Over 30 years of reporting on Congress, federal agencies and the White House for corporate America as well as national trade and professional associations.

Critics Assail FDA Medical Device Approval Process

July 2011...P&T Journal
    Slow Review Time and Safety Are at Issue

 PRESCRIPTION:WASHINGTON

Stephen Barlas

Mr. Barlas is a freelance
writer based in Washington,
D.C., who covers
issues inside the Beltway.
Send ideas for topics
and your comments
to sbarlas@verizon. net.

The FDA is attempting to respond to
complaints about its procedures for
approving medical devices. Those
complaints come at the agency from different
angles.Medical device companies
say that if the FDA doesn’t speed up the
process, foreign competitors will win the
innovation race and hospitals in the U.S.
will see patients go overseas for cutting edge
treatments that domestic hospitals
can’t offer. The Government Accountability
Office (GAO), on the other hand,
has issued repeated reports criticizing
the FDA’s approval process for various
shortcomings that, hypothetically, could
endanger patients who might receive a
faulty implantable device, for example.
Stephen Ferguson, Chairman of the
Board of Cook Group, Inc., a holding
company for manufacturers of many diagnostic
and interventional devices, says:
“There is a real concern that without
improvement in the current regulatory
system, the role of the United States as
the leader in medical innovation will continue
to decline and [will] result in the
migration of patients seekingmedical intervention
abroad where innovation is
thriving and available.”
Diana Zuckerman, PhD, President of
the National Research Center for Women
& Families in Washington, D.C., takes
the opposing view. She says there are far
too many recalls of medical devices. Between
2005 and 2009, there were 3,510
voluntary recalls, an average of just over
700 per year. The majority—nearly 83%—
were classified by the FDA as Class II recalls.
A Class II recall means that the use
of, or exposure to, these devices could
cause temporary or medically reversible adverse health consequences or that the
probability of serious adverse health consequences
is remote. Class I recalls are
the most serious type, constituting only
4% of the total.
Dr. Zuckerman explains: “The bottom
line is that even ‘moderate-risk’ recalled
devices can sometimes result in death
during surgery and certainly add billions
to Medicare costs when they result
in additional surgery and hospitalizations
from the complications of defective
devices.”
Because of perceived problems with
the approval process, the GAO put the
FDA’s review program on the federal
government’s “high risk” list in 2009,
where it has stayed, as the GAO has
issued successive critical reports,mostly
about the extent of recalls. The FDA
responded by forming some internal
review groups that made recommendations.
In 2011, the agency announced that
it was implementing these recommendations.
To respond to complaints from industry
about the plodding pace of new device
review, the FDA is promoting an “innovation
pathway.” The agency held a
public meeting on that topic in March. Its
initial plan was to pick a couple of medical
devices each year for expedited review;
however, AdvaMed, the medical
device trade group, argues that the FDA
already has such a pathway—its Product
Development Protocol review.
Janet Trunzo, Executive Vice President
of Technical and Regulatory Affairs
at AvaMed, says:
The proposed Innovation Initiative contains
many good ideas, such as early and consistent
interaction and the focus on cooperative
effort, which ultimately should
be applied across the board to all devices to
get safe and effective products developed
and reviewed quickly. The FDA has a number
of tools to achieve these objectives
already available, and it should use them
more broadly and effectively. Minnie Baylor-Henry, worldwide Vice
President of Regulatory Affairs for Johnson
& Johnson Medical Devices and
Diagnostics, notes that the agency has
designated a brain-controlled robotic
prosthetic arm as the first device to enter
this innovation pathway. She agrees it is
a radically different and revolutionary
medical device and ought to be accorded
an expedited review. She adds, however:
“Significantly redesigning a marketed
device to allow it to be used safely and
effectively at home can be an innovative
breakthrough.”
She also says that the FDA should not
focus exclusively on “technologically
radical” developments.
The approval of new medical devices is
not the only pressing issue facing the
FDA—so is the classification of old devices.
Since 1976, the FDA has been
slowly classifying the 140 categories of
devices that were on the market before
that year, when Congress passed the
Medical Device Amendments of 1976.
That legislation, which amended the
federal Food,Drug, and Cosmetic Act of
1938, required the FDA to categorize all
medical devices as Class I, II, or III, with
III representing the most potentially
dangerous class, including, for example,
implantable devices. Manufacturers of
new Class III devices can submit a Premarket
Approval (PMA) application for
an innovative device, in which case a
clinical trial or similar study is required.
Alternatively, a premarket notification
states that the new device is similar to
one that is already on the market. In this
situation, detailed scientific information
about safety and efficacy is not required—
nor is it typically required for
“new” Class I or II devices.
The 140 categories of devices are referred
to as “pre-amendment” devices.
Only 26 categories remain to be classified,
but they include some widely used
devices that, if identified as Class III,
would have to be the subject of first-time
clinical trials. Examples include auto-mated external defibrillators, implantable
hip joints, and electroconvulsive therapy
devices that are used to treat depression.
Manufacturers of these medical devices
have hinted that they cannot afford clinical
trials and would stop manufacturing
the product if the FDA considered the
devices to be Class III. However, patient
advocacy groups counter that some of
these devices are dangerous and should
be banned or should at least be subject to
restrictions imposed on hospitals where
they are used.

