What Scott Gottlieb’s Resignation Means for Medical Device Investors
This Tuesday Scott Gottlieb, the US Food and Drug Administration (FDA) commissioner, announced that he is resigning at the end of April. Let’s unpack that a bit and dive specifically into what his resignation means for the medical device segment.
Gottlieb was confirmed as FDA commissioner in May 2017, immediately following a ten year stint in the private sector which included time as an investor, consultant, and board member in the biotechnology and healthcare industries. Given that background it is no surprise that Gottlieb has been viewed as generally favorable to the medical device industry, especially with regards to new product approval timelines as well as championing reform at the policy level to continue to accelerate approvals.
Industry sympathies notwithstanding, Gottlieb is most commonly associated with his pronounced anti-vaping agenda. This included restriction of flavored vaping juices as well as his recent stinging criticism of major corporations including 7-Eleven, Walgreens, and Walmart for selling vaping products to minors.
Gottlieb’s tenure as commissioner has been positive for the medical device industry, and his departure creates risk for medical device innovation in the short- and medium-term.
There are two specific areas of exposure:
Gottlieb was a proponent of “modernizing” the medical device approval pathway, specifically by revitalizing a rarely-used option known as the de novo process. This process allows manufacturers of certain high-risk devices to attain marketing approval with less documentation and clinical testing relative to the traditional Premarket Authorization process. The de novo process can therefore decrease the cost and approval time for cutting-edge devices. Although the ball is already rolling to expand the use of de novo approvals, if Gottlieb’s successor is not as supportive of the initiative it will take longer to see material upside from this policy initiative.
There has been negative public sentiment in general about medical device regulation not protecting patient safety (specifically vaginal mesh and steel orthopedic implants, as shown in popular Bleeding Edge documentary). Furthermore, During Gottlieb’s tenure the number of 510(k) clearances began to increase, reversing a slight decline from 2013–2016. These two issues may compound to create significant pressure for Gottlieb’s successor to be more conservative with regard to medical device approvals.
For investors in the medical device segment, the best way to mitigate against these potential risks is to reduce exposure to companies who rely significantly on new product approvals to drive growth and/or cash flow. This would necessarily mean allocating more capital to large, public medical device companies with stable product lines rather than early-stage companies or those driven by new product introductions.
This can be visualized in the chart above, which plots the percentage of revenue invested into R&D (as an estimate of revenue from new products versus existing ones) on the Y-axis and market cap on the X-axis. Companies in the lower right section of the scatter are large and drive revenue through existing product lines, and should therefore by minimally impacted by potential regulatory headwinds opposing new product approval.