4 Stocks Proving That Regulation Matters


Medical devices can and do make life decidedly better for a whole lot of people. However, some device manufacturers have alarmingly put out products that either fail to improve patient outcomes or, in too many cases, actually cause more damage. It looks likely that the FDA is going to tighten up surveillance, which means that these companies are going to have to get their acts together.

How could this happen?
The basic problem here is that, unlike drugs, a whole lot of medical devices make it to market with no clinical testing. Once implanted, they receive precious little oversight. Regrettably, it seems we cannot rely on the companies themselves to ensure that their products are safe, and so begin our problems.

Many of these offenders come from the 501(k) process that lets device makers gain approval for new products by claiming they are not materially different from pre-existing approved ones. In one case, a company didn't seek approval at all, leading to an inquiry from Sen. Chuck Grassley, as we'll see below. And in 2009, the Government Accountability Office went so far as to release a report on the FDA's oversight failures. All this has finally pushed the FDA to begin work on a national surveillance strategy, due for release by the end of this year.

And our offenders are...
Let's take a closer look at four companies exhibiting bad behavior and responsible for some, in my opinion, egregious medical device troubles.

Johnson & Johnson's (NYS: JNJ) DePuy Orthopaedics unit makes total hip replacements. These ice-cream-cone-shaped devices used to be made of both plastic and metal, but when DePuy chose to switch to an all-metal design, the device slipped through the clearance process without testing because it was deemed "substantially equivalent" to the previous model.

Trouble is, it did not behave equivalently once implanted. Nearly half of all implant recipients needed a second surgery within six years to repair the damage. DePuy only recalled the device after almost 100,000 people had already served as unwitting test subjects. A recent Forbes estimate puts the cost of claims settlements for all-metal hips to J&J, Zimmer (NYS: ZMH) , and other manufacturers at about $5 billion.

Edwards Lifesciences (NYS: EW) makes annuloplasty rings, which hold a leaky heart valve together. The company had full FDA approval for an existing set of rings, but in 2006 it released the Myxo ring, a new product Edwards had re-engineered on the basis of the old one.

The Myxo ring went into hundreds of people's chest cavities with no testing or approval of any kind. To be fair to Edwards, this was all perfectly legal, and was based on a gaping loophole in the FDA's regulations. But critics in the medical community say the process amounted to an aftermarket experiment on unwitting human guinea pigs. The process was so alarming that it prompted that previously mentioned Senate probe. Edwards ultimately came away largely unscathed, but had to pull the product from the market and rebrand it under a new name with FDA approval.

Boston Scientific (NYS: BSX) makes surgical mesh that is designed to support internal organs. The company had a mesh product designed to repair internal hernias, and sought approval for that product's vaginal use to treat urinary incontinence. Never mind that this was a different body part and required a different implantation method. The ProteGen Sling sailed through to market, again without specific testing for this new application.

The complaint reports started to flood in. One study found that 15% of vaginal mesh recipients suffered complications, and that the mesh benefited them no more than alternative treatments. Boston Scientific has not budged on its assertion that the mesh is safe and effective, so the FDA finally got off the couch this January and ordered proper studies of the product. We'll have to wait for results, but I'm betting they won't look too good.

St. Jude Medical (NYS: STJ) makes implantable defibrillator leads. Defibrillators are similar to pacemakers, and basically shock a struggling heart back to life. The leads are the wires that connect the defibrillator to the heart. High-profile malfunctions have plagued the entire heart device industry, but St. Jude's may take the cake.

The company's Riata lead -- wiring up about 79,000 fragile hearts in the U.S. alone -- started eroding through its protective coating in some patients, thereby jolting them unconscious with raw electric shocks. One study found the flaw in 15% of patients, but other studies show the actual number may be double that. All this culminated in a recall, but only a full year after St. Jude had stopped selling Riata and sent guidance to doctors about the known flaws.

Accountability returns?
There is clearly a thread through these stories: If medical device manufacturers were high school kids in the basement with a keg, the FDA was the parent who went upstairs and trusted the teens to holler if there was a problem. But these companies are not children, and I expect better from them. I cannot see clear to investing my money in companies that do not take the safety and efficacy of their products more seriously. It's only going to get harder for them now that the FDA is finally rousting itself to action.

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