Starting in 2021, Breakthrough devices will have to jump through fewer hoops to gain NTAP temporary reimbursement, as CMS strives to expand access to technologies addressing clinical unmet needs.
DeviceTalks Boston finished off their conference last week with a bang –an interview with Theranos Whistleblower Tyler Shultz, who spilled the beans to the Wall Street Journal about the lack of science and surfeit of lying at the infamous company. We hoped to get the inside scoop on this big con that has spawned numerous articles, a podcast, an HBO documentary, and an upcoming feature film (we’re going with Zac Efron to play Tyler), and he did not disappoint. Tyler started off by describing how the aging, powerful Theranos Board members, including his grandpa and former US Secretary of State, George Shultz, were creepily charmed into Elizabeth Holmes’ orbit by her “big blue eyes” (according to Tyler, Theranos Board member Henry Kissinger wrote Holmes a limerick more or less saying dead Steve Jobs was pre-imitating her, not the other way around – no comment…).
Beyond the shock factor, Tyler’s stories left us with some clues for how to identify potential Theranosing (yes, we are making this a verb) in our midst. Here is a helpful guide so you can recognize when a company might be Theranosing and nip it in the bud, or stay far, far away:
· Ill-Suited Boards/Weak Oversight: Theranos loaded the board literally with top brass, including General “Mad Dog” Mattis, who knows little about healthcare and even less about diagnostics. Kissinger may have changed our relationship with China, but what does he know about quality systems or CLIA? Avoiding traditional healthcare VC financing may be a necessity in medical devices where few VCs are still active; it may also be a way to avoid management accountability or maintain unwarranted valuations.
· Impossible Financials: According to Tyler, Theranos investors never saw, or demanded, audited financial statements for the company. He claimed that grandpa George only turned on Elizabeth quite recently after seeing in black and white in an SEC document how Theranos claimed to have $100M in revenue when they only had $100K. But what’s a few zeros among (mesmerized) friends?
· Internal Secret-Keeping: A story Tyler used to illustrate how Theranos leadership kept their own people in the dark, was a visit by an electrician to fix a ceiling light. Up on that high ladder, the electrician could easily view the Edison “lab in a box” devices that were kept hidden from most of the employees. While unphased by this electrician, reporters, or regulators, Elizabeth went to great measures to ensure that her own scientists were unable to put the pieces together and uncover the truth. Companies with nothing to hide will foster cross-functional communication and learning.
· Fake Apartments: This was just too good a share from Tyler to leave out… If the CEO rents a staged apartment with only a mattress on the floor, black turtlenecks in the closet, and bottled water in the fridge to demonstrate their ascetic corporate devotion, all the while living in a luxurious mansion in Atherton, proceed with caution.
We all would like to believe that another Theranos couldn’t happen, or that we’d see right through the scam if we encountered it. The desire to believe can be intoxicating, though. If we didn’t think we could achieve great things in the face of daunting risks and skepticism, none of us would be in this business. It is easy to characterize Elizabeth Holmes as a misanthropic villain driven by ego and greed, but where does one cross the line from optimistic exuberance to deliberate deception? The healthcare industry needs visionaries who are not discouraged by the doubters or constrained by the current state of the world. What we don’t need are liars and criminals who would sacrifice patient safety for their own aggrandizement, no matter how big their blue eyes are.
Photo Credit: Wall Street Journal
This morning’s New York Times article on the astonishingly successful MitraClip trial results, read at 4:30am before my flight to The MedTech Conference, sent me digging for some history. Hadn’t we been talking to cardiologists about MitraClip for years? I recalled clinicians telling us how challenging it is to place correctly. Why the news now? Wait, didn’t Abbott acquire that technology ages ago?
To save you some work, here’s the whole timeline (VC-backed friends, you may want to stop reading at this point):
1999: Evalve (inventor of MitraClip) founded
2008: MitraClip receives CE Mark - “first commercially available device which enables a non-surgical option for patients suffering from the effects of mitral regurgitation (MR).” Also in 2008 – MitraClip receives priority FDA review because there are few options for patients with degenerative mitral regurgitation (MR) who can’t withstand surgery.
2009: Evalve acquired by Abbott for $410 million – this deal was one of four in 2009/10 of pre-IDE structural heart companies, two purchased by Medtronic (CoreValve for $825M, Ventor for $325M), and one by Boston (Sadra for $386M). It was a heady time for structural heart deals.
2012: COAPT trial initiated - randomized, open label, 610 patient efficacy trial in symptomatic heart failure patients to measure 2 year impact on mortality, hospitalizations and quality of life in patients with moderate-severe functional MR (60-80% of MR patients).
2013: First FDA PMA approval for MitraClip with a limited indication to the non-surgical candidates, based on a mixed bag of trials and results.
