Newsletter for Leaders in the Medical Device Industry – March 2010

17 March 2010 Publication
Authors: Nathan A. Beaver Courtenay C. Brinckerhoff Paul D. Broude

Legal News: Medical Devices

Regulatory Changes May Lead to More “Buy” and Less “Build” in the Medical Device Industry
By Martin D. Mann (, and Richard C. Segal (

In 2009, the life sciences sector as a whole weathered the economic downturn comparatively well. This sector captured the largest percentage of total venture capital investment at 34 percent ($6 billion) according to PricewaterhouseCoopers and led the merger and acquisition (M&A) charts with 24.9 percent of total deal value according to the 2009 Deal Drivers review. However, there is evidence that the medical device industry has not fared as well as some of its counterparts within the entire life sciences sector. Nevertheless, cash-rich large device companies recognize the imperative of capturing a portion of the robust product pipeline coming out of smaller companies in response to a growing “buy it” rather than “build it” mentality driven in part by what many view as rising barriers to entry in the medical device industry. In turn, there is growing concern that the general economy, together with potential barriers to entry, will continue to stifle venture capital investment in the device industry.

We believe that these perceived entry barriers to the medical device industry are a result of several proposed legal and regulatory changes and the resulting climate of uncertainty. First, there is significant concern that proposed changes to the FDA’s premarket notification program, also known as the 510(k) clearance process, will result in many more devices having to undergo the more stringent, time-consuming, costly, and uncertain premarket approval (PMA) process. Second, the proposed Medical Device Safety Act of 2009 (MDSA) seeks to overturn the Supreme Court’s 2008 ruling in Riegel v. Medtronic that held that the Medical Device Amendment of 1976 (MDA) preempted state law claims brought by parties injured by medical devices that had undergone the PMA process. If passed into law, the MDSA could allow for a significant rise in product liability litigation against device manufacturers along with the corresponding drain on resources. Finally, many of the proposals for health care reform call for significant tax increases on the medical device industry, potentially to the level of $20 billion industry wide, per year according to BusinessWeek. Further, the general climate of health care reform in the current administration has already increased pricing pressure on the industry, thereby cutting into margins.

Taken in sum, it appears that the looming specter of increased regulation, litigation, and downward price pressure is making the medical device industry comparatively less attractive to venture investors who are dealing with struggling portfolio companies and continue to seek certainty and quick returns. This is especially worrisome for early-stage medical device companies who have yet to develop an exit strategy and are heavily dependent on venture funding to keep research and development progressing. Nevertheless, we believe that funding options remain open, especially for later-stage companies. Many of these funding sources will come through partnerships, licensing agreements, and M&A deals with larger medical device companies seeking to employ the “buy-it” model to enhance their product pipelines. For example, Thermo Fisher Scientific, Inc. recently acquired Ahura Scientific, Inc. in order to enhance their position in the handheld analyzer market, while Medtronic, Inc. recently purchased Invatec S.p.A. in the interest of growing their cardiovascular business. Consistent with such recent transactions, anecdotal evidence suggests that there is significant money on the sidelines from large device manufacturers who are looking to expand market share. Whereas early-stage venture investors may be reticent to enter or further commit to the industry in light of the current uncertainty, established players need to remain competitive regardless of regulatory changes and understand that the new barriers to entry, combined with the increased time and expense required to bring products to market, make the “buy it” model increasingly attractive.

In spite of the potential impact of regulatory changes on venture investment in the short term, the improving overall economic conditions in 2010 and beyond will likely increase the volume of medical procedures, thereby boding well for the future health of the industry as a whole. In addition, to the extent that the proposed health care reforms result in more people having insurance coverage, this too may increase demand for purchase of medical devices. Finally, the increasingly aged American population will certainly continue to drive growth in the device industry. Thus, while the current regulatory climate may be less than ideal for early-stage ventures, for companies with the wherewithal to form strategic partnerships, create licensing opportunities, or involve their company in a M&A transaction with a cash-rich company, the opportunities seem promising. 

New Patent Term Adjustment Calculation Could Lengthen Patent Term
By Courtenay C. Brinckerhoff (

[Portions of this article were originally published in Genetic Engineering News.]

