The Food and Drug Administration released its first round of changes to the 510(k) approval process, which is a commonly used regulatory pathway for many medical devices. At first glance, we don't anticipate adjusting our fair value estimates for firms in this industry based on announced changes, as most of them appear minor in terms of the potential costs to industry.
The FDA appears to have listened to industry concerns and deferred decisions on controversial initiatives until the Institute of Medicine can weigh in on those matters in the summer. The IOM's recommendations on these controversial issues, such as creating a Class IIb category that has the potential to significantly hurt the financial prospects of many device firms including orthopaedic firms, are expected to heavily influence the FDA's final changes to the approval process (the cardiac device makers such as St. Jude Medical, Medtronic, and Boston Scientific are less vulnerable to some of the potential changes because the majority of their devices are already subjected to more rigorous and costly regulatory requirements). While not guaranteed to be positive, we are encouraged by the agency's apparent willingness to consider the feasibility of proposed changes for industry players before finalising the regulations.
Combine that action with President Obama's recent stance on trying to enact appropriate regulations that protect US citizens but also promote economic growth, and we remain hopeful that our harsh reform-related scenarios for orthopaedic device firms such as Smith & Nephew (SN.), Stryker (SYK) and Zimmer (ZMH) are becoming less likely. As the medical device industry is a largely American one from both a revenue and corporate headquarters perspective, we hope regulators remain true to the strategy of trying to promote growth. One of the biggest concerns of industry players is that new legislation will stifle new technology introductions by lengthening timelines and increasing costs associated with new device approvals. While not completely out of the woods, industry players appear to have made their voices heard by regulators, which could bode well for them in future regulatory changes.
