Life Science Startups Have a Long and Expensive Gestation Period
The approval process for new drugs and high risk (Class III) medical devices is expensive and long. Such drugs and medical devices must generally go through at least three phases of clinical studies before they can go to market. Phase I trials test such a drug or medical device for the first time on a small group of people (20–80) to evaluate the product’s safety, including identifying side effects, and in the case of a drug, to determine safe dosage.
Phase II trials expand the number of participants in the studies (100–300) to attempt to establish whether the drug or medical device is effective and to further evaluate its safety and side effects.
In Phase III trials, which examine long-term efficacy and safety, the drug or medical device is given to large groups of participants (1,000–3,000). Successful drugs and medical devices will generally go to market during or following Phase III trials, although studies will continue in order to obtain additional information, including the product’s risks, benefits, and optimal use (Phase IV trials).
It is common for Phases I through III of the clinical studies for a new drug or medical device to cost in excess of $100 million and take at least six years. Due to the amount of capital required to develop such products, life science start-up companies cannot rely solely on bootstrapping or funding from angel investors and must look to other options, with venture capital funds primary among them.
However, even under the best of circumstances, the path to market of a life science startup’s product may run up against the 10-year lifespan of most venture capital funds. And, it should be noted that neither going to market nor FDA approval guarantees the acquisition or IPO for the company that affords venture capital funds and their limited partners with the liquidity they desire.
As Terry McGuire, cofounder and general partner of Polaris Venture Partners and past chairman of the NVCA, asserted in a recent interview, “The [exit] process has gotten to be so long, and the capital required so deep, that it’s becoming more and more difficult to generate venture-type returns, and therefore, make it worth your while to do it.”
The path to market for certain products may actually become more challenging in the near future. Under the FDA’s 510(k) system, a low risk (Class I) or medium risk (Class II) medical device can be “cleared” for use if it can be established that it is substantially equivalent to a medical device (a “predicate”) that has previously been cleared or approved by the FDA.
510(k) clearance requires fewer if any clinical studies, and is therefore, generally less expensive and faster than the approval process described above. About 90% of medical devices submitted to the FDA are reviewed under the 510(k) system.
However, a series of recent recalls of 510(k)-cleared devices, foremost among them Johnson & Johnson’s decision last year to recall more than 90,000 artificial hips, has led to scrutiny of the 510(k) process. The criticism has led to slower turn-around times on 510(k) clearances and an internal FDA review that may result in an overhaul and slowing down of the process.