You are worried about the state of innovation in medtech – and maybe you should be. Because we aren’t talking about the stuff you spend most of your time doing, which is very likely iterative improvements to technology already on the market. We are talking about true, breakthrough product innovation.
Michael Drues, an industry analyst and president of Vascular Sciences, says, “As an industry we’ve gotten very good at talking about stuff we do well, but not so good at what we don’t do well.” What he means is that industry is very good at making small improvements and doing the smart marketing work to get healthcare markets to adopt it. “The culture in industry is a disincentive to ask hard questions. We have incentives to make incremental change, but not truly innovative breakthroughs.” And this is not to say such improvements are not important. But they are not the path to a sustainable business model, and they are not the only thing the healthcare industry needs.
The pressure to create new healthcare technology is being felt at all levels and in every tier of medical device companies. But it is particularly evident at large companies, which often lack the dexterity found in smaller, independent firms. Ernst and Young’s Pulse: medical technology report 2015 identified this challenge specifically, saying “organic growth has been difficult to achieve, particularly at the industry’s leading therapeutic device companies, since true breakthrough innovation remains rare.”
R&D spending and raising capital
Small companies and start-ups, which drive new technology, are facing challenges as well. The EY report says there is a “dearth of early-stage capital” which could lead to a vacuum in innovation. Sean MacLeod recently told me that he thinks start ups need to be smarter about taking advantage of partnerships and state and city incubation programs, as well as R&D tax credits. A lot of “little” dollars, he said can make a difference.
It’s clear that within industry, the message has been received. The device industry invested a significant uptick in R&D over the last year. According to Pricewaterhouse Coopers HRI Medical Technology Innovation Scorecard 2015, “Medtech executives were almost twice as likely as executives across all industries to say that product innovation was their top priority in the coming year (46% compared to 29%).”
E&Y’s report confirms this trend, noting that cumulative spending on R&D rose 6% to $14.3 billion, continuing its 5-year trend in increasing dollars to innovation. But we don’t know whether that increase in spending was simply to keep pace with generating more and better evidence for iterative improvements, or whether it was allocated to the groundbreaking innovation the market is demanding. As the EY report says, “R&D budgets are on the rise, perhaps reflecting changing priorities and a realization that investing in innovation, and demonstrating the value of that innovation, are essential for medtech’s future growth prospects.” The keyword here is “perhaps.”
Brent Saunders, CEO of Allergan, touched a key problem with R&D spending in medtech during the OCTANe Medical Device and Investor Forum in Irvine, Calif., last month. Saunders told attendees that many companies allocate R&D as a percentage of sales. He minced no words, however, in saying that such practice was “stupid.” He told attendees the problem is that, either, “you spend more than you need to on a dumb idea or you don’t have enough to spend on a great idea. Spend what you have to spend, and spend them on the good ideas.”
Saunders is also famous for believing that product innovation in large companies will come from acquisitions. Small firms that want this type of attention need to focus on their value proposition, says Macleod. “While clinical efficacy is a must, the true value in medtech today is a company’s ability to provide information, services, and other assistance to customers to solve additional problems such as improving diagnostics, increasing operating room efficiency, reducing length of hospital stays, monitoring patients remotely, and keeping people out of the hospital.”
In short, even a small firm needs to think holistically about product design.
Getting serious about serendipity
To be holistic, the medtech industry needs to improve its R&D management, advises Stratos project manager Lisa Schmalhurst. PWC’s analysis discussed the issue, noting, “Medtech executives expect more breakthrough and radical innovations in services and business models, but just 14% said that they coordinate and manage innovation processes for maximum efficiency.
Schmalhurst says system innovation is key to improving design and product development. In a recent blog, she describes a scenario involving battery life. Designers should “recognize that the whole is … greater than the sum of its parts.” She says developers should look at an entire system (and even the ecosystem) of the situation, in order to take a problem out of solving a simple technical constraint. In the battery example, she described a way to get away from confronting a lithium ion’s life to suggesting a solution might be found in adding more charging stations, or introducing wireless charging options for users. Essentially, she says, “Concept and development of the product must be firmly rooted in the user’s needs and motivations.”
A change in systems thinking requires improving the use of tools to better engage customers and patients. The PWC report says that only half of medtech companies engage stakeholders in managing health and that “only 12% are using them aggressively to create new business models that center on clinical and consumer dynamics.” The other 88% have “outdated and unresponsive information technologies,” and “might miss opportunities to meet the needs and demands of the next generation of consumers.”
One challenge is finding external partners with whom to collaborate. The PWC report says medtech executives admit to collaborating with “customers or external partners on less than one-third of their products and services.” The report advises companies to take steps to improve social media, mobile, analytic, and cloud technologies.
No more excuses
Regardless of challenges, Saunders suggests that there is plenty of “therapeutic white space.” Upstarts who can improve interoperability, for example, will very likely find success. PWC reports that, “While clinical efficacy is a must, the true value in medtech today is a company’s ability to provide information, services, and other assistance to customers to solve additional problems such as improving diagnostics, increasing operating room efficiency, reducing length of hospital stays, monitoring patients remotely, and keeping people out of the hospital.”
Drues says companies have also hidden behind the regulatory barriers. He notes there is a culture of fear of FDA, or the feeling that the regulatory process has stymied real innovation. “Don’t use FDA as an excuse to hold us back from developing better products.” FDA, by many accounts, has improved its accessibility to medtech developers. A recent report from the federal safety watchdog says PMA applications saw a 98% approval rate in 2015. In addition, the report states that the average time for approval went from 432 days in 2013 to 262 days in 2014, with FDA optimistic that average submission times will continue to improve. FDA gives credit to the agency informing companies of deficiencies earlier in the process, and working with medtech developers before PMAs are submitted.
There is no arguing that medtech firms will have to be nimble to keep pace with the rapidly evolving healthcare system. PWC notes that several new companies have entered the medtech space, “and are driving innovation at the pace of technological, not healthcare, change.” And EY’s report urges medtech companies to focus on innovation “across the medtech value chain.”
And “value” will be a key idea moving forward. Those who can demonstrate the value of a product or suite of services over the entire care continuum will see greater success than those who simply solve standalone health problems.