7investing Explains: How are Medical Devices and Genetic Tests Regulated?

Given the rise of exciting new therapeutic modalities ranging from mRNA to gene editing, investors would be forgiven for overlooking opportunities in medical devices. They might be worth a closer look though.

In this episode of the 7investing podcast, the team's health-care trio provide a high-level overview of the regulatory environment for medical devices, describe why and how genetic tests are regulated as medical devices, and provide three examples of companies in the space and how they fit within the regulatory landscape.

Medical devices are regulated by the U.S. Food and Drug Administration (FDA) within three categories:

Class I devices are the simplest and least likely to pose safety risks. Examples include bedpans or medical gauze. These require regulatory clearance.

Class II devices are more complicated and require more data within their regulatory submissions to ensure the safety and effectiveness of the device. Examples include X-ray machines or knee braces. These require regulatory clearance.

Class III devices are the most complicated and pose the greatest potential risk to patients, such as life-supporting, life-sustaining, or implantable devices. Examples include liquid biopsies, pacemakers, or implantable contact lenses. These require regulatory approval.

Although Class I and Class II medical devices can be submitted through the 510(k) process and only need to show equivalence to a predicate ("existing") device, Class III medical devices must be submitted through the more rigorous premarket approval (PMA) process that often requires a clinical trial. Unlike a drug candidate that requires at least three separate clinical trials (phase 1, phase 2, and phase 3), a Class III medical device often only requires a single clinical trial.

It seems odd, but genetic tests and liquid biopsies are also regulated as medical devices. These product candidates are categorized into one of the classes above, which typically impacts how and where they can be used. The three designations of genetic tests include:

Research use only (RUO) products cannot be used as diagnostics and don't require a regulatory submission. RUOs can form the basis of a more advanced diagnostic product from the originator or its customers. These serve an important role, but generally have the smallest market opportunity.

Laboratory developed tests (LDT) must be designed, manufactured, and processed by a single CLIA-certified laboratory. These tend to be Class II medical devices and require a 510(k) filing. LDTs are often used with centralized business models, where patient samples are shipped to a centralized facility. Examples include genetic screening tests. These have the largest volume potential, but low to moderate pricing and insurance coverage. These have moderate to large market opportunities.

In vitro diagnostics (IVD) are more robust tests and can be shipped to the point of care, which means placed in the hands of doctors, oncologists, and medical facilities. Because these are not self-contained within CLIA-certified labs, they're often classified as Class III medical devices and require a PMA filing and clinical trial. IVDs are often used with distributed business models, where patient samples are processed at the point of care. Examples include liquid biopsies. These have both large volume and high price potential, which results in the largest market opportunities by monetary value.

Finally, the podcast concludes with three different examples of medical device companies:

7investing Lead Advisor Dana Abramovitz discusses Inviate (NYSE: NVTA).

7investing Lead Advisor Maxx Chatsko discusses Nano-X Imaging (NASDAQ: NNOX).

7investing Lead Advisor Simon Erickson discusses STAAR Surgical (NASDAQ: STAA)

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