By FRED BURBANK AND THOMAS J. FOGARTY
Venture capital is drying up for medical-device startups facing the new 2.3% levy.
On Jan. 1, manufacturers of medical devices in the U.S. were hit with a new 2.3% tax on revenue, one of the many sources of money tapped to pay for ObamaCare. This tax will likely cut into the profits of large medical-device manufacturers, a cost that will almost certainly be passed on to health-care consumers. But its effect on U.S. medical-device startups—the small companies that fuel innovation—may prove devastating.
Coincident with the 2.3% tax, venture capital investment in medical devices has all but ceased. Why? Ask yourself two questions: Who would want to invest in a highly-regulated, government-controlled industry that faces a unique tax? What startup medical device company can reach the magical break-even point with a tax on its revenue?
When combined with the ever-increasing time it takes to get approval from the U.S. Patent and Trademark Office and the Food and Drug Administration, this levy is bound to destroy startups and stunt medical-device innovation in the U.S. and thus the quality of health care world-wide.
We are physicians and developers of medical devices, and we know firsthand that—unlike, say, the pharmaceutical industry, which requires high-cost, high-tech labs—substantial breakthroughs in our industry are made by individuals or small teams working in a space the size of a garage.
More than 40 years ago, Dr. Fogarty conceived and developed the embolectomy catheter in an attic during medical school by tying the tip of a surgical glove to a urinary catheter with a fly-fishing knot. This marked the first step in the evolution of the “Fogarty catheter,” which became the world’s first intravascular treatment. This device was a radical departure from the previous cut-down approach for vascular treatment. It enabled minimally invasive access to the inside of vessels, paving the way for angioplasty and stents. In 1969, Edwards Lifesciences acquired the Fogarty catheter, and still distributes it throughout the world.
In 1993, Dr. Burbank and his small team of physicians and engineers invented the Mammotome, a vacuum-assisted, needle-shaped breast biopsy device that enables a doctor to control the pattern of biopsy collection under mammographic, ultrasound, or magnetic resonance imaging guidance. The Mammotome transformed breast biopsy from open-breast surgery to a minimally invasive method requiring only a bandage to cover the skin nick at the end of the procedure.
Dr. Burbank conceived the Mammotome in his living room, creating a model made of balsa wood, a wooden dowel and a drinking straw before developing it into an actual medical device in a shop the size of a two-car garage.
To further develop and finance the Mammotome, the two of us, with pass-the-hat seed money from three other founding physicians, formed Biopsys Medical Inc. As the device succeeded in testing, Biopsys obtained investments from venture capitalists. Once the breast biopsy device proved clinically successful, investors were provided an exit through an IPO in 1996 (Biopsys Medical Inc.). In 1997, Johnson & Johnson acquired Biopsys and began selling its products world-wide.
Venture money is only available if VCs see an exit somewhere in the near future (when their invested money will be returned with a profit). Without reasonable response times from the Patent Office or the FDA, and without new medical-device IPOs and acquisitions, venture capital dries up, leaving startups stuck in the two-car garage stage of development.
How did we get here? There’s a lot of blame to go around. In its 2007 decision in KSR v. Teleflex , TFX +0.46% the Supreme Court reinvigorated the “obviousness test” used to determine whether a patent should be issued. The court found that lower courts had not been using stringent-enough standards to determine whether a new device was infringing on an existing patent. Thus patents acquired from medical-device startups by large medical-device companies might not hold up in court when a competitor begins selling a similar device. Across town, the FDA slowed its work down to a walk or carefree stroll, making timely approval for new devices increasingly difficult.
At present, response times by the Patent Office and FDA can be measured in portions of a decade. One of our recent patent applications, for a vibrating pad to treat the sleep loss associated with restless legs syndrome, took the Patent Office three years, three months and 17 days to reach an initial negative decision. For the same device, the FDA took four years, two months and 28 days to reach its initial negative decision which, months later, was reversed. Most medical-device startups and their investors can’t—or won’t—wait that long, especially now that a 2.3% revenue tax has to be weighed.
Unless the federal government changes the 2.3% revenue tax, and until the Patent Office and the FDA improve their turnaround time for regulatory decisions, medical-device startups in the U.S. are all but doomed. For the sake of medical innovation and the future of health care, our lawmakers should repeal this damaging tax immediately.
Dr. Burbank is director of the Salt Creek International Women’s Health Foundation in San Clemente, Calif. Dr. Fogarty is director and founder of the Fogarty Institute for Innovation in Mountain View, Calif.