Effects of medical device legislation on innovation within Australian manufacturing companies.

SUMMARY

Unlike many other industries in Australia, manufacturers of medical devices must meet strict regulatory requirements to be permitted to supply their products on the consumer market. With the introduction of the Therapeutic Goods Act and Medical Device Regulations, Australian manufacturers became legally obligated to follow specific principles of quality systems implementation in design, manufacturing and product delivery processes. A survey was conducted to determine manufacturers' perceptions of the effects of the regulation on the product development practices within their companies. Results of the survey showed that the majority of respondents are anticipating or have already experienced mostly positive effects of the legislation on quality, reliability and safety of products and legal security of their companies. However, the respondents estimate that the legislation will negatively affect the cost of innovation and delivery time of new products to the market.

KEY WORDS

innovation; legislation; medical devices; rehabilitation equipment

INTRODUCTION

The Australian medical device (MD) industry is regulated by the Therapeutic Goods Act 1989 (TGA) (Office of Legislative Drafting, 1989) and Medical Device Regulations 2002 (MDR) (Office of Legislative Drafting, 2002). In addition to high risk medical devices, such as devices that are used for medical treatment and diagnosis of diseases, soon this legislation will also control the supply to the market of previously exempt low-risk medical devices including a broad range of rehabilitation equipment.

There is a clear need to ensure the quality and safety of medical equipment including low risk medical devices. However, despite the intended overall advantageous outcomes of the legislation, such as the increased safety of products and the removal or reduction of barriers in international trade, the imposition of compliance and aftermarket surveillance requirements may well stem innovation and place a substantial resource burden on small and medium enterprises (SMEs). This could force some small Australian manufacturers to cease design, innovation and development of new products and to become suppliers for local or overseas larger manufacturers.

Industry

Peacock et al. (2001: i) reported that, in 1996, 80% of the Australian MD market was dominated by imported products. However, the size of the medical device industry was still enormously valuable for Australia, with its share of the market still estimated to be approximately AU$150 000 000 (Therapeutics Goods Administration, 2002). An average growth rate of nearly 5% per year was also evident. Peacock et al. (2001: 2) further demonstrated that this growth is likely to be maintained due to an increasing health budget and an ageing population. Their study estimated that nation-wide in 1997 the industry comprised approximately 670 companies employing a total of about 4 600 employees. The proportion of the total number of medical device manufacturers that are SMEs does not differ significantly from the proportion of SMEs nationally and is about 95% (Terziovsky, 2002; Therapeutic Goods Administration, 2002).

Legislation

The Therapeutic Goods Act 1989 is administered by the Therapeutic Goods Administration. In 2002 the Act was updated with a specific regulation to control medical devices. The updated legislation became aligned with the European Union Medical Device Directive and with international best practice to remove technical barriers in international trade. Other main goals of the new legislation include:

* The avoidance of burdensome regulations that would stop innovation and slow down access of new products on the market; and

* The maintenance of public health and safety.

In isolation, these goals are admirable but are also conflicting in some aspects. For example, fast access to new products on the market in practice may compromise the safety of these products. The legislation tries to resolve these conflicts through the use of a new approach. This approach includes the differentiation of all medical devices into five classes on the basis of risks associated with the intended use of these devices (with Class 1 as the lowest risk). Consequently, the conformity assessment procedure depends on the Class of the device. That is, higher class medical devices have to go through more a rigorous assessment procedure than lower class products. In addition, despite strict requirements, and as a realisation of a new approach to legislation, the regulation does not limit the possible ways to achieve these requirements. Thus, manufacturers have a reasonable degree of flexibility in choosing how to achieve compliance. In accordance with the new approach, all manufacturers of medical devices have to demonstrate the compliance of their products with the relevant essential principles (that is safety and performance requirements) of the TGA and must implement an after-market vigilance system. Manufacturers of higher risk medical devices must be formally accredited to the quality standard (starting from Class IIa) and must be subjected to a pre-market assessment by the TGA (starting from Class III).