The Federal Circuit’s recent decision in Wyeth v. Kappos may result in longer patent terms for many patents. The Court determined that the U.S. Patent and Trademark Office (PTO) had erroneously interpreted the patent term adjustment (PTA) statute in a manner that shortchanged patentees by under-calculating PTA in certain circumstances. To maximize patent term and patent value, applicants should understand the PTA statute and take PTA into account when formulating patent strategies. The potential impact of PTA also should be taken into account when performing due diligence reviews for product clearance, as PTA can extend the term of a patent well beyond the standard 20 years from the filing date.  

While older U.S. patents have a 17-year term measured from the grant date, patents issuing from applications filed on or after June 8, 1995 have a 20-year term that runs from the earliest effective non-provisional U.S. filing date. The change to a 20-year patent term underscored the adverse consequences of delays in the patent examination process, as any such delay shortens the effective term of the patent. To address this problem, Congress enacted the PTA statute (35 U.S.C. § 154(b)(1)) to compensate for PTO delays under certain circumstances. The statute provides “guarantees” against three different types of PTO delay:

  • “A” delay, when the PTO fails to act in accordance with set timeframes (such as issuing a first office action within 14 months, issuing a second action or allowance within four months of a response, and issuing a patent within four months of the Issue Fee payment).
  • “B” delay, when the PTO fails to issue a patent within three years of the actual filing date of the patent application.
  • “C” delay, when the application is involved in an interference or appeal, or is subject to a secrecy order. 35 U.S.C. § 154(b)(1)(C).

The statute also provides that “[t]o the extent that periods of delay … overlap, the period of adjustment … shall not exceed the actual number of days the issuance of the patent was delayed.” The issue in the Wyeth case surrounded the interplay between A delay and B delay, and how double counting of those types of delay is to be avoided.

Since at least 2004, the PTO took the position that any A delay contributes to B delay, and thus “overlaps” with B delay. Under this interpretation, the PTO awarded PTA for only the longer of its A delay or its B delay, not both. Wyeth challenged this interpretation, arguing that A delay and B delay only “overlap” if the delay occurs on the same calendar day. The district court agreed with Wyeth, and the Federal Circuit now has affirmed that decision. The Court determined that the clear and unambiguous statutory language provides that “no ‘overlap’ happens unless the violations occur at the same time.”

The Wyeth decision could result in additional PTA for many patents, particularly for medical device patents that often experience both A delay and B delay. According to the 2009 Patent Pendency statistics published by the PTO, patent applications relating to medical devices (examined in Group 3700) wait for an average of 24.7 months before receiving a first office action. That represents an average A delay of 10.7 months for the first action alone. While the average device application is granted in under three years (32.7 months), many applications take longer to issue, and so also experience B delay.

Now that the Court has determined that A delay and B delay should be added when determining the total PTA award, many patents that were pending for more than three years will be entitled to a longer term. For example, if the PTO took 24 months to issue a first office action (an A delay of 10 months) and the patent issued three years and six months after its filing date (a B delay of six months), the patentee now will be credited with 16 months of delay under Wyeth, where the PTO previously would have credited only 10 months of delay (the longer of the two types of delay). This additional patent term may be particularly valuable to medical device patents, which often retain their value throughout their term.

Not all patents that take a long time to issue are awarded PTA, however. The PTA statute provides that the PTA award is “reduced by a period equal to the period of time during which the applicant failed to engage in reasonable efforts to conclude prosecution.” Thus, if an applicant delays the examination process more than the PTO, the patent may not receive any PTA, even if it took much longer than three years to issue.

Applicants should be aware of the PTA regulations that define certain actions as constituting delay. For example, while applicants may not be surprised to learn that extending response periods can count as delay, they might not realize that the timing of other filings can result in charges of delay. Applicants also should be aware of the impact of certain patent strategies on PTA. For example, filing a request for continued examination (RCE), divisional or continuation application, or Terminal Disclaimer all can have significant impact on PTA.

PTA considerations also are important to due diligence and product clearance. For example, it cannot be assumed that a patent granted on a pending application will expire 20 years from its U.S. filing date, as PTA could extend the term for many months or years. Pending applications can be monitored for the accrual of PTO delay and applicant delay, and PTA predictions can be based on this information.

