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FDA Changes Will Reward Medical Device Innovation: Here’s What Investors Need to Know

  • The U.S. FDA plans a major overhaul of how medical devices are regulated and approved in the United States. The changes are intended to keep unsafe products off the market and reward innovation from medical device companies.
  • This has been one of the hottest sectors of the last ten years. One medical device ETF has almost tripled the performance of the S&P 500 since its inception. Recently, companies developing devices for neurostimulation have been well-received by the public markets.
  • One small company to watch is Nexeon Medsystems (NXNN), which manufactures medical devices for larger companies and also has two of their own unique neurostimulation products that could be approved in the coming years. Neurostimulation is a growing market, and this is a micro cap to keep an eye on as they bring some novel technology to market.

NEW YORK, NY / ACCESSWIRE / November 28, 2018 / Investing in medical device companies has been one of the most profitable moves of the last decade. iShares' U.S. Medical Devices ETF (IHI) has returned 330% since its creation in 2006; the S&P 500 has returned 120%.

In 2019, the United States' Food and Drug Administration (FDA) has plans for a major overhaul of how they review and approve new medical devices, to both protect consumers and reward innovation among device makers.

FDA commissioner Scott Gottlieb is known for his innovation-friendly approach to running the agency. As he looks to sunset some of the FDA's archaic procedures and incentivize the medical device industry to bring better products to market, it makes sense to look for true innovators in this space.

The FDA Will Push for Device Makers to Innovate

The FDA's 510(k) clearance pathway, which accounts for most devices that the FDA reviews, is the primary target of upcoming regulatory changes. This pathway is used for the clearance of low- to moderate-risk devices (called Class I and Class II) and it allows a medical device company to reference older already FDA-cleared products (called a predicate device) to demonstrate the safety/effectiveness of their own device. Class III devices are the most complex and usually require a more stringent clinical trial-based approval process.

Almost 20% of current 510(k)s are cleared based on a predicate device that was more than 10 years old according to the FDA. The older predicate isn't necessarily bad or unsafe, but this raises questions about whether companies are improving the technology every time they bring a new device to market. The FDA's Gottlieb believes that newer devices should be compared to more modern technology.

As a result, the 510(k) process is about to go through some big changes, all designed to get companies innovating more and referencing higher standards for their new products. This is intended to increase safety for consumers and bring better and better products to market.

One change will be for new devices that don't have predicate devices, but that would still be considered at low risk of safety problems (Class I and II). This has so far been called the De Novo pathway, which permits the evaluation of novel devices and allows the FDA to establish special controls for devices of the same type. In the coming weeks, the FDA will issue proposed rules around this more recent pathway in order to help modern devices navigate the regulatory process.

How Enhancements Could Benefit Consumers AND the Industry

Both the public and medical device industry innovators can benefit from the coming changes.

The timing is prescient: the International Consortium of Investigative Journalists published a bombshell report on the failings of medical devices in the week before the FDA's announcement, detailing the pitfalls of the 510(k) pathway that brought some devices to market when they never should have been. With newer standards, the goal is to keep unsafe products off the market.

Innovators in the medical device field will benefit too. Clarifying the De Novo pathway could come as a big win for a small-cap company that's working on a new neurostimulation device and hopes to use the De Novo pathway soon for their own unique device.

Nexeon Medystems (NXNN) is working on an Auricular vagus nerve stimulator for a variety of neurostimulation settings. The device uses non-invasive activation of the vagus nerve, and their first target market is in the unmet need for opioid withdrawal treatments. Another vagus nerve stimulator is already approved in this space but requires needles (similar to acupuncture), making it onerous for users. Because this is a non-invasive device, Nexeon expects to use the De Novo pathway, and improved regulatory guidance could pave the way for advancements in 2019 as they move forward with development.

The market for neurostimulation devices was estimated at $5.7 billion globally in 2018 by Global Market Insights. This market has taken off as devices have proved effective in many neurological conditions and our understanding of the brain has improved. Deep Brain Stimulation represented a $1 billion market opportunity globally in 2018.

Nexeon's second proprietary device is called the Viant system, a Deep Brain Stimulator with some key advancements over other products on the market. Existing DBS devices used to treat Parkinson's Disease and other movement disorders are unable to record brain function, necessitating a trial and error adjustment process which relies on a patient’s observable symptoms. This requires multiple doctor visits.

Viant is designed to detect, measure and collect brain signals while also providing targeted DBS therapy to reduce the need for lengthy and painful reprogramming visits to the doctor.

Nexeon is also known for manufacturing medical devices for larger companies. The company reported third quarter revenue of $1.9 million, an increase of 138% compared to $0.8 million for the same period one year ago. In Q2 of 2018, the reported $2.8 million, and in 2017 they reported annual sales of $7.4 million.

Public Neurostimulator Companies Commanding InvestorAttention

The public companies ElectroCore (ECOR) and Nuvectra (NVTR) each employ neurostimulatory devices, called gammaCore and Algovita, for the treatment of migraines and chronic pain. They've both been received well by the investment community.

Nuvectra was spun out of GreatBatch Inc in 2016 and has sales of over $14 million quarterly. ElectroCore has almost no sales to date, yet has a $300 million market valuation after their 2018 IPO. NVTR is on track for sales of around $50 million in 2017, and has a market valuation of $375 million, or about 7.5X their sales. Both demonstrate the appetite among investors for this newer class of medical devices, which is why Nexeon is an intriguing emerging company to watch as they approach possible FDA and European approvals in the next year or two.

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