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HEALTH CARE

23andMe Ticked Off Regulators. How Smart Startups Win Them Over

The problem with big, audacious ideas in health care? They tend to get tangled up in FDA red tape. But it doesn't have to be that way.

During the government shutdown last fall, a slice of the Silicon Valley startup crowd was almost gleeful at the fact that they didn't know what was going on in Washington and didn't think it was their job to care. 

You can bet none of those people were running health care startups. While other entrepreneurs can hunker down in their metaphorical garages, health care entrepreneurs need to be thinking about the U.S. Food and Drug Administration--right from the very start. "We really encourage the startups we talk to to just be thinking about the ramifications of FDA approval really early on," says John Fein, managing director of the Techstars/Sprint mobile health accelerator in Kansas City. Startup teams that include a physician "are much more realistic about how to proceed." Teams that are exclusively techies? Often, oblivious. "It's understandable," says Fein. "It's not part of their world." 

It needs to be. Goof, and you'll end up in the position 23andMe now finds itself in. The company sells a genetics kit to consumers, who send in a saliva sample and in return were receiving information on their genetic makeup, including the risk of certain diseases and information about their ancestry. In November, the FDA asked 23andMe to stop selling its kit, and 23andMe is now concentrating on the ancestry part of its business while it works with the FDA. 

Entrepreneurs complain that the path to FDA approval is long, uncertain, and expensive, which can certainly be true. That encourages many founders to look for an alternative: either, as 23andMe did, by trying to work in an area that the FDA does not regulate, or by trying to do trials or even a launch outside of the U.S. before braving the U.S. regulatory system. 

No matter which strategy you choose, Amir Nashat, a managing partner with venture capital firm Polaris Partners, advises you to just chill out. "The FDA is like an offensive lineman in football. They only get noticed when something goes wrong," he says. "We never reward them. Did anyone send a thank you note to the FDA thanking them for getting that cystic fibrosis [Kalydeco] drug out? As a society, we have a really asymmetric view. They're really doing an awesome job." 

Your relationship with the FDA may be frustrating, but it doesn't have to be combative. Here are five strategies that can help. 

1. Grin and Bear It 

This is the tack taken by Scanadu, makers of a handheld medical device that measures a variety of health-related factors, from heart-rate-variability to blood pressure and pulse oximetry. From the beginning, Scanadu has planned that its device, called the Scout, would be tested in the U.S., would be launched first in the U.S., and would win FDA approval as a medical device. 

Scanadu co-founder Walter de Brouwer says there's no other way. Consumers want the same information that doctors have, he says. When consumers give medical information to their doctors, it's in everyone's interests for the doctors to trust it. 

In the short term, that means extra work for de Brouwer and his team. "We have to set up a quality control system. There is a mountain of paperwork and documents. And you have to work with people who have been though it before, otherwise the company becomes a school." 

De Brouwer isn't sure exactly how much the push for FDA approval is costing the company, but he expects it to be money well-spent. "Trying to do something medical and avoiding the FDA, that is a lost battle," says de Brouwer. "It's like asking the Vatican to become atheist." 

2. Work the System 

What the FDA most wants is not what most health care entrepreneurs want. Those who can change their perspective to match that of the agency may have an easier time, or may be able to qualify for an expedited approval process. 

According to Nashat, the FDA prioritizes therapies that treat a very serious condition, where there are no existing solutions, and where the market is relatively small. (That's right, small. If only a few people are using the therapy, and it turns out that there's a problem with it, the general population has not been exposed to a health risk.) "If we already have good acne medicine, the fact that you have a new one isn't a big deal. They'll raise the safety standards really high on you," he says of the agency. "If, on the other hand, people really are going to die, then they're going to be much more open to having an innovator go really quickly," he says. 

That combination--serious unmet need, a big medical problem, and a small population--pretty well describes orphan drug manufacturers. Some targeted cancer therapies also qualify. 