July 2018 – FDA approval of next gen MitraClip device that makes it easier to precisely place and use in difficult anatomies; other issues are also addressed
August 2018 – French trial MITRA-FR failed to show efficacy in severe functional MR patients. Not great for Abbott (this was supposed to be for reimbursement in France).
September 2018: Surprise! COAPT’s fabulous results presented at TCT. Trial was larger than MITRA-FR, patients were less sick, and endpoints were different. In COAPT, clinicians had to actually demonstrate their skill in inserting MitraClip (for MITRA-FR they had to have performed 5 prior procedures).
S2N’s take – what we can learn from the MitraClip journey is that can take a long time from invention to broad commercial adoption, especially for novel therapeutic devices. Factors that contribute to the 20-year, overnight success scenario:
The first generation of any complex product is likely to be kludgy; in med tech there is often a push to get “something” on market asap, mainly because we can (e.g. in Europe). While this is a great opportunity to learn with real-world use, be prepared to iterate the technology based on this critical feedback
Early users of a new device often “niche” it because they want to minimize safety risk and get comfortable with how and where to deploy it, especially when there are alternative clinical approaches. As in the MitraClip case, the FDA may also restrict labeling based on the population studied and trial results.
These new devices are expensive (MitraClip is ~$30K), and usually require new reimbursement codes. Payers can more or less demand as much data as they want before agreeing to cover a new technology.
Trials don’t always work out the way we planned, and many factors can contribute to the failure of a trial. Abbott learned along the way and adapted patient selection, endpoints and operator training. With more upfront work and modeling, some of these risks might be mitigated sooner.
On a positive note, analysts are now super bullish about MitraClip taking off based on the COAPT data, and the market opportunity with expanded labeling and use in heart failure will be well into the US$ billions. If the technology helps keep heart failure patients out of the hospital, the one-time $30K price tag could seem like a bargain, especially when compared to any number of drug therapies.
A change in the US leadership, especially one as significant as we will experience this month, naturally generates uncertainty about the future of health care policy and finance. A few things are certain, though (and this is not fake news):
· US healthcare costs are expected to grow another 6.5% next year, far outpacing inflation, and these cost increases will hit providers, insurers, and consumers
· By pretty much any metric (except cancer survival), the US is the least healthy of the major developed countries, despite spending so much of our money on health care
This economic predicament has energized a drive toward value-based vs. volume-based payment for health care, led by the US government, which carries ~42% of US health care costs, mostly through Medicare. Other healthcare stakeholders such as commercial insurers, hospital systems, and patient advocacy groups also support value-based payment in the hopes of improving quality while containing costs. Medical device companies have certainly gotten the value imperative memo from their health system customers, who are increasingly on the hook for delivering outcomes and at risk of losing revenue if they don’t. In medical technology purchase decisions, Value Analysis Committees have been gaining power over physician preferences for several years now, helped by the rapid growth of employed physician models.
It seems like simple logic to allocate more resources to services, products, and providers that deliver the most bang for the health care buck, right? Unfortunately, value-based healthcare is not simple at all. There are three big, highly complex questions that must be answered to build a system that rewards outcomes vs. activities:
1. What does value mean?
2. How is value assessed?
3. Who determines value?
What Value Means
The business guru Michael Porter defines value in health care simply as “outcomes achieved per dollar spent.” Outcomes can mean many different things, though. Historically, the gold standard measurement of outcomes was survival – whether the patient lived or died, and how long they lived. Even in the context of terminal illness, though, the definition of outcomes has expanded to include more consumer-oriented metrics such as quality of life and patient satisfaction, and to factor these metrics into CMS reimbursement calculations. We recently spoke with an administrator of a large academic health system who described the ideal measure of healthcare value as “Appropriateness*(Quality + Patient Experience)/Cost” to contextualize the cost-benefit equation for each patient's situation. For example, the surgical approach to hip fracture might be different in a relatively younger, active patient vs. an older, more frail one if remaining life span, ability to rehab and functional goals are taken into account. For medical device innovators, the need to demonstrate not just performance but also value raises the bar overall, but the broader definition of value also presents opportunities to make a case beyond traditional clinical outcomes.
How Value is Assessed
In order to know which technologies and services deliver value, and how much value they deliver, there has to be a clear understanding of both the cost and benefits during some measurable period of time. Historically, purchasers and payers of innovative medical devices have relied on randomized, controlled trials and published studies for evidence of clinical and health economic impact, particularly when the new technology comes with a high price tag. With the definition of value expanding both in terms of metrics and timeframe, new approaches to assessing “real world” value are emerging. Electronic health records, combined with the integration of provider networks, are enabling more sophisticated and powered evaluation of clinical and economic benefits of health interventions in actual patients. The cleverer med tech innovators are taking advantage of these new data collection possibilities and are collaborating with health systems in novel risk-sharing arrangements to build evidence of a positive cost-benefit balance.
