Innovation in the medical device industry differs significantly from that in the pharmaceutical industry. There are significant differences in who does the research and development (R&D), the nature of that R&D, and the public policies that affect it. We see larger firms taking the lead, a more fluid innovation process, and looser regulations on medical devices when we compare the device sector to the drug industry. This chapter discusses the significant distinctions between device and pharmaceutical innovation and their public policy implications.
The usefulness of patents as incentives for innovation is determined by the different natures of drug and device R&D. Drug patents are generally more valuable since it is challenging to build a medicine replicating another drug’s effects and side effects. Another distinction between the two industries is in which elements of the invention are protected by patents. The usage of antihistamines to treat allergies is an example of this in the pharmaceutical business.
The fundamental idea behind the usage of antihistamines is not patentable, but the particular medications are. In the world of technology, this is frequently the case. The basic principle may be patented, but specific devices rarely are. In general, it is feasible to invent a medical device for any purpose in a variety of ways. The breakthrough frequently lies with the underlying concept used in the particular application.
Patents appear to be less important in many areas of the technical device sector. Competition generally follows after a product is launched. Patents, on the other hand, play various roles in the innovation process. Until recently, the patent application significantly impacted whether royalty payments to the inventor were treated as ordinary income or capital gains.
The IRS recognized that the subsequent royalty payments were capital gains because a patent had been filed. When a tiny firm requires investment money, another instance in which the patent comes into play is when a small business seeks funding. Investors frequently worry about whether any patents cover the new project. Even if they are minor, investors like to feel safe.
Who Does R&D?
Small, entrepreneurial firms are the norm in creating new medical devices. Larger businesses tend to buy up the smaller innovative enterprises and their goods or develop their versions once an introduction is made. Several reasons small businesses dominate medical device innovation and large corporations dominate the pharmaceutical company. Its dangers and constraints far more restrict the drug industry.
In the device business, neither the regulators nor the technology provides nearly as much restraint. A small firm can produce a new product in a fraction of the time required by a big company. In the small firm, the innovator is often also a key decision-maker, and they may take chances based on their firsthand expertise of the technology and its applications.
In a large company, the decision-makers are often removed from the innovators and may not get the comfort provided by direct involvement in the process. These decision-makers do not have access to the tools to evaluate risks if they are omitted, and as a result, they will avoid them at all costs. On the other hand, in the past, large businesses tended to create expensive research divisions to generate new ideas.
Within these divisions, researchers discover a culture that allows for innovation without the pressure of a startup’s need to develop software as quickly as possible. Many large businesses have grown dissatisfied with this research and discovered it far more lucrative to purchase ideas from small businesses.
Lest one becomes overzealous about the prospects of becoming an entrepreneur, it should be emphasized that the vast majority of small entrepreneurial firms fail. The reasons might include a technological complexity that is too great, a lack of marketing savvy, a small market, or insufficient capital.
Entrepreneurship is increasingly challenging in this sector as the regulatory climate gets more rigorous and venture capital becomes scarcer. The medical device business is no longer as popular with the investment community as it once was. Unless cost-effectiveness can be demonstrated early in the product cycle, new technology is no longer embraced in hospitals.
Because the two fields are so different, drugs and technologies are regulated differently. Traditionally, drug products have been made using chemistry and biochemistry, and the Food and Drug Administration (FDA) has a lot of expertise in these areas. In contrast, technologies are utilized in a wide range of applications, including biomaterials, electronics, optics, mechanics, fluidics, and others. Even our largest businesses rely on just a fraction of these technologies, and the FDA cannot be competent in them all. This creates an extra barrier to evaluating and regulating medical devices.
Mr. James Letko is an experienced medical device executive who has worked in a number of different industries, including pharmaceuticals and medical devices. In this blog post, he discusses the dynamics of medical device development- from patents to financing innovation. He also provides excellent insights into who does R&D and how it’s financed. If you’re interested in learning more about the medical device industry, check out Mr. Letko’s blog posts!