The path for medical devices is less clear, but the FDA has been experimenting with making it more transparent. "The venture capitalists didn't want to work with medical device companies that were doing U.S.-first approvals," says Anjali Kataria, who ended a second term as an FDA entrepreneur-in-residence in November. "There was no way to know the status of an application." Companies that successfully apply for the agency's "innovation pathway" can communicate directly with their review teams, making the process much more collaborative. "If you know you need to do animal studies, you can start right away instead of waiting for a big meeting," says Kataria. "Before it was a black box." 

3. Launch in Europe--or Asia--First 

Regulatory agencies in other countries, while zealous about safety, are not necessarily as strict as U.S. authorities in other regards, says Mike Carusi, a general partner at Advanced Technology Ventures (ATV). The thresholds for beginning a clinical trial may be lower; the path to approval may be more certain. "That's why you see a lot of companies doing early clinical work outside the U.S.," says Carusi. Results from European trials can help companies design a stronger U.S. trial, with more confidence that it will eventually succeed. 

Other companies are looking not just to do trials abroad but to launch there first, too. "Some companies are wondering if they ever want to launch in the U.S.," says Carusi. "The U.S. is still the biggest market. But that's a conversation that's happening in board rooms." 

Depending on which health problem an entrepreneur is looking to solve, the U.S. may not actually be the biggest market, points out Frank Rimalovski, the managing director of the New York University Innovation Fund. A team that understands the regulatory environment in India, say, could get a drug or device approved there, and then use data from India to approach the World Health Organization for certification. Rimalovski calls that the gold standard for many countries. 

4. Split Strategy 

Quality of Life Devices, like Scanadu, anticipates full regulatory approval. But Bez Arkush, the founder and CEO, sees an opportunity to sell breath-training devices to consumers before it's approved by the FDA. "Already, opera singers want to start training with it," Arkush says. "Along the road, one of the main uses I can see is to help kids with asthma." QOL is developing games that allow players to control characters with their breath, which could make asthmatic kids and others more likely to stick with their breathing exercises. 

Essentially, Arkush's strategy is two-fold: sell a consumer-friendly version of the product, dubbed the Alvio, which doesn't make any health claims, alongside a more doctor-friendly version that is approved by the FDA. Ideally, the consumer product will launch early next year and the FDA will approve a version at about the same time. If FDA approval is held up for any reason, revenue and interest from the consumer product could help support the company until it does win regulatory approval. 

"A two-tiered strategy helps," says Fein. "Investors won't be as leery as if the device were strictly FDA-regulated. It's also a way to get into the market and to get feedback." 

5. Take a pass. 

There are plenty of health-related ventures that don't need FDA regulation. Cosmiceuticals, nutriceuticals, and supplements are the usual suspects. Systems that help hospitals with billing, and other cost-saving measures, are another. 

A newer category of unregulated companies are those that fall within the realm of so-called quantified life, and provide health-related information that consumers have not previously been able to readily access. Here, says Alan Ying, a former physician and venture capitalist who is now the managing director of Polus Capital, "The strategy and business model is about eliminating regulation and working directly with people. In that way it's more like media, and it makes it easier for venture capitalists to jump in."

But providing data is one thing. Helping customers interpret it so that they're better equipped to make choices about their health is another--and comes perilously close to the practice of medicine, which of course is highly-regulated. One of the problems with the genetic data once provided by 23andMe is that without some sort of number-crunching and interpretation, it's almost impossible for the layperson to know what to do about it. Most people don't want raw information about their genome--they want to know if they're at increased risk of diabetes. Now, the company will say only that 23andMe "is working with the FDA to provide customers with access to their genetic data in a way that clearly demonstrates the benefit of having that information." 

Some in the venture community speculate that, even while keeping mum, 23andMe is challenging the FDA's authority to regulate the company at all. That may or may not be true, but the company's heritage is supporting the possibly-wishful thinking. Says one VC: "It's exactly what you'd expect the wife of a Google founder to do."

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Last updated: Feb 26, 2014

KIMBERLY WEISUL | Staff Writer | Inc.com Editor-at-Large

Kimberly Weisul is editor-at-large at Inc. and co-founder of One Thing New, the digital media startup that is rebooting women's content. She was previously a senior editor at BusinessWeek.




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