medical device industry, because if I’m a VC putting money into a new idea, and I don’t know the regulatory pathway, I can’t assess the risk—I don’t know how much it’s going to cost me to get there, so I’m not going to put money in.

I think today’s earlier commentary about shifting the whole industry overseas, that’s really what’s been happening. Let’s hope that we’re trending back to the middle. But I think we need to get into 2013 to find out if that’s the case, and whether it’s a function of the administration or not.

David Floyd: Brian, there’s another huge dynamic at FDA other than product approvals, and that’s regulatory compliance and inspections, and tightening standards for manufacturers. What’s the impact of all of this been on the supplier base?

Brian Moore: I think it’s good news. But you have to look at it at three levels. The first level is, Oh dear, we’ve got a lot of costs. More metrology, more demands. More time.

That puts a lot of people off, and most people don’t get past the first level. But if you get past the first level, the second one is to look at your internal costing and pricing policies to deal with this situation.

I think most people in the room wouldn’t know what’s in their absorption costing rates, but one of the things that you need to be aware of is if, for example, your quality people are now having to do more, rather than treat them as an overhead having to be absorbed, you might want to charge them out as a unique activity. That in turn builds the estimate up, and that in turn builds the price up.

Just to tell you a story. We were working with a company about pricing, and one of the exercises we do is to say, Go sit in a room and think of all the things you do for your customers that you don’t charge for.

The whole of the orthopaedic industry at the moment is hooked up on unit price. It’s the unit price of the joint recovers all of its costs. The unit price that you sell to the OEMs recovers all of its costs. They return with all of these activities. This one guy said, “We’ve got to do these quality standards, papers, all sorts of documents.” So he went back and charged a different part of the OEM an invoice for $15,000, and it was paid.

I checked up with him a few months ago; he’s now at $150,000 that’s gone down a different route into the quality area. He’s being paid. It’s not on the unit price; it’s not in the hands of these “nasty” buyers (if there are any in the room), and he’s now at $120,000—which is a $5 million business—I think it’s huge. Straight through, bottom line, profit and cost.

The third stage is if you have a portfolio of products that are very well regulated, that the OEM has all sorts of approval on, it’s going to cost a lot of money to move it out of your facility, so you then have pricing power. You have to decide how you’re going to use that pricing power.

Clearly, there’s a balance between new work and putting a gun to the OEM’s head and saying, “You can’t move this or I’m doubling the prices.”

Relating to what’s happening in aerospace, the VCs are becoming more active. If you move the clock on, they’re going along and buying companies in the supply chain that have a portfolio of highly regulated products. They’re going to the OEMs and, in some cases, asking for a 100% price increase. I was dealing with a situation the other day where the OEM considered itself fortunate to negotiate itself down to a 50% price increase.

David Floyd: That thought should warm a lot of hearts in the room…

Brian Moore: Well, you have to take the long game plan; you have to treat it as a business decision. Every problem is an opportunity. If you are prepared to invest in filling your facilities with highly regulated products that the OEM find very difficult to move, at great cost, and great time, you’ve got pricing power. That’s the end-game.

David Floyd: To summarize: There is tremendous opportunity for orthopaedics in the future. It’s a good business. It’s probably going to be more challenging in the future than in the past, but there are unmet patient needs, opportunities for technology and innovation, and at all levels of the business, opportunities to do well.