Is the FDA killing innovation?

The Brooklyn-born entrepreneur has spent the past seven years trying to earn federal approval for MelaFind, a handheld device that uses noninvasive computer imaging to help doctors spot melanoma. Clinical trials found the scanner 98% effective in identifying cancer in targeted lesions.

In the early going, the company worked so closely with the Food and Drug Administration that they negotiated a rare, binding agreement to set the terms for the product’s path through the review process. But Gulfo says when the company returned in 2009 to present its findings, it encountered a different agency. Bucking their own guidelines, the FDA refused to green light the next step toward approval — a review by outside experts — citing quibbles with the data. The agency eventually relented, and the experts recommended approval, but the product has been stuck in limbo since.

What happened? Venture capitalists watching the case say the product got caught in a broader shift at the agency. After a string of high-profile scandals in recent years — Merck’s (MRK) Vioxx, GlaxoSmithKline’s (GSK) Avandia, ReGen’s surgical knee mesh, and Johnson & Johnson’s (JNJ) artificial hips — investors complain the FDA has been in a defensive crouch when it comes to clearing new products.

The agency itself says that’s flat wrong. Public safety watchdogs counter that the FDA these days is simply applying some basic rigor to its reviews; and a panel of medical experts recently said the FDA in fact needs to go further, by tearing up the fast track it uses to approve most devices.

But the impact has been measurable, with early-stage investment in medical device companies off 10% since 2007, according to Dow Jones VentureSource. Jessica Canning, the firm’s global research director, notes that that dip is specific to the sector. “We’ve seen a pretty steady and significant decline in early stage investment in med devices that really isn’t there for the rest of the industry,” she says. “And what it essentially boils down to is that uncertainty strangles innovation.”

That uncertainty has been a consistent if amorphous gripe from the business community since the start of Obama’s presidency, and his administration is trying to tackle it now with a push to streamline rules government-wide. The White House late last month unveiled its plan to trim hundreds of regulations that it says will save $10 billion over the next five years.

FDA on the offensive

With a dual mandate to safeguard public health and work with industry to move new products to market, the FDA is a key proving ground for the balance the administration is trying to strike. The agency reacted to the White House directive by announcing plans to move toward electronic filing and simplifying its risk-based categorization system for devices. And the agency notes that long before the administration’s order, it was moving aggressively to respond to complaints from the investor community about the unpredictability, inefficiency and opacity of the approval process.

The FDA created a new group called the Center Science Council to standardize decision-making on new technologies across the agency’s branches. It’s developing an auditing program to check in on select decisions, another to monitor complaints, and another to improve training of new reviewers that will include some on-site visits to device makers.

“The point that certainly has been made relates to the timeliness and consistency of our decision-making,” says Bill Maisel, deputy director of the FDA’s device division. “And so we have implemented and are in the process of implementing some of these administrative changes to try to improve the consistency.”

Venture capitalists are going to be watching the pace and percentage of the approvals themselves. Mike Carusi, a partner at Advanced Technology Ventures, says venture capitalists aren’t looking for “sea changes” at the FDA, pointing instead to recent reforms at the patent office as a model. “We want them to pull back to a certain level of reasonableness,” he says.

Three years ago, he helped found a group called the Medical Device Venture Council to advocate for life sciences investors inside the Beltway. On a trip to Washington this spring, the group made the rounds on Capitol Hill and met with the Council of Economic Advisors to press the point that domestic innovation and investment are suffering as device makers move to friendlier markets overseas.

Carusi gives the FDA credit for its outreach. “They’re trying to interact with industry and patient groups and stakeholders,” he says. “I don’t know if we see eye-to-eye on things, but I’m encouraged there are folks there willing to listen.”

Risks of criticizing the FDA

Others are less sanguine. John Fleming, the managing general partner of Oxford Bioscience Partners, said the treatment the medical device sector has received from Washington over the last few years has prompted him to switch political teams. Fleming was a life-long Democrat and major donor, contributing a more than $246,000 to Democratic candidates and committees over the course of his career, according to figures from the Center for Responsive Politics. No longer.

“The policies of this administration without question have caused a loss of economic growth, a loss of jobs, a loss of American lives unnecessarily, and in the future, when we have to buy new advanced technology and drugs, we’re going to be buying them from foreigners, because they can’t get approved here,” he says. “That’s why I’m changing my politics.”

Fleming is not an investor in MelaFind, but he’s an old friend of Gulfo, the CEO, and a skin cancer survivor. “I’m a little more emotionally involved in this story, because I understand the importance of catching these melanomas early,” he says. The disease is the most deadly form of skin cancer, but long-term survival rates are excellent for cases detected early. The National Cancer Institute estimates this year will see more than 70,000 new cases and 8,790 deaths.

Fleming says he counseled Gulfo that he’d be “effectively committing career suicide” by speaking out against the agency. For his part, Gulfo says he understood the risk but decided that “transparency favors those with data and research and results. We’ve got it. There’s not a stronger case out there, and the more light that shines on this, the more people’s jaws drop.”

In Congressional testimony in July, Jeff Shuren, chief of the FDA’s device division, acknowledged that the agency was wrong not to have sent the device to a review panel initially. After that panel narrowly recommended approving the scanner last November, Gulfo tried to strengthen his case with the FDA by volunteering to limit its use from doctors generally to dermatologists specifically.

Shuren, in his testimony, said the agency is still reviewing the device and the data behind it to determine if it can now give it the thumbs up. In the meantime, the FDA is taking pains to stress that the MelaFind’s case is an outlier. Maisel of the FDA points out that the agency reviews nearly 4,000 medical submissions every year, and it does a good job most of the time.

Gulfo maintains that because his company is an outlier — a non-invasive diagnostic with a rare, binding agreement that sent it down the FDA’s more rigorous approval pathway — its fate will be an important signal of the administration’s commitment to its regulatory overhaul.

“What’s coming out of the White House is beautiful,” Gulfo says. “But what’s happening at the FDA is completely different. And if you can’t get this device approved, with everything we’ve done, forget it.”