Cytori Breast Repair Device Gets Higher Hurdle from FDA as Rules Pondered

Cytori Therapeutics Inc., a developer of medical devices, may need to spend $10 million more and take five years longer to win U.S. approval of its first product, under regulation stricter than the company expected.

Cytori had laid out $200 million in eight years on the device, and sought “fast-track” clearance for it, when the U.S. Food and Drug Administration said in March that the product -- for body-tissue repair -- must take the slower regulatory path used for about one in every 10 experimental devices. Shares of San Diego-based Cytori have since fallen by half.

Setbacks of the sort encountered by Cytori under U.S. rules might become more common, delaying products and driving up expenses, said Ira Loss, a senior health-policy analyst at Washington Analysis LLC, in Washington. That’s because the FDA may recommend new regulations this month to answer Congressional criticism over product safety, he said.

“Everyone expects the rules to get tougher,” Loss said in interview.

Venture investors will find that device start-ups are riskier as a result of the rules, with more capital required and lower returns, Loss said. Financiers may slash their investment or compel device makers to seek partners or buyouts, he said.

The FDA may require more companies to conduct clinical trials that cost tens of millions of dollars or more, compared with as little as $1 million under the current program for most approvals, said Linda Alexander, a medical-device industry consultant at Alquest Inc. in Minneapolis, in an interview.

Product Delays

Requirements of more testing may delay products from the largest makers of medical devices, such as Minneapolis-based Medtronic Inc. and New Brunswick, New Jersey-based Johnson & Johnson, said Mark Leahey, president and chief executive officer of the Medical Device Manufacturers Association, in Washington.

Surviving may become harder for smaller companies, such as Cytori and closely held Neuralieve Inc. in Sunnyvale, California, Leahey said in an interview. Cytori had revenue of $14.7 million last year, mostly from milestone payments from a joint venture, and $22.7 million in cash on March 31.

Uncertainty in the FDA approval process has already prompted providers of venture capital to trim investments in medical-device start-ups, said Ross Jaffe, a managing director at Versant Ventures, in Menlo Park, California.

“Given how hard it is to raise equity these days, the longer the process at FDA, the harder it is for small companies to attract they money they need,” Jaffe said.

Venture Investments

Venture investment in medical devices in the first quarter fell 49 percent from two years earlier to $517 million, while total venture capital provided to all industries declined 39 percent to $4.7 billion, according to the National Venture Capital Association, based in Arlington, Virginia.

The FDA began a review of its medical-device approval program in September, after a January 2009 report by the Government Accountability Office called for “immediate steps” to increase scrutiny of higher-risk medical devices that were cleared under more-lenient rules introduced in 1976 under section 510(k) of the Food, Drug & Cosmetic Act.

The FDA’s staff also issued a report, in September, saying the clearance of a knee implant made by Hackensack, New Jersey- based ReGen Biologics Inc. was flawed and influenced by company lobbying and New Jersey lawmakers. The ReGen device had been cleared under the 510(k) rules used for about 90 percent of experimental devices. ReGen “stands behind” its product, and evidence of its safety and effectiveness is “solid,” according to a company statement on Sept. 25.

‘Increasingly Complex’

“What’s happened over time is more and more devices have gone through 510(k), and they are becoming increasingly complex,” said Jeffrey Shuren, director of the FDA’s Center for Devices and Radiological Health, in a telephone interview on April 9. “With a higher level of risk, the need for data may need to increase.”

Shuren doesn’t intend to “scrap” the 510(k) program, he said at an FDA meeting in Bloomington, Minnesota, in May.

The agency is reviewing a committee’s advice on how to revise the 510(k) program, said Dick Thompson, an FDA spokesman, in a telephone interview on June 10. “We’re in the final stages of completing the report.” The FDA has said it expects to begin implementing the recommendations by Sept. 30.

The FDA has also asked the Institute of Medicine, part of the National Academy of Sciences, to conduct an independent evaluation of the program. The institute held a public workshop on the matter June 14-15, in Washington.

