Newsletter for Leaders in the Medical Device Industry – November 2010

22 November 2010 Publication
Author(s): Judith A. Waltz

Legal News: Medical Devices

FDA and CMS Look Toward Parallel Approvals; Public Comments Accepted Until December 16, 2010
By Judith A. Waltz (  

Although both the FDA and the Centers for Medicare and Medicaid Services (CMS) are organizationally housed within the federal Department of Health and Human Services (HHS), historically there has been limited interaction between the two entities even when addressing the same product. Increased collaboration has been a recent goal, as evidenced, for example, by the CMS regulation that authorized sharing of CMS’ Part D (prescription drug) data to support the FDA’s Sentinel Initiative in its efforts to identify possible post-market adverse events.

Recently, the FDA and CMS jointly issued an official notice that they are considering establishing a process for overlapping evaluations of premarket, FDA-regulated medical products when the product sponsor and both agencies agree to such parallel review (Notice, 75 Fed. Reg. 57045 (September 17, 2010)). Public comments were requested and will be accepted until December 16, 2010. The agencies also announced their intent to create a pilot program for parallel review of medical devices, to begin after both agencies have reviewed the public comments received in response to this notice.

The advantages of a parallel process are clear, and discussed at some length in the Notice. The FDA is responsible for assuring that drugs and medical devices intended for use in the treatment of humans are safe and effective for their intended uses and that product labeling reflects true and accurate information. CMS makes coverage and payment determinations for Medicare beneficiaries, as well as setting certain broad parameters for product coverage and payment by state Medicaid programs, which are funded in part by the federal government.

Manufacturers have faced a long process to finally secure payment for their products, having to first secure FDA approval and then navigate through the CMS coverage process and payment determinations, particularly if they are seeking a CMS national coverage determination (NCD). Many payers follow Medicare’s lead for coverage determinations, so the adverse impact of payment delay can be multiplied. There also is no assurance of a good result (i.e., Medicare payment) from CMS even if the FDA has approved the product. Different types of information may be required by CMS than that which has already been compiled for the FDA. In appropriate circumstances, CMS may even consider coverage of products for FDA-unapproved or off-label use, clearly requiring significantly different information than that submitted for FDA approval.

According to the Notice, a parallel process where both FDA and CMS approval are processed more or less simultaneously (rather than sequentially as is now the case) will serve the public interest by reducing the time between FDA marketing approval or clearance decisions and issuance of NCDs. Among the reasons expressed in the Notice supporting this parallel process are the following:

  • Both agencies believe they should address the growing need to improve public health by speeding consumer access to and spurring the development of new, affordable, reliable, safer, and more effective medical products and services
  • The limited predictability of market access may hinder investment in the development of innovative therapies and diagnostics
  • A parallel review process can furnish an opportunity to educate developers regarding clinical study designs that are more likely to simultaneously address both FDA and CMS questions

The Notice includes 17 specific issues for which public comments are requested. These include topics such as who should be able to initiate a request for parallel review (for example, the FDA, CMS, an interested third party); which classes of products would various stakeholders benefit most from parallel review; how to decide whether to grant a request for parallel review; how limits should be placed on the number and/or type of products concurrently under parallel review; and identifying potential disadvantages and barriers to parallel review.


Parallel FDA and CMS product review offers an opportunity to reduce the time it now takes to secure Medicare payment for new products. Innovators, manufacturers, and other stakeholders have an opportunity to influence the development of this process, and should consider submitting comments by the December 16, 2010 deadline.

1-3-15, Patent Metrics for Medical Device Startups
By Keith D. Lindenbaum ( and James D. Borchardt (  

IP protection, and particularly patent protection, is critical to attracting funding for new ventures in the medical device field. Accordingly, one question asked by startup medical device companies as they develop their patent filing strategy is: How many patents and patent applications does our company need before pursuing startup financing, first-stage institutional financing, later stages of institutional financing, or IPO? The answer to this question depends on a number of specific factors such as the specific technology, the specific product, the prior art in the field, patenting trends in the field, and so forth. However, some general information can be provided based on our experience representing startup medical device companies to develop a patent strategy, our experience representing established companies considering partnership/licensing with a startup medical device company, and our research related to the patent portfolios of medical device companies at IPO during the past 10 years.