A range of low-risk medical devices was excluded from the initial edition of the Therapeutic Goods Act (Office of Legislative Drafting, 1989) by the Therapeutic Goods (Excluded Goods) Order No.1 (1998). However, a number of recalls of low-risk medical devices, and particularly of rehabilitation equipment (Therapeutics Goods Administration, 2005), and legal investigations such as the Sandra Lee Rothwell death (South Australia State Coroner Inquest, 2000) possibly influenced the inclusion of these kinds of products into the new TGA MDR (Office of Legislative Drafting, 2002).

Low risk Class I medical devices do not have any explicit requirements for compulsory quality systems and pre-market assessment. However, the legislation does require manufacturers of Class I medical devices to document:

* Design data;

* Proof that their products comply with the relevant essential principles;

* Risk analysis of products;

* Any changes in the design together with explanations and reasons for these changes;

* The manufacturing process;

* The results of post-market surveillance; and

* Clinical evidence that the device is appropriate for its use.

In other words, the legislation does not formally require Class I medical device manufacturers to undergo a quality standard accreditation process but does require implementation of many of the principles of quality systems. As a result, all Australian manufacturers of medical equipment are now formally obliged to implement the principles of specific quality systems in the design and manufacturing processes. Considering this and taking into account that some sectors of the industry have never been regulated and that the industry consists mostly of SMEs that have limited resources, it was difficult to predict the long term effects of the regulation on manufacturers of the sector. Probable adverse results in this situation are:

* The closure of a business (there is anecdotal evidence of such closures in Australia) because of the uncertainty related to the implementation and function of the legislation;

* The false declaration of compliance by manufacturers as observed by Medical Devices Experts Group (2002: 43);

* The cessation of innovation and development of new products by Australian manufacturers and their transformation into dealers for overseas larger manufacturers; and

* Increased consumer costs.

As one example, it appears that in Australia wheelchairs are currently 15%-20% less expensive than in the USA and Europe. The possible negative outcomes of the legislation may affect either safety or cost of rehabilitation equipment and so diminish any pre-existing market advantage.

EFFECTS OF THE LEGISLATION

The effects of legislation on innovation in various sectors of national economies are presently being investigated by a number of European researchers and organisations (European Trend Chart on Innovation Technical Report #2, 2003a; European Trend Chart on Innovation Technical Report # 4, 2003b; European Trend Chart on Innovation Technical Report # 5, 2003c, Medical Devices Experts Group, 2002; Smith, 2002; Thumm et al., 2000). This paper includes a summary of the initial findings for the first such study in the Australian medical device industry.

Methods

A preliminary exploratory survey was conducted between September and December 2005 as a precursor to more comprehensive research that will be undertaken in the near future. This preliminary survey was part of a wider study to determine the effectiveness of selected technological and management approaches. The main objectives of the survey were to:

* Test an hypothesis that the TGA legislation affected the new product development process within Australian SMEs;

* Clarify the directions of the major part of the wider study.

The survey was designed to provide some basic statistical information such as means, frequencies and some multi-variable relationships for use as indicators in further studies.

Samples for the survey were selected from the following lists and databases:

* The online list of current corporate members of Australia's Biotechnology Industry Organisation www.ausbiotech.org (medical device manufacturers);

* NovitaTech Engineering web-list of tested equipment www.novitatech.org.au/test (rehabilitation equipment manufacturers);

* A supplied list of members of the Design Institute of Australia with experience in medical equipment design www.dia.org.au; and

* Data from the Institution of Engineers Australia online members database with experience in project management www.ieaust.org .au (non-medical equipment manufacturers).

The medical device manufacturers were represented by two groups:

* Manufacturers of higher risk medical devices. Most of these companies had operated under regulation of the Therapeutic Goods Act since 1989 and therefore might be able to predict, with higher accuracy, actual effects of the new MDR 2002 legislation; and

* Manufacturers of goods previously exempt from the regulation, such as rehabilitation equipment. Most of these companies supposedly were familiar with the legislation and mostly completed the compliance process. Therefore, it is important to take into consideration that evaluation of the effects by these companies were mixed in terms of their perception of actual effects and their estimation of future or possible effects.

The study was conducted as a postal survey which included a questionnaire, a cover letter and a prepaid return envelope. While the survey was simple and of ultimate benefit to those approached, it must be recognised that busy work schedules either delayed or prevented feedback from some small businesses.