Rules for Derivatives: Pit U.S. Business Against U.S. Treasury

June 2011...Financial Executive Magazine

The Obama administration's implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s provisions on derivatives has set off a political slugfest, with U.S. Treasury Secretary Timothy Geithner and other federal regulators in one corner and business financial executives in the other. What is surprising, and maybe ultimately the knock-out blow, is that despite the sharply partisan atmosphere
on Capitol Hill on many other issues, for this one both Republicans and many Democrats appear to be in the corporate corner.

Sen. Richard Shelby (R-Ala.) highlighted the bout on April 12 at hearings in the Senate Banking Committee when he asked Thomas C. Deas Jr., vice president and treasurer of FMC Corp., a hearing witness that day, whether he agreed with Geithner that derivatives “only benefit Wall Street, not Main Street.”

“No, sir, I don't,” Deas responded. “We are manufacturing goods consumed in theU.S. and derivatives help us offset risks we couldn't otherwise control.” Deas was representing the National Association of Corporate Treasurers and has been a leading lobbyist for the Coalition of Derivatives End-Users, of which Financial Executives International is also a member.

The Obama administration's implementation of Dodd-Frank's exemption for clearing and margin requirements for nonfinancial users of derivatives is a major sticking point with business, especially the margin requirements. The Federal Reserve, Federal Deposit Insurance Corp. and other banking regulators proposed a rule on margins on April 12. It was roundly criticized within the business community.

A week prior to the Senate Banking hearing, Sen. Tim Johnson (D-S.D.) and another Democratic Senate committee chairman had written to Geithner, Federal Reserve Chairman Ben Bernanke and other federal banking regulators pleading with them to prohibit margin set-asides for commercial end users of derivatives who are hedging business risks. But that plea fell on deaf ears.

“The letter sent by Sen. Johnson and others reaffirmed congressional intent and admonished regulators to ensure that end users were not subject to such requirements,” explains Deas. “However, the prudential regulators' proposal indeed subjects virtually all end users to margin requirements.”

The Obama administration, however, did pull its punch on one issue. In late April, the Treasury Department
announced its decision to exempt foreign exchange (FX) swaps and forwards from the definition of “swaps”—meaning they do not have to be cleared, nor is margin an issue. This was welcomed by the mostly large multinationals that do extensive exporting, or that have business units overseas. But according to Luke Zubrod, director of Derivatives Regulatory Advisory service for Chatham Financial, FX swaps and forwards constitute less than 10 percent of the hedging done by most major U.S. companies. Interest rate swaps account for perhaps 80 percent of commercial hedging, with commodities somewhere near FX swaps in terms of percentages. Moreover, FX options, cross-currency swaps, non-deliverable forwards and other FX products will still have to be cleared, and even forwards and swaps remain subject to Dodd-Frank reporting and business conduct requirements.