Who Determines Value
In the good old days of health care, the main arbiter of value for a health care product or service was the physician. Patients listened, hospitals complied (and made money, too), and payers paid. When health care expenditures inevitably spiraled out of control, the value decision shifted to payers under the banner of managed care, assisted by gatekeeper primary care physicians who were supposed to control access to expensive specialists, advanced diagnostics, and procedures. Now hospitals and health systems are being drawn into the value determination as they take increasing financial risk for patients in and outside of the hospital, such as under CMS’s Comprehensive Joint Replacement bundled reimbursement model. Even though access to data for basing these decisions has improved, there are still huge gaps and silos, and few areas of consensus on what constitutes the best care. Hospitals are grappling with these decisions to stay solvent while balancing the competitive demands of the marketplace for patients and providers seeking all the latest and greatest technology. Medical technology innovators are learning how to partner with health systems to create solutions that help hospitals manage their payment risks and keep their customers happy, too.
The message to our new US government leadership is this: We haven’t yet cracked the code on this value-based health care thing, but we are finally asking the right questions. As the biggest funder of health care, and therefore the keeper of the most comprehensive data set on health care spending and outcomes in the country, please continue to support data collection and access so we can advance our understanding of value and make informed choices as insurers, providers, and consumers (all of us taxpayers, too). And while I have your attention, some more funding for early stage medical technology innovation would be nice, too…
Recently, S2N mentored some med tech start-ups preparing for competitions, helping them refine their pitches before taking the podium (and doing our part for the innovation ecosystem). Among this crop of companies, several have technologies with “high consumer touch,” meaning that consumers are the primary users of the devices for self-care or dependent care. At the same time, though, these entrepreneurs seemed to shy away from directly engaging consumers, instead preferring to rely on physician marketing channels, at least initially, as the safer, less costly bet.
Certainly, for the vast majority of FDA-regulated devices, clinicians have a firm place along the pathway to revenue – for establishing credibility, generating data, and ultimately writing a prescription, although this landscape is changing. With the device-consumer relationship becoming ever more intimate, practically and financially, our industry is slowly getting religion on the need for direct consumer engagement, and not just in the traditional sense of stimulating demand (e.g. “ask your doctor” campaigns).
There are several reasons why device companies need to establish direct relationships with the end-users of their technologies. To articulate these consumer imperatives, we spoke with a woman (let’s call her Kate since that’s her name) who has bilateral cochlear implants. Kate and her cochlear implants help demonstrate the power of, and need for, direct consumer engagement:
Consumers Increasingly Control Purchase Decisions: A perfect storm of increased patient cost-sharing and access to information is requiring consumers to be front and center in any medical device marketing strategy.
“I chose my implant brand based on the company’s customer service. It remains very impressive more than 15 years after my initial decision. For someone with a cochlear implant, downtime can be devastating. A breakdown for a month or two means that people lose speech, not to mention their ability to go to work or school and participate in everyday social interactions.” - Kate
Patients Eventually Need Other Stuff: A lot of patients with long-term medical devices go on to need other devices or ancillary services. Kate started with one cochlear implant and then received a second one several years later, choosing to go with the same brand. Companies are now offering a variety of self-pay accessories to their patients, such as waterproof cases that allow recipients to keep their cochlear implant processors on while they swim as well as assistive listening devices, and Kate’s implant company would like her to buy these things from them.
“Recently the company emailed me to invite me to a user’s group for patients to talk and ask questions. I was pleasantly surprised. At the user’s group, they told us about their assistive listening devices which could be really helpful to me.” - Kate
Patient Communities Foster Clinical Success: Demonstrating the benefit of a medical technology often relies on consumers doing their part, whether simply using a device correctly or creating the conditions for successful outcomes (e.g. engaging in rehab following total joint replacement). The responsibility landing on patients’ shoulders can be substantial, and they need support to stick with the plan. Kate, for example, has joined Facebook groups to connect with other cochlear implant users.
