Rethinking The Medtech Value Curve — Moving Beyond Feature- And Cost-Based Differentiation

By Scott Fishman, CEO of Envisage and Program Executive at The Wharton School

All product development ventures face the essential question of whether the opportunity is worth pursuing. Sometime in the distant past, before the hijacking of healthcare by the insurance industry — perhaps 15 or 20 years ago — the path from technology concept to medical device was a straightforward one. If you had an idea with clinical merit, and you were self-possessed and persistent enough, you probably could find a way to get your product to market.

Today, the odds are stacked against you, irrespective of your invention’s clinical merit. This is because proof of concept now carries a much more immediate imperative than demonstrating technological viability: proof of revenue potential in the short term. But profitability doesn’t necessarily have any connection to the potential improvement of human health, except to the extent that improving human health is a secondary outcome of generating revenue for investors.

Don’t get me wrong — I’m an investor myself, and I like making money as much as the next guy. But, if you’ve invented a device or a method that can improve the probability of survival from, say, a major cardiac event, I’d like to believe that technology might be available for my children and their children — regardless of whether it provides extraordinary short-term return on investment in the next three to five years.

Okay, that statement may be a bit pollyanish. Inventions need to stand on their own merits, and those merits must include being a viable investment proposition, as well as being a practicable clinical tool with a potent pharmacoeconomic argument that insurers will embrace. Oddly, many of the product developers I meet don’t seem to give much consideration to these essential requirements — not just for medical devices, but for any viable new healthcare technology. So, this is my four-point checklist to creating a cogent investment thesis:

1. Ensure that your technology’s intended use addresses a clinical need that isn’t fully or adequately addressed.
2. Confirm that you can identify and reach the people who have that clinical need (your product or service’s intended users).
3. Convince them that your technology provides genuine incremental value, or has the potential to transform the way they currently do things in a way that is at once palatable and useful.
4. Be able to coherently explain the clinical case and core of the investment proposition in a 2-minute pitch. You won’t have years to convince people to change what they’re doing — even if they are completely unaware right now that your product or service is something they need or want.

The simple fact is that most of your prospective customers don’t really care about how brilliantly your new invention diverges from the state of the art, or how it captures a stunning new intellectual property domain. Exceptions may include lawyers (who get paid for their interest), biomedical engineers (who are intellectually curious), and wealthy individuals or “family offices” (who will fund you because they have a personal connection to the clinical outcome you intend to improve). Yet, the early guidance inventors receive almost always focuses on protecting their intellectual property and advancing the science of their technology.

Ingenuity and genuine technological advancement are perfectly valid issues, but they’re insufficient to sway potential investors. The question you really need to answer is whether anyone is looking for the solution you’ve devised, and/or whether they actually will care. Those answers will inform the fundamental question of value you’re going to face with investors or internal constituents who might fund your venture: “What’s in it for me?”

I gave a talk this month to Phase II Small Business Innovation Research (SBIR) and Small Business Technology Transfer Programs (STTR) grantees of the National Science Foundation (NSF), and I proposed that these company founders reset their thinking about value. Traditionally, everyone thinks about adding value by creating a better way of doing something, and that often means a more costly way because innovation needs to have strong revenue potential. I introduced the NSF attendees to the idea of modifying the value curve — something that’s pretty well known in business school classrooms, but often absent from the field of medical device development. What I proposed is to change the rules of the game.

Historically, companies either: 1) offer more at a higher price (product-based differentiation), which seems to be the primary conceptual driver behind medical device development, or 2) offer less at a lower price (cost-based differentiation), which seems to be the primary driver behind insurer reimbursement. This is a logical way of thinking: You don’t expect poorly made clothes when you buy at Nordstrom’s, and you don’t expect world-class service when you shop at Walmart.

But there’s a third path less taken. What if, instead of focusing solely on the technology solution and its inevitable higher cost (due to the time and money necessary to develop and market), you spent half as much time and attention deconstructing why your prospective customers do what they do, and then translated your findings into a roadmap to a better offering? It might — and should — mean subtracting rather than adding: modifying lesser features that don’t add incremental value proportionate to their cost, and elevating to prominence the one or two key features that matter more than anything else.