Congress Listens, Rulemakers
Make Rules


The Treasury decision to exempt FX swaps and forwards does nothing to erase business concerns about having to post margins on interest rate and commodity swaps, one of the issues that
dominated the April 12 Senate hearing. It was the committee's first oversight hearing on the controversial, far-reaching Dodd-Frank act, which requires agencies such as the Commodity Futures Trading Commission, U.S. Securities and Exchange Commission and the federal banking regulators, including the Federal
Reserve Board, to finalize numerous rules by July 2011.

For companies represented by the Coalition on Derivatives End-Users, there are two key rulemakings. The first involves the CFTC and SEC definition of “swap dealers” and “major swap participants.”
Companies that fit those definitions must register with the government and clear their swaps through a central
clearinghouse — two requirements that will add considerably to corporate costs. Commercial end users of swaps —those that are not market makers looking to make a profit but multinationals hedging
the risks arising from price swings in commodities, interest rates and foreign exchange rates — can qualify for an exemption from that clearing requirement. If they do, they would then be subject to margin requirements — if their risk threshold exceeds a certain level — set by the Federal Reserve Board, FDIC, Comptroller of the Currency and other financial agencies.

The second key rulemaking is really the more important of the two, since it affects many more companies, was published by the banking regulators on April 12. It describes how banks should set their risk thresholds below which no margins would be required. Most U.S. companies will not be swept into the “swap dealer” or “major swap participant” definitions, so they will not have to clear swap contracts where they hedge commercial risk. Very large companies such as Kraft Foods Inc. and Phillip Morris International Inc. that
use captive “centralized hedging centers” to hedge foreign commodity, interest rate and currency prices could, under certain conditions, have to work through the new swap clearinghouses, meaning systems and record-keeping costs.

However, the majority of U.S. companies that contract with their commercial lenders to hedge commodities,
foreign currency and interest rates — those are the “Big Three,” although sometimes companies even go so far as to hedge the weather — will not have to clear their swaps. If companies are exempt from clearing for commercial swaps, then the next question is whether their banks should have to collect “margin”
on those contracts. According to Ann Marie Svoboda, author of Actual Cash Flow and member of FEI’s Committee  on Corporate Treasury, companies currently with strong credit histories do not have to
post margin on derivatives they buy from their commercial banks. This could change under
the “margin” proposed rule.

The proposed rule says each bank must establish “credit exposure limits” for each customer or counterparty,
based on a computation using a standardized “lookup” table that specifies the minimum initial margin that
must be collected, expressed as a percentage of the notional amount of the swap or security-based swap.
These percentages depend on the broad asset class of the swap or securitybased swap. If a company's risk exposure is below that threshold, the bank would not have to collect margin, as long as the threshold was established under appropriate credit processes and standards.
Zubrod notes that proposed margin
rules allow for margin amounts to reflect
the credit strength of each company.
Although all companies will be
subject to margin requirements, highlyrated
companies may post less collateral
than companies with questionable
credit ratings.
Margins could be doubly troublesome
for companies that ordinarily secure
derivatives transactions with
physical assets — like real estate and
utilities. Such hard assets cannot be
used to satisfy margin requirements under the proposed rule.
Again, the prudential regulators do
not propose a standard method for setting
collateral thresholds. So banks have
some leeway to set thresholds but, because
regulators will be looking over
their shoulders, they could be very conservative
in their approach.
Moreover, Zubrod questions how
regulators will use their supervisory authority.
He notes that “the regulations
require that margin thresholds be ‘appropriate.’
We worry that regulators will require
banks to lower thresholds
during times of market stress —
when preserving liquidity is
most critical for end users.”
Even if regulators exercise
their authority judiciously,
banks may feel limited ability
to negotiate thresholds with
their corporate customers. They
may rebuff corporate efforts to
negotiate more favorable
thresholds, saying, “Sorry, I
can't give you a better deal
because I have the Fed breathing down
my neck.”
Where banks will set risk thresholds
for margin requirements is the big
issue for U.S. companies that use commercial
swaps. Diana Preston, vice
president and senior counsel, Center
for Securities, Trust & Investments for
the American Bankers Association, says
it is too early for ABA to comment. The
comment period for the proposed rule
closed after press time.