“These communities are especially helpful to less tech savvy people, maybe older people, who are managing their devices, but it’s also really nice to be able to connect and share ideas with others who know the experience first hand. It’s fine if these forums are created by the device companies, as long as they aren’t too commercialized. It’s important that people can express their thoughts openly. Mostly the Facebook pages are positive – people are grateful to be able to hear.” - Kate
Not all of Kate’s experiences with her cochlear implant company have been positive, though. Ironically, the company initially declined her request for CART (Communication Access Realtime Translation) at the users' group meeting; CART is a very helpful accommodation for people with hearing impairments trying to listen and understand in a large group setting. With this experience in mind, Kate has a suggestion for medical device companies:
“It was obvious to me that the very company making my cochlear implants was pretty clueless about the needs of the community they intend to serve. I would encourage companies to hire people who use their devices, if possible. There is no one better than an actual user to provide real feedback and answer customer questions!” - Kate
Unless your job involves orthopedic devices, you might have glossed over this year’s exciting news: as of April 1, 2016, the Comprehensive Care for Joint Replacement Model (CJR) is mandatory for 791 hospitals in 67 geographic areas of the United States. The headline may not have been very catchy, but really everyone in our industry should be paying attention to this first wave of emerging healthcare payment schemes. The Centers for Medicaid & Medicare Services (CMS) implemented the CJR to better manage its >$7 billion cost for the 400,000 annual hip and knee replacements performed on its beneficiaries, so CJR hospitals are now paid a capitated sum for the entire 90-day episode of care. It will not be long before CMS bundles payment for other procedures as well (cardiac care, e.g. heart attacks and bypass surgery, is next on the docket).
This payment model shift is not just putting pressure on healthcare providers; medical device manufacturers are being asked to help customers achieve value-based care goals, too. The response by orthopedics companies is evident – they clearly got the memo that gadgets are out, solutions are in. Just as quickly as CJR was announced, Zimmer Biomet launched Signature Solutions, an array of value-enhancing services for joint replacement care, including surgical planning, patient engagement, and data analytics. Stryker saw the handwriting on the wall early, offering similar capabilities under their Performance Solutions program since 2009. Other big device companies are also planting the solution flag, such as Medtronic which since 2013 has acquired a diabetes management company and entered the cardiac care services business. Incidentally, Medtronic also aims to compete for CJR dollars with their purchase of the low-cost implant maker Responsive Orthopedics.
This shift toward med tech offering end-to-end solutions is being driven by three powerful forces in the healthcare ecosystem that are only going to gain steam in the future:
Provider Financial Pressure
For the last decade or more, the mantra of healthcare reform has been the “triple aim” – improving the experience of care, improving the health of populations, and reducing per capita healthcare costs. This drive is slowly bearing some fruit, and providers are expected to continue carrying the costs and risks of the value-based care mandate. This is all relatively new territory for providers, who are just starting to figure out how to calculate their costs and measure outcomes. As a result, they are scrambling to find somebody (anybody!) willing to step up and shoulder some of the burden, or at least help them understand the risks they are taking on and how they might be mitigated. Long used to selling into hospitals subject to capitated payment, and gaining ever more share of providers’ wallets through consolidation, large medical device companies are in a unique position to lend a hand. A first step for med tech can be advising customers on how to reap the most value from products they've purchased from them. As Medtronic’s CEO Omar Ishrak put it, “…the appropriate application of technology can not only address inefficiencies in healthcare delivery but potentially drive inflection points in value creation.”
Whether you call it “big data” or some other buzzword, both health systems and medical devices are generating lots more of it every year. Providers need some way to make sense of all this information and harness it to measure and improve their performance on care delivery and cost. Data integration and analytics support is where medical device companies can really shine as solution partners to their customers. As the med tech industry embraces this role, it will also become ever more entangled in clinical decision making; eventually lots of regulatory, legal and ethical boundaries will need to be reconsidered to truly realize the value of the data. New models for using clinical data to evolve toward best care will be needed to replace the gold standard approach of randomized, controlled trials. In this new model of data-driven care, medical devices could become the central hubs, driving not just procedural practices but entire care pathways. Data will also form the backbone of true risk-sharing models where payment for medical devices is tied to performance on value-based metrics.
Whether pushed by growing financial responsibility for care, or pulled by enabling digital health technologies, patients have an increasingly large role in their healthcare. In addition, payers and regulators are measuring providers on patient satisfaction and other patient-reported metrics. As with other types of risk they’ve assumed, providers are looking for allies in their effort to make and keep their patients happy. To help their customers, and also cleverly differentiate their products with means other than price, device companies are learning new ways to interact and communicate with their patient customers – a group traditionally understood in terms of anatomy, biology and physiology. Engaging patients in their own care is critical for good outcomes, and good outcomes are critical to hospitals and device companies alike, particularly in a bundled payment world. To this end, Stryker recently introduced its new web-based JointCOACH platform, which enables two-way communication between patients and care teams about things like pre-op prep, pain control, and rehab during the 90-day CJR period.
The success of the major med tech companies will increasingly hinge on their ability to demonstrate and deliver value to their customers, either by improving care or reducing costs, and hopefully both simultaneously(!). With bundled payments like the CJR emerging, the stakes are getting real now, so the choice is becoming clear – either be the solution or prepare to be commoditized, with all that entails. Medical devices are already a bargain compared to many drugs, but the bargain aisle isn’t the only place we want to live.