Grassley’s View

“I welcome any efforts to improve FDA’s ability to ensure the safety and efficacy of medical devices, without causing delays in new and lifesaving devices getting to market,” Senator Charles Grassley, a Republican from Iowa, said in a statement on June 11. Grassley had criticized the FDA’s device- review program as being too friendly to industry.

The cost of getting a device cleared through the current fast-track process can range from less than $1 million to as much as $50 million, compared with $50 million to $150 million under the rules for higher-risk devices, said Alexander of Alquest.

Cytori’s experimental device extracts stem cells and other generative cells from a person’s own body fat, for such possible uses as breast augmentation and reconstruction after cancer surgery. The company sought U.S. clearance under 510(k).

On March 12, Cytori said the FDA instead is requiring review under rules called PMA, for “pre-market approval,” that are usually applied to higher-risk products. The FDA deemed the Cytori product to be not similar enough to approved devices to warrant the fast track, according to the company.

Delay Is Seen

The review will delay Cytori’s product from reaching the market by three to five years and will cost at least $5 million just for the human studies, and probably twice that or more in total, said Kenneth Kleinhenz, Cytori’s vice president of regulatory affairs.

Cytori shares have declined 50 percent since March 11, the day before Cytori disclosed the FDA’s stance. Today, Cytori closed at $3.73, up 2 cents or less than a percent, in Nasdaq Stock Market composite trading at 4:00 pm New York time, valuing the company at $167 million.

“Going from a 510(k) to a longer approval process does affect the company’s stability, ability to raise financing and continue as a going concern,” said Jan Wald, a Boston-based analyst for Noble Financial Group, in a telephone interview on June 2.

Wald recommends buying Cytori, giving a target price of $10.50 a share, according to data compiled by Bloomberg. Once completed, the more-stringent studies will bolster the company’s efforts to market the device to doctors, Wald said.

‘Staying Power’

Larger companies such as Medtronic, which had $15.8 billion in revenue last year, can withstand FDA delays better than smaller competitors, Medtronic’s CEO William Hawkins said in an interview on May 25.

“Clearly, we have a lot of staying power versus some of the venture-backed companies that are dependent on financing,” Hawkins said. “On the other hand, we want to see some of the small companies survive” because Medtronic wants to acquire new devices or companies to help fuel growth, he said.

When the FDA announces its new regulations, they will probably require more data from laboratory tests, animal studies and human research for higher-risk devices, plus follow-up tests after products reach the market, said Susan Alpert, Medtronic’s chief regulatory officer, in a May 20 telephone interview.

A Johnson & Johnson spokeswoman, Carol Goodrich, referred a reporter inquiring about the FDA rules to the Advanced Medical Technology Association, another Washington-based trade group.

“Although patient safety is the number one priority of the medical technology industry, we believe any new regulatory requirements should balance FDA’s dual mission of protecting the public health while facilitating innovations that benefit patients,” AdvaMed said in a June 14 statement.

‘Completely Stifled’

Officials of Neuralieve, which has been trying since 2006 to gain U.S. clearance for an experimental device that uses magnetic stimulation of the brain to treat migraine headaches, say that even the current FDA rules and procedures can drive up expenses and hold up products.

After successfully completing a 200-patient study in 2008 for a 510(k) approval, Neuralieve encountered agency delays, staff changes and new requirements for a larger clinical study, said Ting Lu, president.

“We’re completely stifled,” Lu said in an interview on June 3. “It’s going to be a huge delay and expense for this company.”

Neuralieve, which has raised about $20 million in angel and venture financing, might need an additional $10 million to pay for the FDA study, money it may not be able to raise, Lu said. Instead, the company will try to commercialize its product first in Europe, where approvals tend to be faster, to generate revenue sooner, Lu said.

To contact the reporter on this story: David Olmos in San Francisco at dolmos@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.