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In the United States, the U.S. Food and Drug Administration (FDA) is the primary regulator of the Medical Supplies Industry. The products produced here are mainly regulated by the Center for Devices and Radiological Health, a branch of the FDA. Before initiating the approval procedure, a company must begin with a process known as “first clinical use”. U.S. requirements for this are more extensive than in many other countries, both time and cost wise. Thus, it is not unusual for companies to seek patient enrollment outside of the U.S. in order to expedite the approval process. In fact, at present, about 75% of clinical testing for cardiovascular devices is done outside of the United States.

The FDA determines approval/rejection of a device based on the risk associated with the equipment. The risk factor is arranged in a three-tier system, class I, II, or III, I being the lowest risk. For class I devices, formal FDA review is typically not required before bringing the offering to market. However, general information, such as labeling and side effects, are mandatory. Class II devices are higher risk and usually require FDA approval before making a debut on the market. Here, design controls and post-market status may be looked at more closely.

Class III devices require the most stringent testing and scrutiny by the FDA before a company can win market authorization. This group includes pacemakers, heart valves, defibrillators, and coronary stents. Such devices carry great risk as they are life sustaining and a company must demonstrate through clinical trials that the device helps the targeted patient population. During the development phase, doctors and clinicians are deeply involved in the process, not only to ensure patient enrollment safety, but also to address safety concerns in these fledgling stages.

Overseas regulatory boards have their own criteria for approval. Although some guidelines are similar to FDA regulations, they can also differ. For instance, in Europe, the system relies on notified bodies that determine the efficacy of a product and recommend what is known as CE mark, which is the approved status in European countries. The FDA and foreign regulatory boards alike may opt to change the guidelines for consent if they wish to do so. This, in turn, can make the approval process more costly and time consuming, but companies must adhere to these rules if they desire to bring an instrument to market.

Regulatory boards operate with the interest of the patient in mind and clearly attempt to ensure that devices are safe. However, it is not unusual for a medical device company to experience a product recall scenario, even after a device has been approved. This could be prompted by several factors such as patient injury/fatality or oversights by the company. Whatever the situation may be, when this occurs the reputation of the company involved may be tarnished and the recall could result in severe top- and bottom-line penalties.

Over the years, the number of product recalls by different companies has been significant. One of the more recent recalls was by Boston Scientific (BSX). Specifically, the company put a sales freeze on its defibrillator products in mid-March 2010, after it was discovered that the company failed to submit regulatory papers to the FDA for review and approval of two manufacturing changes in these devices. The case was reviewed by the FDA and approval was granted by mid-April, thereby allowing sales to resume. Still, operations were marred and losses may well follow the company throughout this year. In addition, it lost some of its Implantable Cardioverter Defibrillator (ICD) market share to major competitors such as Medtronic Inc. (MDT) and St. Jude Medical (STJ). And it is not the first time Boston Scientific has faced such woes. The company was obliged to recall certain pacemakers and defibrillators in 2006 after it was discovered that implants resulted in patient injury. These products had not been manufactured by Boston Scientific but by Guidant, a company that BSX acquired, and was, therefore, liable for such injuries. Ironically, this latest recall involved Guidant products again. There have been other instances where Boston Scientific has had to recall products. In light of its most recent debacle, the company is currently facing a shareholder lawsuit as well as informal investigations by both the Securities and Exchange Commission and the Department of Justice.

But this has happened to other companies too. In November 2007, St. Jude Medical was forced to recall one of its defibrillators after the lead wires malfunctioned and in some cases perforated the patient’s heart. In similar fashion, Medtronic had to follow the same course of action in October 2007 when the leads in one of its defibrillators were found to be fractured and had possibly been the cause of five patient deaths. This was not comforting to the other quarter of a million patients who had the device implanted and were advised to seek consultations with their physician.

Product recalls are not isolated to cardiovascular makers, but span the spectrum of all medical device manufacturers. Orthopedic developers Zimmer Holdings (ZMH) and Stryker Corp (SYK) have both had to pull products from their portfolios after malfunctions occurred. And STERIS Corp (STE), a developer and manufacturer of sterilization systems for use in hospitals, recently faced FDA woes after the agency warned hospitals against using one of that company’s sterilization systems.

This scenario is not positive for any of the firms involved as losses may be severe. Apart from this, patient safety is at the forefront of concern for all involved. But changes may come soon. A task force set up by the FDA has recommended that there be more disclosure regarding the approval process, particularly with regard to concerns and reasons for denial. If this occurs, the public will be more aware of the prospects of individual devices and investors will gain a more thorough look into a stock’s potential. Also, in light of the numerous recalls, stricter approval guidelines are being recommended so that the entire process may become more difficult. Although the regulatory path is a bit tedious, stricter practices, such as lengthier clinical testing, will aid in ensuring the safety and well being of patients who depend on these instruments as a means of securing a better way of life. So, in the end, investors interested in this industry will not only have to consider the impact of the current regulatory process and the effect of the recalls, but also the potential drag any new regulations might have on company profits.