As the route to a successful exit in med tech has grown longer, and the pathway riskier and more expensive, many VCs have shifted attention to other sectors such as tech, biotech, and health IT. S2N’s emerging med tech clients wrestle daily with this new reality, turning over every rock to find money, tapping foreign investors, family offices, and physician-believers in the technology for cash. Pitches have taken on a more biotech-y or tech-y tone in pursuit of broader appeal and higher valuations, with Theranos as a prominent and lucrative example (until the bottom fell out). One of the many curious / suspicious things about Theranos was always the lack of any traditional med tech investors around the star-studded BOD table. Turns out that a number of veteran health care VCs were pitched Theranos and didn’t like what they saw. Smart.
To define the elusive concept of "smart money" in our industry, we approached two dedicated early stage med tech investors, Aaron Sandoski, Co-Founder and Managing Director of Norwich Ventures and Joshua Phillips, Managing Partner of Catalyst Health Ventures. Norwich and Catalyst are both relatively small funds, closing one or two deals a year from among the heaps of pitch decks they receive. Having stuck it out through the rollercoaster ride of the last decade, Josh and Aaron have accumulated wisdom that informs their investment decisions and interactions with entrepreneurs. So what makes these focused, experienced med tech VCs different from other sources of capital for emerging med tech companies?
Both Josh and Aaron started off with the diligence process – a critical function of any venture investor and a good way to know if you are dealing with smart money. For Josh, it boils down to the clinical value proposition, which has to be “clear and tangible, not a me-too or a just a little different.” Josh sees many cool, futuristic technologies that don’t really change outcomes (a particular issue for diagnostics); less savvy investors can be dazzled and lose sight of this critical success factor. Aaron goes right to the big picture math: “The main question is whether the company can get to the finish line in the right amount of time with a reasonable amount of capital.” In med tech, defining that finish line is where smart money again can distinguish itself. Unsophisticated investors look to FDA approval as the end-game, but for Aaron “FDA is very far down the list.” Aaron pointed out that <20% of 510(k) devices are acquired before commercialization; while that figure goes up to 60% for PMA technologies, once development costs and time are factored in, “timelines to exit and returns are not any better for 510(k) vs. PMA.” That’s smart med tech money talking.
On the other side of the diligence gauntlet, if you are lucky enough to get funded, is the thought-partnership a smart investor can bring to their portfolio companies on complex topics, such as what evidence will generate the most incremental value (e.g. animal vs. human). “You don’t necessarily have to get this kind of expertise from an investor, but you need it from somewhere; the entrepreneur who doesn’t believe this doesn’t understand what all is involved in med tech development,” cautions Aaron. Smart money investors also understand that med tech development is iterative by nature, and they are less likely to get spooked and run when problems arise. Josh summed it up: “When things don't go right, it’s very easy for investors to give up and leave; it might be easier to get money from a family office your uncle knows, and their valuations might be better than ours, but when things aren’t going well and you need someone to talk to, good luck.”
Experienced med tech investors also have the benefit of seeing many technologies spanning multiple market segments, so they can “go broad” to source innovative ideas and solutions while the entrepreneurs “go deep” and focus on execution. By Aaron’s rule book, “an entrepreneur should know 10X more than me about the companies and technologies in their specific field, but having been in the industry for a decade and seen 1,900 companies, I should know a lot more about companies outside their field.” This panoramic view enables smart money investors to propose different ways to frame challenges and expand the solution set. Aaron cites the example of intellectual property strategy: “You can approach IP in many ways, and we know lots of tricks other med tech companies have used successfully.” Josh has gained important insight along the way about managing burn rates by outsourcing many functions, and has built up a network of contractors with capabilities in different aspects of med tech development (manufacturing, quality systems, etc…) that can be leveraged.
Going in, I thought these investors might tout their ability to open doors with potential acquirers, but both Josh and Aaron downplayed this factor as benefit of working with them. If the company is pursuing something valuable, it’s not that difficult to make connections with the big device companies who constantly scout for new technologies. Josh is more concerned about his entrepreneurs becoming de-focused in “trying to make Medtronic happy.” Aaron thinks the involvement of smart money in a deal “might give strategics some comfort” and lend an edge to early interactions, but “a good product and entrepreneur will get there anyway – there is no magic Rolodex.”
Wherever emerging med techs go hunting for money, Josh and Aaron recommend conducting diligence of their own on potential investors, for example by asking other entrepreneurs who have worked with that investor about them and their relationship. “You should do reference checks on investors the same as anyone else getting involved in your business,” explains Aaron. “Would you hire a VP and not call references? Think about how long the average employee is with your company—3 years? The average investor will have more control and will be involved much longer than even your key hires.” So, med tech entrepreneurs, before you take one more dime from an investor, consider what value they bring beyond the cash, and think about going after some smart money.
