Measuring the capital markets' price tag on product recalls

The results show that the quantile of 30% of companies with the lowest 'recalls per 1 million USD revenue' ratio outperformed their peers in the quantile of 30% of companies with the highest ratio by 256 percentage points (Fig. 1). Interestingly, this effect has only become (increasingly) significant in the last five years (since 2018). This observation is fully consistent with previous research1  that found no evidence of market penalties for medical device recalls at the aggregate level at that time.

What are the early warning signs?

We analyzed the most frequently raised recall reasons using the FDA Medical Device Recalls Data-base to better understand root causes and early warning signs of emerging non-compliance issues² . Unsurprisingly, poor design controls topped the list by a large margin, accounting for 34.8% of recall reasons. This is followed by poor labelling and packaging controls (23.0%), non-conforming product (17.9%) and poor production and process controls (15.2%). Deficiencies in any of these categories are highly likely to put patients at risk and are often the reason for recall decisions.

Unfortunately, the role of quality and regulatory compliance as a factor seems to be obscured by the primary recall reasons. Although quality system deficiencies do not appear in the top recall reasons, they are often a key underlying factor leading to design deficiencies, product nonconformance or poor execution of production processes. Quality system deficiencies cause more indirect harm to patients than direct harm. Therefore, products are not recalled because of poor quality and regulatory compliance, but because of the indirect consequences.

Rethinking quality assurance and regulatory affairs to gain real competitive advantage

MedTech executives have increased their efforts in recent years to innovate, automate, harmonize and simplify their quality management systems and regulatory affairs functions and to increase digitalization. Below we present selected areas of innovation in the quality and regulatory space:

Summary, outlook, and invitation

The regulatory and business environment for the MedTech industry has changed significantly in recent years. This has accelerated the increase in the cost of regulatory non-compliance. The ability to consistently meet quality and regulatory requirements without compromising a company's agility and speed has become a strategic differentiator and driver of financial performance.

In future research, we aim to extend our investigations further into individual firm-level factors. At present, we find that there is a lack of factual evidence as to how exactly the (business) case for quality and regulatory compliance is supported by the aforementioned and other investments, including compliance culture, QA/RA headcount, QA/RA organizational structures, digital maturity, production strategies⁴ , etc.

Therefore, we invite our readers to support our future research efforts by participating in more detailed firm-level analysis and benchmarking activities. For more information, download our paper on MedTech Quality Costs here.

• ¹ Thirumalai, Sriram/ Sinha, Kingshuk K. (2011): Product recalls in the medical device industry: An empirical exploration of the sources and financial consequences, Management Science 57, no.2, pp. 376-392.
• ² All FDA medical device recalls listed in the FDA Medical Device Recalls Database in the period 2012 -2022 were filtered for ‘root cause’ and mapped to the respective 21 CFR 820 subpart. We excluded recalls labelled as ‘under investigation by firm’, last access on August 7, 2023.
• ³ Erdmann, Nico et al. (2022): "AI Maturity Model for GxP-Application: A Foundation for AI Validation”, ISPE, last access on August 23, 2023.
• ⁴ Similar research in the automotive industry has identified product variety and production plant capacity (over-) utilization as drivers of subsequent recalls. See Shah, Rachna/Ball, George/Netessine, Serguei (2016): Plant Operations and Product Recalls in the Automotive Industry: An Empirical Investigation, Management Science 63, no. 8, pp. 2439-2459.

Further Reads
 

• Developing Medical Devices using Artificial Intelligence
• 2023 Global Life Sciences Outlook
• Never the same again: How COVID-19 created seismic change in global life sciences regulations
• MedTech commercial transformation: Moving from “doing digital” to “being digital”
• Disruption and innovation, two sides of the coin: 2022 Medtech industry trends
• Exponential innovation in MedTech: Unleashing the full potential of digital technologies