Medical Technology and Kubler-Ross' Five Stages of Grief

Last year when I left the IBF MedTech Investing conference in Minneapolis all I could think about was MacBeth and how the med tech community was being drawn into its own tragedy, its leaders uttering under their breaths, “Something wicked this way comes.”  At the time I wrote a post called, “What’s Done Cannot Be Undone” in homage to the sense of doom that hung over the conference as medical device leaders awakened to new financial imperatives.  As I embarked for the conference again this year, having agreed to moderate a panel of payers and providers talking about reimbursement (take cover!), I wondered what sentiment I might find there in the Land of 10,000 Lakes.  Would the talk of the conference be a new, low cost, high-speed machine to help med tech executives light themselves on fire even more efficiently?

What I found this year, however, was sort of interesting. Unlike last year, this year there was very little whining about good days gone by and harebrained schemes about how to bring them back.  Rather, there was a sense that the world had changed and now was the time to figure out how to capitalize on it.  To use psychology-speak, the medtech industry is clearly trying to work its way through Kubler-Ross’ five stages of grief.  The last several years were all about denial, anger, bargaining, and depression.  This year seemed to be more about acceptance and much of the conference’s focus was about how to move on—how can the med tech industry pick itself up, dust itself off and start all over again in a new world that prefers “good enough products at low cost,” as one participant said, vs. the most elegant yet costly solution

The first clue that the acceptance stage has been reached was highlighted by conference chairman Kevin Wasserstein’s informal opening poll; he asked the room who thought that the medtech world was doing better this year than last year (3 people!), who thought it was worse (5 people) and who thought it was the same (everyone else in the room of about 400 people).  I know if you had done that poll last year you would have gotten 400 “worse than last year” responses.  We were then still in the early phase of the capital crunch that has besieged medtech and there was yet much denial that the lofty venture firms of old were now the dearly departed.

After Kevin did his poll he said that the medtech industry was now aptly characterized by the Chinese symbol for the word crisis.  The symbol is apparently made up of two separate characters, one that represents the word danger and one that represents the word opportunity.   Last year I am pretty sure that if you asked anyone in the room to guess the meaning of the two symbols that characterize medtech you would have heard Holy and Crap. But this year there was a clear sense that it was time to accept our new step-mother, healthcare economics, and rise to the occasion, however challenging it may be, to figure out how to make medtech rewarding again.

While some people’s idea of the medtech bright side is, “At least it’s not worse than last year,” others pointed out some real positive momentum in a few areas, including:  new sources of capital from strategics, pharma and overseas; greater flexibility/responsiveness at the FDA; voracious acquirers with big wallets; rich public market medtech valuations; and, even a glimmer that we might see some relief from the Medical Device Tax (I am guessing this is on every medtech CEO’s Letter to Santa).   In the panel I moderated, which featured executives from three large health insurers and one large integrated health system, these representatives from the Axis of Evil, as most medtech CEOs might have once see them, even had concrete ideas about the kind of new medical devices they were eager to pay for:  products that improve outcomes in orthopedics and spine, products that eliminate patient reliance on medications (e.g., hypertension, diabetes, cardiovascular disease); and products that take cost out of the overall episode of care, even if the device itself is costly.

David Coats of Correlation Ventures also reported some very promising data from extensive research performed by their firm.  Correlation’s analysis of thousands of deals demonstrates that the realized average investment return multiples for medtech consistently outperform ALL other venture investment sectors, not just other healthcare sectors, over the last 12 years.  And by ALL he meant Facebook-investing, Instagram-buying, Pinterest-backing everyone.  When he spoke you could almost hear the angels sing.  I am pretty sure that every time a medtech investor makes a better return than the people who invest in consumer Internet, an angel gets its wings.

But back here on earth we also saw PriceWaterhouse’s quarterly data on medtech investing and it was sobering.  In Q1 2013 there were only 8 early or seed stage medtech deals totally $23mm in invested capital; in the same quarter $500mm went into late stage and other not-early medtech deals.  In other words, commented PwC’s Mark Scholtes, the front of the pipeline is drying up.

And yet, many of the medtech CEOs that spoke at the conference seemed quite optimistic, if worried about the capital crunch.  While there was widespread recognition that their customer is no longer just the technology-hungry provider (turns out that the payer and health system may have a say in purchasing now), there was also an emerging understanding that evidence of both clinical and economic value might be the ticket to a big pay-day.  Stacy Enxing-Seng, Covidien’s President of Vascular Therapies, spoke at length about the opportunity to capture value from the entire clinical pathway, meaning what comes before, during and after surgery, and not just from a stand-alone procedure.

So if we are in Kubler-Ross’s fifth stage, acceptance, what does that look like as we move forward as an industry?  New alliances and real awareness of how patients, payers and providers needs align are going to be key features of the next generation of medtech success stories.  Michael Wasserman of HIG BioVentures said that medtech companies used to think only about whether their product was better for the patient or better for the provider, but now they have to think about how their product is better for the healthcare system overall.

Lisa Ernhardt, CEO of IntersectENT noted that it was essential to have conversations with payers early and often to ensure that companies are building products for which they will actually get paid.  I think that if she had said that five years ago she would have received actual smirking from the audience.  Payers? Who are they? The doctor decides what to use!

In a way, Ken Paulus, CEO of Allina Health in Minneapolis told the most telling story of the day.  He talked about how his hospital routinely used to carry 13 different hip replacement products because the 75-provider orthopedic group they contracted with demanded the flexibility.  But one fine day Allina found out that this very same group only offered 1 hip replacement product in their own outpatient surgery center to hold down costs.  Now Allina offers 2 of the products, not 13, and the providers have worked out how to live with it…go figure.  It’s bad news if you’re one of the 11 hips that got voted off the island, but great news if you’re one of the 2 that got to stay around to get all the market share by proving you’re worth. And Allina reports that they have saved $7 million/year  just by making this one change.

So while it’s true that the bar has been raised for medtech products, it’s a bar worth bellying up to.  Medtech companies have spent significant time the past several years denying the importance of cost efficiency, angry at payers for not paying anyway, bargaining with providers to try things they didn’t really need and depressed at the FDA’s roadblocks.  They have also built too many copy-cat products without evidence that the added cost resulted in improved value for anyone other than the manufacturer.  In a world where all players’ financial interests become aligned, there is great opportunity for new medical technologies to make a profit by advancing everyone’s goals in concert and building products the world really needs.

The acceptance of this fact gives medtech companies a meaningful path forward towards success. And success in our current world could be big, as the world is not getting any younger.  In 2010, an estimated 524 million people were aged 65 or older—8 percent of the world’s population. By 2050, this number is expected to nearly triple to about 1.5 billion, representing 16 percent of the world’s population. Now that’s a lot of hip replacements.