Some of S2N’s recent work has gotten me thinking about variation, sometimes extreme, in the practice of seemingly routine medical care. Take the interventional treatment of peripheral arterial disease, for example. We recently spoke to physicians about their approaches to stenting; some stent about 10% of lesions, some stent everything, and about 1 in 10 had practices that were really out of the norm, such as using TPA or inordinate numbers of covered stents. Peripheral interventions being somewhat new on the scene, one could expect, and accept, a certain amount of variation. Not long after, though, we were speaking to neurointensivists about the management of neurogenic fever in the ICU and came across wildly different beliefs about the efficacy of acetaminophen (a.k.a. Tylenol), definitely not a new therapy, in reducing fevers (somewhere between 0% and 100% apparently). What are we to make of this vast variation in medicine? What would Darwin say?
Natural selection, the greatest algorithm of all time, addresses variation by filtering variants based on strength vs. weakness; the strong variants survive while the weak die off. The application of selection methods to medical practice has had some successes over the years (e.g. the sterile field in surgery, lobotomies not a thing), and there is a substantial industry around scientific study and evidenced-based medicine. Despite all this science, however, medicine remains more of an art. Shifting the balance toward replication of optimal care and reduction in counterproductive variability will require streamlining of both the selection and dissemination of best practices (unless we want to off the weak practitioners, which no one here is recommending).
Selection: Simply put, medicine needs a good way to pick winning practices. Maybe you are thinking, silly, we can do that now with randomized controlled trials (RCTs), the pinnacle of rigor in determining the superiority of approach A vs. approach B. Even with medical devices, we’ve figured out a way to conduct sham-controlled studies using fake surgical sounds and video reels. A key limitation of the RCT, however, is the huge investment in time and money required for just one such selection process; data quality is prioritized over cost-efficiency and speed. Perhaps medicine could learn something from the tech industry, where web-based companies are constantly running real time experiments to evaluate page performance and optimize particular metrics in the form of A/B testing. In comparing medical practices that are thought to be similarly safe against near-term endpoints such as length of stay, patient tolerability, or acute complications, this type of rapid, scaled testing might be feasible. In any event, there needs to be some innovation in picking winners in medicine outside the traditional RCT paradigm if we are going to keep pace with patients’ needs and really impact the variation problem.
Dissemination: According to Darwin’s theory, it is crucial not only that traits best suited for their environment confer survival, but also that they be heritable - reproduced through the passing down from generation to generation. As Atul Gawande explains, the problem in medicine is “...good ideas still take an appallingly long time to trickle down.” “Scaling good ideas has been one of our deepest problems in medicine,” laments Gawande. Currently, good ideas in medicine are circulated primarily through a complex web of hundreds of peer-reviewed journals and scientific conferences. The timeline from completion of science to publication or presentation is a year at lightening speed, and it can take 10 or 15 years for a truly good idea to be incorporated into standard of care and benefit the majority of patients. While I don’t think dissemination in medicine will ever be as fast as pushing new code out to an autonomous surgical robot (the FDA being one major hurdle to this vision), health IT solutions leveraging the ever increasing capture of real-world healthcare data could greatly facilitate the identification and dissemination of incremental advances in care.
There is no doubt that variation will be an enduring, and essential, aspect of medical practice. While our current system may be burdened with too much needless variation that detracts from quality, some level of experimentation is necessary to prevent stagnation at a “local optimum” (like reaching the top of a hill when there is a mountain beside it). Along with natural selection, variation is what drives evolution. We will always need fresh, new experimental ideas / techniques / care pathways to run against current best practices and challenge ourselves to find even better solutions. Given human nature, and physician nature in particular, I am confident there will always be a wealth of new ideas. We just need a better way to know if they are good ones, and if so how to put them to work asap.
S2N Analyst Rebecca Noble contributed to this blog. Thanks, Rebecca!
We awoke yesterday to news of yet another med tech mega-merger, with acquisitive Abbott ponying up $25B for St. Jude Medical, even before the ink is dry on Abbott’s $6B takeover of Alere (though that deal may be on the rocks). Fair to say that consolidation in med tech is firmly a trend, with this deal following a string of other big fat $1B+ global weddings:
|Stryker+Sage Products||Patient Care||$2.8B||2016|
|Hill-Rom+Welch Allyn||Patient Care||$2.0B||2015|
|Smith & Nephew+Arthrocare||Orthopedics||$1.7B||2014|
The rationale behind these mergers is well understood; med tech is under intense price pressure from health system all over the world, and increased scale helps both the sides of these companies’ ledgers by lowering operating costs and enhancing negotiation leverage with customers. Then of course there are other incentives like tax inversions, though that window may be closing (see failed “Pfizergan” deal).