The Wyeth decision provides additional opportunities to maximize patent term and enhance patent value by developing patent strategies that take the PTA provisions into account. While some PTA strategies involve the minutiae of day-to-day patent practice, they can significantly enhance return on investment if they result in a longer patent life for an important product.


Preparing for an IPO
By Paul D. Broude (

As 2010 began, there was increased optimism that the market for IPOs would return after a long and painful hiatus. While the stock market’s gyrations during the first quarter have dampened expectations somewhat, many medical device companies continue to explore the possibility of an IPO. The key for those companies is to be prepared to take advantage of an IPO opportunity when it arises. Many of the factors that affect the IPO market are beyond a company’s control — economic downturns, market turmoil, interest rate changes, unexpected military or terrorist events, poor performance by competitors, and similar issues.

The IPO process realistically takes at least six months to complete from the time a company begins talking with investment bankers, assuming there are no company-specific problems that take longer to resolve. So how can a company minimize the chances of problems that could delay or derail an IPO? Here is a list of issues to consider:

  • Settle on your management team. If you plan to upgrade your management team, do it as part of your IPO planning process. Your team will need to be able to “sell” your story and inspire confidence in the investor community.
  • Look into directors and officers liability insurance. Board members of public companies will insist on D&O insurance, and it takes time to put in place.
  • Make sure key contracts can be disclosed in your prospectus. If you need third-party consents to disclose the existence of contracts, get permission now, before you lose leverage. In general, it is a good idea to include language in any contract that permits disclosure “as required by law, including any governmental filings.”
  • Think about confidentiality treatment requests. Key contracts need to be filed as exhibits to the company’s registration statement. The SEC generally permits only limited provisions to be redacted, typically royalty and milestone payments.
  • Know your investors. Make sure all of the company’s equity and debt issuances have been properly documented.
  • Think about cheap stock issues. The SEC may require valuations for all stock and option issuances to employees, directors, or consultants for up to 18 months prior to an IPO in order to avoid incurring earnings charges on the company’s financial statements from those grants. If the company is not already doing valuations for stock options for 409A deferred compensation purposes, consider starting valuations now, and get the consent of the valuation firm to provide copies of their reports to the SEC if necessary.
  • Address intellectual property issues. It is critical to a successful offering, and to attracting interest from investment bankers, to make sure you own or have sufficient license rights to all of your IP. Make sure you have assignments of inventions from all inventors — they will come out of the woodwork once they hear you are going public.
  • Engage your key IPO advisors. These include your accountants and lawyers (corporate, FDA, IP, and any other special needs the company might have). There are many moving pieces in the IPO process, so organization and experience is critical. The company’s lawyers need to know the company to give the legal opinions required by underwriters, and accountants need to complete audits, including for any significant acquisitions the company has made in the recent past.
  • Become SOX-compliant. Many of the requirements of the Sarbanes Oxley Act apply as of the date a company first files its registration statement with the SEC, not the effective date of the IPO. For example, the company needs to have independent board members and committees, including an audit committee financial expert, and needs to eliminate any loans to officers and directors. Plan to have processes in place regarding insider trading and proper reporting procedures for the company’s ongoing SEC and stock exchange requirements.
  • Clean up your Web site. Both the SEC and prospective investors will scrutinize the company’s Web site. The company needs to make sure statements are true and supportable; eliminate links to third-party sites; and be prepared to continuously revise the Web site as the company’s registration statement is drafted, filed with the SEC, and amended.
  • Develop a practice of issuing press releases. The SEC will scrutinize press releases during the “quiet period” after a company files a registration statement. If the SEC believes the company is issuing press releases to condition the market for the sale of its stock (so-called “gun jumping”), it can delay the IPO and create potential liability for the company. Quiet period press releases must be consistent with past practice, so get in the habit of announcing factual information about the business in press releases intended for customers and suppliers such as landing key contracts or hiring key employees.

The IPO process is lengthy and complex, and there are inevitably surprises along the way and problems to address. Even for companies with good histories and good opportunities, setbacks and delays are the rule, not the exception. But by planning ahead, a company can position itself to take advantage of an IPO window when the time is right. 

China Publishes Regulations on Medical Device GMPs and Inspection Requirements
By Steven J. Rizzi ( and Nathan A. Beaver (

Reposted from the March/April 2010 issue of Update with permission.