The market for newly introduced medical devices has never been stronger, and that growth is not expected to stop anytime soon.
The experts at BMI Research for instance, project an over 6% compound annual growth rate for the medical device market for U.S-based manufacturers for the next few years, despite a projected overall slowdown in nationwide health spending.
But while tens of millions of Americans now have medical devices implanted in their bodies, some of those devices are faulty, including products that have been on the market for years. You need look no further than corporate icon Johnson & Johnson (NYSE:JNJ) for an example: The company's metal-on-metal hip implants (known as articular surface replacement, or ASR, systems) were on the market for many years before being recalled.
During those years, the metal-on-metal implants' high failure rate created the need for further costly and painful surgeries. While the implant was supposed to accommodate younger patients by providing more flexibility and range of motion, many users ended up instead with crippling injuries, including dislocation, immobility, and metallosis (metal poisoning).
Medical device failures can also injure shareholders of the companies that make them. J&J faced more than 7,500 lawsuits for its recalled hip implants and paid billions in settlements. But the damage to the company was much greater than that.
A major hit to the brand
Lax product development standards and a laissez-faire attitude about safety often deal stunning setbacks to companies. In J&J's case, a seemingly endless stream of product recalls (including household name drugs Tylenol, Benadryl, and Rolaids) cut deeply into consumers' confidence in the company.
It comes as no surprise, then, that J&J's stock performed quite weakly during 2010 to 2012 when headlines about recalls were at their height, gaining less than 3% during this time period, even as the S&P 500 rose by more than 23%.
Johnson & Johnson subsequently took aggressive steps to overhaul its manufacturing, including investing more than $100 million in facilities and equipment.
But in the case of medical devices, shoddy manufacturing often isn't the culprit. Instead, a design process that prioritizes getting a product to market quickly can compromise device safety. In addition, some believe a loophole in the regulatory framework makes design problems in medical devices more easily overlooked than, for instance, problems with medications by the Food and Drug Administration.
Critics who point to such a loophole hold up the troubled history of J&J's hip implant systems as indicative that some companies could be exploiting an inadequate and piecemeal testing system for medical devices. While J&J subsidiary DePuy can be justly proud of its other 200-plus innovative products, Johnson & Johnson phased out production of its ASR hips and started recalling the remaining devices in 2010. But by the time that happened, over 37,000 people in the U.S. and 93,000 people worldwide had the devices implanted and were at risk. So how did this device slip past both company and FDA scrutiny for so many years?
The testing loophole
In the United States, the FDA typically conducts stringent pre-market testing on new medical products. But the review process is often bypassed if the manufacturer can demonstrate the product is "substantially equivalent" to one already on the market. In that case, the new medical device can be used in patients without clinical testing or review of outcomes.
In J&J's case, according to The New York Times, the FDA required DePuy to run clinical trials before selling the device in the U.S. But while those studies were under way, DePuy used a regulatory loophole in 2005 to start selling a version of the implant in the United States for standard hip replacement surgery. The version that was sold resembled in some ways another device that was already on the market, but its critical component -- a solid metal cup that replaces a hip socket -- experts say was flawed in deign.
Medical device manufacturers often rapidly make small changes to a device to improve the product. But if they continually bundle unapproved components into an existing design, the final device can contain minimally tested components. Those components can then cause major problems later for end users. In the case of the DePuy metal-on-metal implant, the agency in 2009 decided to reject the submitted version--which also had the now-finally-tested critical solid metal cup--but the company was not necessarily obligated by that to recall the version on the market.
J&J isn't the only company to have produced faulty implants. In 2012, Stryker Corporation, one of the world's largest manufacturers of medical equipment, recalled two of its artificial hip implants. Stryker has faced multiple lawsuits filed by patients who received the recalled hips. Zimmer Holdings, the market leader in knee replacement products, has also initiated recalls on a device called the NextGen Complete Knee Solution.
The vast majority of medical devices are safe. Without a doubt, people are living longer, more active lives thanks to continuing advancements in medical technology. But as the number of devices increase, the number of recalls is growing. With over 100,000 different medical devices on the market, according to FDA data, between 13 and 75 medical devices are now recalled in the U.S. every day.
Patients and profits: A tricky balance
The balance between profits and patients is a difficult one for medical device makers. Due to the extremely competitive nature of the market, the push to be first with a breakthrough medical product can lead to an ever-shrinking development cycle.
Compounding that, medical devices are becoming increasing sophisticated. In fact, software design failures are now the most common cause of recalls, according to the FDA.
Many breakthrough products -- such as the cochlear implant pictured at the beginning of this article -- use wireless connectivity. Others feature 64-bit architecture, 128-bit encryption, Web services, graphical user interfaces, multiple operating systems, advanced 3D capabilities, augmented reality, and even haptic feedback to emulate the sensation of touch. But, of course, all of these nifty features also increase the risk by adding confusing displays, upgrade glitches, and systems failing to speak to one another to the long list of problems that could put patients in danger.
What to do? As these devices become ever more sophisticated, interconnected, and interoperable, more work must done to address concerns about their long-term safety. Running a full clinical trial for each and every iteration of a product isn't the answer, as it would bring innovation to a halt rapidly. So we need a solution.
Figuring out how to create safe medical devices for patients and still deliver for Wall Street is not easy, but it's essential. Unlike other industries or sectors, where customers can more easily forgive failures in product performance, medical device manufacturers operate with much narrower margins of error -- and much higher culpability if things go wrong.
The United States is the acknowledged world leader in medical devices, with more than half of the leading global medical device companies based here, and millions of jobs created across the country. While the future potential is tremendous, patients' safety needs to be the top priority. The result of shortchanging that value could be devastating not only to the health of patients benefiting from its technologies, but to the industry itself.
Cheryl Swanson has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.