One Pending Patent Application to Seek Outside Financing

A new medical device startup company typically must own or control at least one U.S. patent application that is pending with the USPTO before seeking startup financing from outside investors (investors outside of the friends and family of the company founder). A pending patent application directed toward the company’s core technology is the first step toward protecting the technology upon which the new company will be based; it stakes out the area of potential patent protection, and it also provides an indication to potential investors of the sophistication of the new company.

Intermediate Stages — Three Is the Sweet Spot

As the medical device startup seeks intermediate stages of funding (e.g., VC financing, partnership/licensing with established medical technology companies), having three patent properties is the sweet spot: one granted U.S. patent, one pending U.S. continuation application, and one pending international (PCT) or European application. The granted U.S. patent provides a zone of exclusion for the company’s core technology, and it also provides an indication that the foreign patent applications also will be granted. The pending continuation application provides flexibility to seek additional patent protection. This flexibility can be critical, allowing broader and different patent protection to be pursued in reaction to changing market circumstances, the development of competing technology by competitors, changes in the technology as it is integrated into the established company’s existing products, or design-around attempts by competitors. Lastly, the pending PCT or European application can increase the value of the startup by providing the potential for patent protection in markets outside of the United States.

IPO — 15 Granted Patents

Based on preliminary research, it appears that the average medical device company owns a portfolio of about 15 U.S. utility patents at the date of IPO. We looked at the U.S. patent portfolios of 20 medical device companies (after removing the outliers) that successfully went through an IPO in the past 10 years. This research indicated that the median patent portfolio of a medical device company at IPO included 15 granted U.S. utility patents. Many medical device products include multiple components and may be one part of a larger system. Thus, the multiple patents in the IPO patent portfolio may be needed to adequately protect the multiple aspects/components/functionalities of the new medical device product, and adequate patent protection for the startup’s core product appears to be an important factor in successfully taking the startup through IPO.

Given the increasingly competitive financing environment, the 1-3-15 IP metrics provide medical device startup companies with a tool to gauge their own progress in an area that is important to investors. Because obtaining granted patents takes some time, medical device startup companies that are developing a business plan for both short- and long-term success should develop a patent strategy early with an eye toward building a patent portfolio that achieves the 1-3-15 IP metrics.

Seed Investors Remain Viable for Startups, If Precautions Are Heeded
By Jacob D. Babcock (

Contrary to popular opinion that funding for medical device startups is dormant along with much of the current economy, many entrepreneurs are finding that sources such as friend and family and angel investor groups are rife with opportunity during this time. It is essential that the opportunity be supported by written agreements that accurately reflect the interests of the parties in this unique business partnership.

The individuals who comprise the friend and family and angel investor groups are determining where to allocate personal investments, and many do not see good options in traditional investments such as equity and debt markets. The stock market is highly unpredictable, and the debt markets are offering remarkably low rates of return. According to Michael Marasco, Director of the Farley Center for Entrepreneurship and Innovation at Northwestern University, many individuals are frustrated with managed money accounts since the vast majority have lost money over the last few years. As an alternative, some people are choosing to put their personal wealth into products, projects, or businesses that are “closer to home” than traditional investments and offer the potential for high return. In an age where investors are separated from their investments by highly complex financial instruments and numerous intermediaries, the notion of investing in something that provides the investor with an opportunity to get to know the product, and even company management, can be quite attractive. Moreover, an investor has the opportunity to profoundly impact an area of personal importance to him/her, like early diagnostic tests for a cancer that has affected his/her family or new diabetes treatments that may improve the quality of life for his/her child.

While these investments can be exciting opportunities for investors and entrepreneurs, it is important for all participants to understand the dynamics of such a partnership and set clear expectations.