In the press releases announcing these deals, there is often lip service paid to the positive impact on innovation, the story being that greater scale and efficiencies equal more money to spend on internally and externally developed new technologies. "The combined business will have a powerful pipeline ready to deliver next-generation medical technologies,” says Abbott CEO Miles White. Omar Ishrak, Medtronic’s CEO, made a similar statement back in 2014: "Medtronic has consistently been the leading innovator and investor in U.S. medtech, and this combination will allow us to accelerate those investments.”
It is too soon to evaluate Medtronic’s follow-through on this promise; they have made a few notable early stage investments since the Covidien acquisition including Lazarus Effect, Twelve and Medina Medical. The legitimate concern of emerging med tech executives, though, is the loss of one more potential acquirer out there, which lessens the chance of an earlier and/or richer competitive deal, and therefore makes the fundraising road even rougher than it already is. In addition, these big acquisitions tend to distract organizations and slow down active discussions for several months or longer as a result of personnel changes, shifting business development strategies, and general chaos.
While a good number of the large M&A deals have been concentrated in the cardiovascular and orthopedic segments, which have been plagued by large, heavily mature product categories, we should expect to see more consolidation generally given the forces at work in the healthcare market. Looking across the industry, the number of now seemingly small-ish $1B+ revenue companies is striking (see below chart). In an “eat or be eaten” world, these smaller market players may be hungry for deals to enhance their own valuations; emerging med tech companies should consider casting a wider net in the search for strategic partners. Ultimately, the established medical device companies cannot merge and synergize their way to top line growth, and will continue to look externally for innovation.
The CEOs of emerging med tech companies are among the hardest working people I know. There are a multitude of things to worry about, with several on the edge of cataclysm at any given point – keeping money in the bank, getting the damn technology to work, the FDA, building out the human and capital infrastructure, managing the burn rate, filing IP, gearing up clinical trials, manufacturing, commercialization, engaging KOLs, generating “buzz”, meeting with strategic partners, managing the BOD, and so on. Just writing that sentence exhausted me. For a new CEO of a small med tech company, all this can be quite overwhelming, so I turned to my road-tested CEO clients and friends and asked them a simple question:
What's the single most important piece of advice you would give to someone about to start their first emerging med tech CEO job?
At press time I had 17 responses from current or very recent CEOs of small med tech companies, ranging from development stage (6) to early commercial (11) and publicly traded (2). All but one of their companies are in the greater Boston area, not that I would expect much geographic bias – the wisdom they shared seems quite universal. The vast majority of respondents were not the founding CEO, so they inherited existing teams and operations (and problems). Most have had only one CEO role, so are close to the experience of being a first-time CEO. I was happy to get replies from so many of these busy people, who seemed eager to share insights from their hard-won experiences that might benefit others on the same path.
In rough order of number of mentions, here is what the CEOs had to say:
1. Get the right team in place, and fast
While it seems obvious that a good team is crucial to success – a platitude, really - the “need for speed” in building a solid senior team came through loud and clear.
The sum total of one CEO’s advice was, “Make your people decisions quickly,” echoed by “make sure you have a solid management team in place, and if not act quickly in creating one.”
Rapid action needs to follow rapid intel, but not judgment; “Gather as much information as you can in a short period of time – don’t assign blame to the people there who are there and have been working hard, but make sure they are capable and you can trust them.”
Great people aren’t enough, though - you also need everyone on the same page in terms of objectives and roles. “If you have great people, all aligned behind the goals and how to operate together, you can accomplish anything,” offered the most upbeat CEO of the bunch.
Another CEO emphasized this point; “Pay attention to how the team works together - individual genius can save a company but dysfunctional teams can disable progress.”
If key people aren’t working out, “don’t delay addressing personnel issues” and “be willing and prepared to make changes to the team as the business develops.”
The CEO’s role is captain of company culture, and according to one CEO a good culture “…allows people to give their best, removes obstacles, and facilitates the great results the team can achieve.”
Singing Kumbaya with your team isn’t the only means to success, though, as one CEO observed. “You cannot gauge progress by measuring satisfaction. Teams are often closest to a breakthrough at the height of their frustration. Revolutionary change is inertial and nearly everyone who is threatened will resist until the facts are undeniable or they have incentive to change.”
2. Investors / Board of Directors (BOD) – pick and manage carefully
One CEO described his relationship with the Board in marital terms, which pretty much says it all. “The board determines the fate of your company and the CEO, and they will require you to alter your vision and compromise, as in any good marriage.“
Boards, like spouses, just want to be heard. “Listen to what’s important to your board members. Understand what the Board considers to be the most important things for the CEO to get done,” offered one CEO.