Pressing for Changes


While a broad swath of the business
community is pressing the banking agencies
to change some of the language in
the proposed rule on margins, a narrower
group of mostly large companies want
the SEC and CFTC to clarify their definitions
of swap dealers or major swap participants.
The battleground there is a proposed
rule issued on Dec. 9, 2010 by the
two agencies that defines an “end user
exemption” from clearing for companies
that otherwise might qualify as swap
dealers or major swap participants.
That exemption rests on whether the companies use swaps for commercial
operations hedging and whether they are
not a bona fide “financial entity.” Those
two agencies issued proposed rules on
the same day, but in some instances they
define the exemptions in slightly different
ways, which has added to the confusion
over who, in the end, will have to
clear swaps.
This fog covers a number of corporate
entities. Companies such as Kraft
Foods are concerned that their centralized
hedging centers (CHC) could be pulled into both the swap dealer and
major swap participant definitions. Those
two CHCs are Kraft Foods Finance Europe
(KFFE), which acts as in-house
treasury and centralizes global cash
management, and Taloca GmbH, a centralized
procurement unit for globally
managed commodities.
Philip Morris hedges foreign currency
risk through Philip Morris Finance
SA (PMF), a wholly-owned treasury subsidiary
of the parent company. Marco
Kuepfer, vice president finance and
treasurer of Philip Morris, says the company
“is concerned that swap transactions
entered into by PMF and other
wholly-owned treasury subsidiaries of
large nonfinancial companies, with their
affiliates on the one hand and
traditional swap dealers on the other,
will not be considered 'hedging or mitigating
commercial risk' under the proposed
rules.”
Companies that might otherwise fit
the definition of swap dealer or major
swap participant but that use swaps for
“hedging or mitigating commercial risk”
are exempt from clearing. While some large multinationals
worry that their foreign financing arms
will be caught up in the new swaps
clearing regime, other Fortune 500 companies
are concerned about their domestic
captive financing arms. The proposed
rule says captive financing arms will be
exempt from clearing if they use derivatives
to hedge “underlying commercial
risk related to interest rate and foreign
exchange exposures, 90 percent or more
of which arise from financing that facility’s
purchase or lease of products, 90
percent or more of which are
manufactured by the parent
company or another subsidiary
of the parent company.”
In a letter to CFTC at the
end of February, the top executives
of Caterpillar Financial
Services Corp. and counterparts
at Nissan Corp., Toyota
Motor Corp., John Deere Corp.
and American Honda Corp.
wrote: “We do not have a clear
understanding of how this provision
works in practice.”
These concerns over the SEC and
CFTC definitions and the prudential regulators
margin requirements have led Republican
members of the House to
introduce legislation prohibiting the agencies
from issuing implementation dates
for final rules prior to Dec. 31, 2012.
However, the bill, even if it passes
the House, probably would not pass
the Senate, especially since CFTC
Chairman Gensler went to great
lengths at the April 12 Senate Banking
hearings to take the wind out of the
bill's sails. Gensler proclaimed his
openness to a staggered, flexible derivatives
implementation schedule — one
coordinated with international regulators,
and said his agency was conducting
additional outreach hearings.
So readers are advised to stay informed
of current developments that
might impact their businesses.
Stephen Barlas (sbarlas@verizon.net)
is a freelance writer who has covered
Washington, D.C., since 1981 and frequently
writes for Financial Executive.