The questionnaire consisted of 17 questions in relation to:

* The size of the company;

* The implementation process of the TGA legislation by the responding medical device manufacturers;

* The effects of the legislation on the responding medical device companies in the scale from--1 (negative effect) to +1 (positive effect);

* R&D expenditures, revenue from new products and number of patents;

* The contact information of the respondents. The results of the study are presented in the following section of this paper.

Results of the survey

In total, 107 survey forms were sent out and nine of these were returned because of wrong or obsolete addresses. As a result 98 survey forms reached the targets and 25 were completed and returned. This relatively high response rate may be explained by the following factors:

* The minimalist and clear structure of the questionnaire;

* Follow up contacts with the targeted companies; and

* The relevance of the study to the respondents' interests and needs.

The respondents represented mostly small companies; 15 respondents or 60% were from companies with less than 10 employees and 6 respondents or 24% were from companies with from 11 to 50 employees. Medium companies (50-200 employees) were represented by two respondents or 8%; larger companies (more than 200 employees) were also represented by two respondents or 8%. Sixteen respondents represented medical device manufacturers and 12 claimed that they completed the TGA conformance process. Some survey forms were completed by non-medical device manufacturers who were representatives of overseas medical device manufacturers (one response) or were not aware if their products are or are going to be regulated by the TGA (one response) but still preferred to evaluate the effects of the legislation. Distribution of the respondent medical device manufacturers was close to the distribution of all respondents: 8 respondents or 50% were from companies with less than 10 employees; 5 respondents or 31% were from companies with from 11 to 50 employees; 2 respondents or 13% represented companies with 50-200 employees and one completed survey or 6% was from a company with more than 200 employees.

Custom-made devices were produced by 5 respondent companies, Class 1 (with subclasses 1m and 1s) products were manufactured by 13 companies and Class 2 (with subclasses 2a and 2b) medical devices were made by 5 manufacturers.

The survey indicated that the TGA MD legislation had mostly positive effects on Australian medical device manufacturers. These effects were on quality, reliability and the safety of their products, and business success and legal security of their companies. From the medical device manufacturers' point of view the legislation did not affect the novelty of their product designs. However, the manufacturers showed that the legislation negatively affected the delivery time, frequency of development of new products and cost of innovation (see Figure 1).

These results are quite similar to findings of a similar study conducted in Europe by Thumm et al. (2000: 63). After surveying and interviewing approximately 150 of the most innovative medical device manufacturers in Europe, they concluded that the European Medical Device Directives 90/385 EEC and 93/42 EEC (similar to the Australia Medical Device Regulations 2002) had improved conditions for innovation and were especially beneficial for access to the pan-European market, manufacturers' quality assurance systems and the quality and safety of medical devices. However, similarly to the Australian study, effects of the directives on innovation cost and delivery time of new products to market were considered to be less positive by European respondents. The significantly increase of administrative expenditure on compliance requirements was another negative outcome according to Thumm et al. (2000: 66). They also noted that in many cases negative feedback was received mainly from SMEs.

Thumm et al. (2000: 67) explained that some of the negative responses were attributed to the transition period of the legislation. It should therefore be noted that the study was conducted 10 years after 90/385 EEC and 7 years after 93/42 EEC Medical Device Directives were introduced in Europe. Therefore, an equal transition period may be expected for Australian manufacturers to adjust to the TGA MDR requirements.

Comparing the results obtained by the Australian and European studies, it is important to consider that, in addition to the differences in numbers of samples (low scale versus larger scale) and in periods since the introduction of legislation (relatively long term versus the early implementation stage), there was another important difference. Thumm et al. (2000: 60) selected for their research the most innovative medical device manufacturers in Europe. In contrast, all Australian medical device manufacturers listed in the above-mentioned databases were invited to participate in the survey. Therefore presumably a more even distribution of companies by inventiveness was ensured in the Australian study. These differences in the sampling process might have significantly affected results in these two surveys and therefore might also explain why the resulting mean values of some variables, for example, evaluation of respondents of the effect of the legislation on the cost of innovation and delivery time of new products, created a significantly more negative picture in the Australian study.