Consider carefully with whom you climb into that figurative marital bed, assuming that decision is in your control. “Find a team of financiers who believe in your vision and especially in you.”
Another CEO described what they look for in their funders; “The best investors want us to create value, and want to be there to back us, and grow their investment with the firm as long as their capacity to do so permits.”
The right investors for an early stage company might not be the best fit as commercialization nears, and managing that transition thoughtfully is important. “It is natural that the appropriate mix of investors change as a firm grows and matures, and it is important to help facilitate fair rewards to your early backers.”
Misalignment between management and the BOD is a big concern - “If the Board members don’t share your values or don’t have the resources to continue investing until you reach an exit favorable to them, your interests will diverge.”
Managing investors’ (and others’) expectations of the team and company progress is clearly challenging, especially when a new CEO is brought in to “fix” things; “Typically people’s expectations are out whack, especially when it involves turnarounds.”
Several CEOs advised a strong, proactive approach to managing these expectations. “Be firm with your Board as to what their expectations should be, and then communicate like crazy to keep them aligned with you,” advised one CEO.
Getting on top of expectations quickly and for all stakeholders is key; "Set and communicate the correct expectations early to the investors, the company, and customers.”
How you communicate with the BOD is critical – honesty is important, within limits that is. “Be as transparent as practical with your board - lead when possible by offering solutions but don’t hide problems,” suggested one CEO.
Fundamental to a good BOD-CEO relationship is gaining a clear picture of investors’ assumptions and motivations. One CEO with a big company background shared his surprise at learning “…the different meanings of value creation to different investors in a startup” and advised new CEOs to “...know your investors and Board - understand what matters to them, what a good return looks like to them, what their timing expectations are, and try to be sure that they know you have their interests in mind in all you do.”
3. You don’t know everything – have strong outside advisors
Perhaps because many of the responding CEOs are fairly new to CEO-hood, several mentioned the need for experienced external business advisors, specifically who are not members of the Board of Directors.
“Find someone, a mentor or trusted former colleague, who you can level with – you can’t always be completely frank with your BOD. It is crucial to have independent perspective and find someone who can challenge you.”
Another CEO was even more to the point. “As a first time CEO you don't know what you are doing. You can’t admit to your team how much you don’t know, but if you pretend you know everything you will be ‘royally buggered’. Surround yourself with people who have done it before and listen to them. Don't put them on your Board.”
Commiseration with other CEOs in a similar boat seems to be helpful, too (and was the inspiration for this blog, by the way). “Seek out advisors who have experience as a first-time CEOs and know what you are about to go through, and learn from them,” suggested one CEO.
Another offered, “Stay humble, don’t think you know it all, surround yourself with advisors/mentors who were in your shoes before and who know the land mines.”
4. Market - pursue good opportunities, and get out there
I was a little disappointed but not shocked that only 3 of the 17 CEOs mentioned anything about their market opportunities (a.k.a. their reason for existing) in their top-of-mind advice to new CEOs. Not complaining, though – their preoccupation with so many other priorities, like staying solvent, keeps S2N busy!
One CEO emphasized the need to personally immerse yourself in the market; “Listen to your customers - get out into the trenches, early and often, and hear what patients are saying about the technology if it is already commercialized, or what the customers need for technology in development.”
The other market-related advice centered on pursuing the right market opportunities. “Be as certain as possible the problem is really worth solving: that there is a real need that someone will pay to address,” offered one CEO.
Another CEO suggested, “Ensure you have picked a relatively large market with a very real unmet need to give yourself the best chance that what you build will be embraced by the market.”
5. Stay funded
Two of the CEOs felt it most important to remind new CEOs that their primary responsibility is to keep the money tap flowing. My guess is that all of the CEOs would agree with this point, and maybe thought it too obvious to mention – no funds, no company, no CEO job.
“Remember your #1 reason for existence is to ensure the company has the money it needs to execute its strategy,” advised one CEO.
Another CEO made his point in all caps, for emphasis; “KEEP THE COMPANY FUNDED. That is the single most important role of a CEO. You need to look at all funding options. When you have few options, you lose your negotiating leverage.”
Many thanks to these CEOs for contributing their time and insights to this blog:
Manny Avila, Bill Floyd, Chris Hutchinson, Edward Kerslake, Doug Lawrence, John McDonough, Jon McGrath, Maria Palasis, Amar Sawhney, Martha Shadan, Ellen Sheets, Jan Skvarka, Samuel Straface, Howard Weisman, Amy Winslow, Chris von Jako, and Marc Zemel