The Unseen Cost: Why Medical Device Companies Can’t Ignore Regulatory Budgeting
Ground-Level Insight
In my current leadership role, my days are often filled with client calls. Despite the various responsibilities that come with overseeing a testing laboratory, I find great value in these interactions. Whether it’s picking up the phone with a simple, “This is Test Labs – how can I help?” or diving into detailed project discussions, these moments keep me connected to our clients’ needs and challenges. My background in engineering and product development gives me a unique perspective, allowing me to truly understand their pains and aspirations.
Despite the complexities of medical device development, one issue consistently stands out: the apparent lack of budgeting for regulatory costs. It’s a conversation I find myself returning to time and again, whether it’s a start-up grappling with new regulations or a seasoned manufacturer facing the realities of global compliance, and that is what I want to discuss here. This is an opinion piece, aimed at questioning why regulatory costs are often left out of the budgeting process and what the implications of this oversight might be.
Despite the complexities of medical device development, one issue consistently stands out: the apparent lack of budgeting for regulatory costs.
In the Regulatory Maze
The regulatory landscape for medical devices is becoming increasingly stringent. The transition from the Medical Device Directive (MDD) to the Medical Device Regulation (MDR) in the EU has been a significant hurdle for many companies, with compliance costs and complexities soaring. The U.S. FDA and other global regulatory bodies are also stepping up their scrutiny, demanding more rigorous testing and documentation.
The medical device testing market is growing at a rate of approximately 8%, nearly double the growth rate of the overall medical device market, which stands at around 4%. This discrepancy indicates a shift towards external testing services, driven by stricter regulatory requirements and the need for unbiased validation. In Europe, where small and medium-sized enterprises (SMEs) constitute a significant portion of the medical device industry, many companies rely on consultants for regulatory work. This reliance often leaves them vulnerable to budgeting oversights, as the true costs of compliance can be underestimated or overlooked.
Where Finance Directors Step In
In my discussions with various companies, a recurring theme is the reactive nature of budgeting for regulatory expenses. The process typically begins with an internal acknowledgment that “something” needs to be done – whether it’s hiring a regulatory consultant or conducting product testing. This realisation triggers a search for service providers, usually involving requests for multiple quotes to ensure competitive pricing. However, this approach often leads to delays, as the responsibility for approving these expenditures usually falls on the shoulders of finance directors or controllers who may not have a deep understanding of the regulatory landscape.
The absence of a pre-approved budget means that each expenditure requires sign-off, which can delay project initiation. This situation is particularly acute for companies that outsource their regulatory work, as these companies may not anticipate the costs associated with compliance. However, even companies with internal regulatory resources are not immune to these challenges. The trend we observe suggests that outsourced regulatory affairs functions often face greater exposure to budgeting issues, but internal teams can also struggle with unplanned expenses.
The Cost of Denial
There could be many reasons why companies require testing, but the crucial point here is that businesses either anticipate this need or discover it unexpectedly. Those in the former category may have provisionally budgeted for these expenses, allowing them to move swiftly. However, those in the latter often face delays, as they scramble to secure approval for unbudgeted costs. This can lead to a form of “regulatory cost denial,” where companies are reluctant to acknowledge the reality of new expenses, particularly for products previously classified differently under older regulations.
For instance, the reclassification of devices under the MDR has caught many companies off guard, especially those with products that were previously classified as low-risk. The sudden need for extensive testing and documentation can be a shock, both in terms of scope and cost. The reluctance to accept these new realities can delay crucial decisions, ultimately affecting the company’s ability to compete in the market.
The Time Trap
Timing is another critical factor. The absence of a dedicated budget often means that the decision-making process falls to financial directors, who may not be fully versed in the nuances of medical device regulations or testing. As a result, they may insist on obtaining multiple quotes to ensure value for money. However, waiting for these quotes can take weeks or even months, especially in a market under pressure, where labs prioritise service delivery over customer service.
To illustrate, we recently worked with a client who requested a proposal for a series of tests. We provided a detailed outline study plan and cost estimate within a day. Over the next few weeks, we followed up consistently, but the client kept delaying their decision, waiting for quotes from other labs. By week six, we pointed out that had they moved forward with us, they would already have had the final report. This experience underscores a critical question: Is the project cost-sensitive or time-sensitive?
In many cases, the opportunity cost of delayed product launches far outweighs the potential savings from lower testing fees. The decision-making delay can result in significant opportunity costs, including lost revenue and delayed market entry. This highlights the importance of timely decision-making and the potential drawbacks of an overly cautious approach driven by financial considerations rather than project needs.
Just do the Budget
The current landscape demands a more strategic and flexible approach to budgeting for regulatory expenses. Product managers and regulatory teams must collaborate closely with finance departments to ensure these costs are not overlooked or underestimated. Ideally, those responsible for the project should have access to a dedicated budget, allowing them to make timely decisions without unnecessary delays or financial bottlenecks.
While many companies recognise that cost is not the only driver of purchasing decisions, it’s crucial to understand that the real cost often comes in the form of delayed market entry and lost revenue. To mitigate these risks, finance directors should treat medical device regulatory and testing costs as standard operating expenses, integrated into the broader financial planning process.
Instead of simply spreading these costs over time on an accrual basis, finance teams should consider a more nuanced approach. This includes setting aside contingency funds specifically earmarked for regulatory expenses, allowing for adjustments based on actual spending and changes in the regulatory landscape. Regularly updated rolling forecasts can provide the flexibility needed to adapt to new information and evolving market conditions, ensuring that financial plans remain relevant and effective.
Moreover, companies should prioritise value over cost savings. This means choosing partners and service providers based not solely on price but also on their ability to deliver quality and timely results.
Adopt a proactive, flexible, and value-oriented budgeting strategy. This approach helps manage regulatory expenses more effectively, ensures smoother project execution, and prevents financial constraints from hindering critical regulatory compliance efforts. Ultimately, it safeguards the company’s market position and long-term success.
Your thoughts?
This article isn’t meant to be a statistics-heavy analysis but rather a reflection of the insights and opinions formed from hundreds of conversations with clients. The goal is to offer a perspective on what’s happening in the market and to prompt readers to consider where they might fit within these scenarios. Whether you see yourself in the camp of proactive budgeting or recognise the challenges of last-minute approvals, the key takeaway is the importance of preparing for the inevitable costs of regulatory compliance.
In the end, the question remains: Are you budgeting for regulatory costs, or are you in denial about their impact on your project’s success? The future of your product may depend on how you answer.
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