Another valuable observation derived from our study showed that most of the respondents did not experience any changes in the new product development process in their companies in relation to the introduction of the TGA MDR 2002 legislation. For example, eight manufacturers of custom made products and four manufacturers of Class 1 devices previously exempt from the legislation stated that they had finished the TGA compliance process without changes in their practices. This response was legitimate and expected for higher risk medical device manufacturers that had been under the TGA 1989 legislation or for companies that supplied their products to overseas markets under similar legislation. The TGA MD legislation has very specific requirements for traceability of products, post-market surveillance and documentation. Therefore, it is not clear whether the companies that were new to the legislation had all of these systems and practices in place prior to the inclusion of their products into the new legislation, or whether these companies had only partially completed their TGA conformance process.

The section of the survey relating to R&D expenditure, the number of patents granted and the revenue from newly launched products proved to be the most difficult for the respondents to complete. As a result only a very limited amount of information was collected. This minimalist data provided information that only allowed a conclusion that R&D expenditures varied from AU $0 to yearly R&D expenditures of AU $40 000 000 and depended on the size of a company. Similarly, numbers of patents granted varied from 0 to more than 100 patents granted in 2005 and also depended on the size of a company.

Overall, the majority of the respondents were satisfied with the new product development process in their companies (the mean value was 0.56 when measured in the scale from -1 as not satisfied to +1 as satisfied). They estimated that the new product development processes in their companies were in line with relevant legal requirements (mean value of 0.68) and adequate to customer expectations (mean value of 0.8). It may be argued that conforming to the TGA legislation increases confidence within the medical device companies. This may explain why the mean values for the satisfaction with the new product development process, the compliance with the relevant legal requirements and the satisfaction of customers' expectations were 0.75, 0.81 and 0.81 respectively for the MD manufacturers. A relatively insignificant minority of the respondents felt that the innovation and design process in their companies needed improvement (mean value of 0.12 for both all respondents and for MD manufacturers only).

CONCLUSIONS

In general, the outcomes of the study suggest that the hypothesis that TGA legislation affects new product development processes within the Australian medical device industry is correct. From the manufacturers' point of view the legislation had mostly positive effects and performed its main function of ensuring quality, safety and the reliability of medical devices sold in Australia. However, the study also provided indications that, from the manufacturers' perspective, the legislation had negative effects on some aspect of the design and innovation processes within manufacturing companies and particularly with respect to the innovation cost and time of delivery of new products to market.

At this stage, it is not clear whether these negative effects will be minimised in the longer term when all medical device manufacturers have adapted to the legislation, or whether the TGA MD legislation will continue to have negative impact on some aspects of the innovation process within Australian MD manufacturing. The negative effects might be minimised or avoided by implementation and use of appropriate approaches developed to increase efficiency of the design and innovation process. A further, more comprehensive study could investigate the details of the current innovation and design processes used by these manufacturing companies and the possibilities for enhancing these processes, the companies' approaches to implementation and use of selected technical and management methods, and environmental factors (size of the company and complexity of the product). Methods and approaches for further study could be selected so as to include tools and methods for all stages of the new product development process, including the stages of conceptual development, innovation management, idea generation and evaluation, production, process planning and refining.

Received 8 February 2007 Accepted 25 September 2007

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ALEXANDER SVISTOUNOV

PhD Candidate

School of Mechanical Engineering

University of Adelaide

Adelaide SA, Australia

KAREN ADAMS

Lecturer Research

Education Programs Graduate Centre

University of Adelaide

Adelaide SA, Australia

COLIN KESTELL

Senior Lecturer

School of Mechanical Engineering

University of Adelaide

Adelaide SA, Australia

KRISTIN MUNDAY

ESL Coordinator

Faculty of Engineering, Mathematical and Computer

University of Adelaide

Adelaide SA, Australia FIGURE 1: EFFECTS OF THE TGA MD LEGISLATION: VARIABLES WERE MEASURED ON THE SCALE FROM -1 (NEGATIVE EFFECT) TO +1 (POSITIVE EFFECT) Variable Mean Quality of products 0.44 Innovation cost -0.44 Reliability and safety 0.44 Novelty of products 0 Business success 0.31 Frequency of new product development -0.25 Legal security 0.38 Delivery time of new products -0.38