First and foremost, it is important to understand who the investors are and what motivates them to invest. Mr. Marasco explains that friend and family investors are generally people who have personal relationships with the entrepreneur and want to help the entrepreneur achieve his/her personal goals, in addition to the standard desire to achieve a favorable return on investment. Angel investors are typically high-net-worth individuals (or groups of individuals referred to as angel investor groups or angel investor networks) with particular experience or expertise in the area in which they like to invest. For example, Mr. Marasco mentioned Marc Andreessen, the founder of Netscape, as a prominent angel investor in the IT space who invests based on the principal belief that he can help parlay his experience and achievements with Netscape into success for his portfolio companies. Another common example of experienced-based angel investors includes medical doctors who tend to invest in medical technology because they have an intimate understanding of the nuances of reimbursement, regulatory, and patient treatment. Moreover, angel investors also may be motivated by a humanistic element such as developing a technology to improve the quality of life for patients, investing in an entrepreneur who appears to have a lot to contribute to society, and so forth.

The trend has shown that typically, neither friend and family investors nor angel investors are motivated purely by financial gain and usually (but not always) have a good understanding as to the risk associated with investing in startup enterprises. However, personal relationships are typically being leveraged to create a business partnership, and this is a situation fraught with peril if proper precautions are not taken.

In one common situation, for example, the founder of a medical device company attracted a $250,000 investment from his uncle as part of the company’s ”seed round.” The uncle was well aware of the high-risk nature of the investment and assigned a low probability of receiving any return on the investment. Against the odds, the company developed a successful product and was approached by a large competitor regarding an acquisition. Much to the uncle’s dissatisfaction, however, his $250,000 share in the company had been diluted significantly through stock option grants to the company’s founders, advisors, and employees. Additionally, the company had incurred substantial debts that required repayment before any of the shareholders could receive any distribution from the acquisition price. Although the uncle did not realistically expect a return, he felt that his nephew had taken advantage of his generosity by diluting his share in the upside. The nephew, on the other hand, maintained that he had been explicitly clear with his uncle at the time of investment about using stock options as a form of compensation. This unanticipated dilution turned what would have been a success story into one of broken relationships and mistrust between an uncle and his nephew. Sadly, this could have been prevented with proper planning and attention to details.

For example, in this situation, the uncle and nephew should have at least reviewed and negotiated:

  • The company’s stock option plan to define the possible recipients and total number of grants eligible under the plan
  • The shareholder’s agreement to define the terms and amounts of loans that are permissible
  • Anti-dilution provisions for the earliest investors (i.e., the uncle and other seed-round investors)

In addition, both parties to any investment deal should always pay particularly close attention to the offering documents, subscription agreement, shareholder’s agreement, company bylaws, charter documents, and federal and state registration compliance.

In another scenario, a recently retired physician made a $125,000 angel investment in a medical device diagnostic company that was focused on early diagnosis of colon cancer — an area of particular expertise to the physician. The physician believed that his involvement in the company would go beyond the investment and hoped the company would utilize his expertise in the development of its diagnostics. The company had initially stated its intent to keep the physician involved through periodic updates and was happy to field his suggestions, but they never held true to that promise. Instead, the company relied on its advisory board for technical expertise and its communication to its shareholders was more infrequent than anticipated. When the company sought to raise more money in a subsequent round of financing, the physician was not interested in partaking given his disappointment over the lack of opportunity for him to contribute his expertise.

As shown above, it is essential that the company and investor discuss and document the essential terms and underlying interests of the relationship. In this situation, the parties could have:

  • Agreed to add the physician to the advisory board in exchange for the investment
  • Include a provision about communication to shareholders in the shareholders’ agreement or subscription agreement

By proactively developing unambiguous documentation that addresses a wide range of potential scenarios and memorializes the parties’ explicit intentions, the investor and company/entrepreneur will dramatically increase the odds of a successful business and personal relationship together, regardless of the ultimate outcome with the investment. In a time when investing in startups can be particularly exciting, it is essential for all parties involved to protect themselves and their relationships at the outset of any arrangement when it is relatively easier to address the important issues that can and will arise throughout the investment phase in any business.