Classic examples of shifting the value curve in this manner haven’t come out of the medical device area. The companies usually lauded for prowess in conquering so-called “blue oceans” include Cirque du Soleil, Southwest Airlines, and Yellow Tail wine. But there is no reason this kind of thinking can’t be brought to bear on our domain.

For example, it is generally accepted that dual-energy, X-ray absorptiometry (DEXA) is an accurate way of measuring a parameter — bone density — but it has lousy predictive value. Take two patients with the same demographics, family history, lifestyle, and bone density scores, and tell me on the basis of DEXA which one will suffer a catastrophic hip fracture from a slip and fall. You can’t. So let’s consider why this “standard of care” might persist:

1. It’s relatively cheap.
2. It’s reimbursed.
3. It’s an ingrained habit.
4. It gives patients and doctors a reference point to track over time.
5. It’s easy to do.
6. It’s a source of practice revenue.
7. There’s nothing better out there.

These all represent formidable market barriers, because any new device I might propose would require product and process education, breaking of habits, and modification of reimbursement.

Were I to determine that the primary reason DEXA persists is practice revenue, I’d design an alternative that could generate more income for physicians. If I found physician inertia was based on fear that a more complex apparatus would be too hard to use as a clinical monitoring tool, I’d focus my development efforts on the simplicity of “reading” the measure and relating it to clinical outcomes. The resulting product in the first instance might be a complex technology that could be economically mass-produced and then sold in mass quantities to orthopedists for use in their offices. In the second scenario, I might focus on creating a simple point-of-care (POC) test capable of producing a time-series readout for the physician after the patient has bought the test and used it at home. Neither technology is intrinsically higher cost for higher value, nor lower cost for lower value; they both establish a different but more relevant value curve.

This simply is an example. I don’t have a solution to the DEXA problem, but I know this approach is one that could be transformative in terms of clinical management, and it doesn’t have to increase the cost of healthcare to be profitable. It just requires some rethinking of the value curve.

We’ve become too used to thinking about clinical medicine on the basis of product- or cost-based differentiation. While the reimbursement industry has trained us to think pharmacoeconomics, that construct revolves around the classical relationship between cost and performance. Walmart-style efficiency isn’t inherently a bad thing; it’s just that insurers care more about income than health. There needs to be a counter, and it’s neither the traditional play of more features at higher cost, nor the new world focus on cost-cutting at the expense of efficacy. Let’s think about taking stuff out, not just putting stuff in, and let’s do it on the basis of what really matters.

In subsequent articles, I’ll address such questions as upper limits to customer capture and the fallacy of “hockey stick” market projections, why IP isn’t the whole story, capitalizing on market forces beyond your control, getting real about competition, and achieving a consensus on prospective value. Until then, have a glass of wine, capture the resulting break from strictly linear thinking, and try to focus a little less on technology improvements and a little more on changing the value curve.

Editor’s note: This article was adapted from presentation the author made to the National Science Foundation on June 2, 2015.

About The Author
Scott Fishman is a serial entrepreneur, investor, and market/technology analyst with over 30 years’ experience as a strategic advisor to the medical technology and pharmaceutical industries. He currently serves as CEO of Envisage (a division of Ethos LifeScience Advisors), which he founded to provide commercial guidance to entrepreneurs, startups, and new product developers in the healthcare space.  He is also an enthusiastic angel investor and sits on the Life Science Investment Advisory Committee for Ben Franklin Technology Partners, one of the nation's most successful technology-based economic development programs.

Actively involved in graduate education, Scott co-created and serves as program executive for the Commercialization Acceleration Program (CAP) at the Wharton School of the University of Pennsylvania. He also serves as a professor in marketing, management, negotiations, and strategic planning in the MBA program at Philadelphia University; co-teaches a commercialization course to bioengineering students at Drexel University; and lectures in translational therapeutics at the University of Pennsylvania Medical School. He earned his master’s degree in advertising from the University of Texas and bachelor’s degree in liberal arts from the University of Pennsylvania.