As a result, across multiple product categories, prices are
starting to tumble. For example, annual price declines have reached
double digits for drug-eluting stents for which hospitals perceive
little product differentiation. A number of key medtech product
categories suffer from the "generics effect": the performance
difference between leading products just isn't evident. Changes in
payment models will likely accelerate this price pressure. Bundled
payments, for example, cover full episodes of care-including device
costs and doctor's fees. The consequence: physicians are
increasingly motivated to preserve their income by lowering the
device costs.
Rising regulatory hurdles: It's increasingly
costly and complex to bring new medtech products to market. The US
Food and Drug Administration (FDA) requires clinical trials-the
pre-market approval path-only for Class III medical devices, which
have higher levels of complexity and patient risk. Now the FDA is
revamping its regulatory pathways and applying greater scrutiny to
a much larger set of products, including products classified as
Class II. The FDA is also intensively investigating quality issues,
as reflected in the industry's rising number of consent decrees and
product recalls. In 2001, the FDA recalled just three devices. In
2009, the number jumped to 31.
These regulatory headwinds pose a major challenge. Medtech
companies must now plan and budget for longer, more stringent
product development-with no guarantee of approval at the end. A
stent clinical trial, for example, can cost tens of millions of
dollars and stretch over several years. In effect, the cost of
entering-and staying in-markets has gone up, so companies need to
respond.
Rethinking the "what" and "how" of R&D
Increasingly, leading medtech companies tell us that they see
the need to fix their R&D models. But their challenge is: where
do they start? Do they focus externally on understanding the new
customer needs? Or should they concentrate on revamping processes
internally? Our belief is that to lean completely into the new
medtech R&D opportunity, companies will need to do both.
Start with what customers will pay for
To thrive in this changing market, medtech companies must
closely align their innovation with customer willingness to pay.
For this, they must consider two steps.
The first involves a choice, as medtech companies have reached a
fork in the road. One path is to step up innovation and develop
products with greater value. These will not necessarily have the
latest features and benefits. Rather, they'll differ in that
they'll offer clinical evidence showing superior efficacy, safety
and cost-effectiveness versus their competitors' products. Some
will even have data demonstrating superior outcomes for patients.
It's an approach similar to one taken by pharmaceutical companies.
Faced with the acute threat of generic drugs at much lower prices,
these companies are starting to prove-and price-the comparative
effectiveness of new drugs. For example, Merck has a
performance-based contract with CIGNA for its oral anti-diabetes
medications Januvia® and Janumet®. Merck offers discounts
to CIGNA's customers if the patients adhere to their physicians'
prescriptions and their blood sugar levels improve. The other path
is to step down innovation and develop products with fewer features
but good-enough performance that sell at lower prices. Such
value-based products are common in other industries, and they will
arrive soon in medtech.
Medtech companies must choose, as staying the course-that is,
investing heavily in incremental innovation-is not an option. Going
down both roads is possible, but only if the company has the
resources and capabilities to win in both categories of
breakthrough and good-enough innovation. What's most important is
making the choice, and acting on it.
The second step, a logical follow-on, is for a medtech company
to X-ray its pipeline. Projects that don't fit the chosen path of
innovation must be redefined or canceled. For example, some
projects will be caught in the middle: derivative projects offering
the promise of modest efficacy improvement, but requiring costly
clinical trials to clear regulatory hurdles. They will arrive in
the market as neither the innovation nor the low-cost leader.
Another critical component of the pipeline X-ray is reviewing
business development issues. The hard question must always be
asked: Is the company better off making or buying the next
technology? The answer lies in understanding the company's
distinctive competence, plus the external landscape of innovation.
When working in collaboration, R&D and business development can
make an informed decision about where to spend the company's
innovation dollars.
Bain experience in helping medtech companies X-ray their
pipelines indicates that up to 25 percent of projects typically
must be reconfigured or stopped. These actions free up scarce funds
to double down on projects that do survive the rigorous
scrutiny.
Rethink how to develop the product
In our experience, five levers are key to reengineering R&D
for major gains in efficiency and effectiveness:
- Improve the quality of decisions: Every
medtech company has a PDP (product development plan) with major
milestones and activities in place. But the PDP doesn't drive
success; good decision making does. What companies need are clear
decision rights-who owns the inputs, who synthesizes the
recommendations and who makes the decision-with processes that are
well defined and adhered to. In the absence of these elements,
decisions take too long or are made poorly. This leads to late
project cancellations or "go" decisions for products that don't
actually merit investment because they won't truly meet customer
needs.
- Elevate project management: Large companies
need to recapture the spirit of start-ups where everything rides on
R&D success-and project managers are the heroes who get
products over the finish line. As many R&D organizations have
grown, they have tilted too much toward functional structures that
focus on optimizing activities instead of project success. To
rebalance, a medtech company can start by installing a senior head
of project management and a team of highly skilled project managers
who have leadership responsibility and budget authority. Next, the
company can embed all the elements that make project management
work, including committed cross-functional team members, metrics
and incentives tied to project success, and a rigorous cadence of
project reviews with the C-suite to drive accountability.
- Get more from existing resources: In most
leading medtech companies, R&D organizations are well stocked
with resources-people, assets and knowledge. Typically, in these
companies, adding more resources isn't what's needed. Rather, the
more common problem is over-management and overcapacity that can
clog the pipeline with activity and delay progress. In our
experience, companies can do more with less. They can expand spans
and reduce layers of management; set tougher performance hurdles;
utilize centers of excellence to promote IP sharing and new ideas
for technology combinations; and capture and reuse knowledge so
that teams start faster and avoid previous pitfalls.
- Form global strategic partnerships:
Outsourcing vendors are maturing rapidly in the medtech space.
Traditionally, clinical research organizations such as Quintiles,
Parexel and PPD focused on biotech and pharmaceutical customers;
now they are shifting attention to medtech as a new growth
frontier. And hardware and software engineering vendors such as
Infosys, HCL and Wipro that built competence serving the aerospace
and automotive industries are investing in healthcare. This is an
opportunity for medtech companies to form strategic partnerships,
including expanding their reach into India and China. This move
will broaden their access to new talent, increase productivity and
lower costs, plus bring R&D in closer contact with new
commercial growth opportunities, particularly value products in
emerging markets.
- Fix the cross-functional pain points: R&D
is always intertwined with marketing and regulatory, quality and
manufacturing functions. Now companies need to find ways to
strengthen these cross-functional linkages because opposing forces
are straining the bonds. Marketing tries to capture the new "voice
of customer" that comes from hospital procurement. The regulatory
department responds to FDA pressure and new hurdles for approval.
Quality control is busy trying to prevent warning letters and
product recalls that immediately damage businesses. Manufacturing
redesigns its plant network to take advantage of lower costs and
higher tax benefits in emerging markets. Various forces tug at each
function, straining their ability and willingness to work
seamlessly together on product development. Alignment is thus
critical, or else all the hard gains made in R&D are washed
away by the enormous time and cost burden of cross-functional
breakdowns.
Pulling these five levers means transformational change in
R&D, and such change takes time. Most medtech companies can
expect to realize the benefits from reengineering R&D only
after several years. But companies need to make these fundamental
changes to stretch their R&D dollars and meet the shifting
needs of customers. For medtech leaders, it's a call to action. By
showing vision and confidence, making tough choices and inspiring
the organization, they can fix the "what" and the "how" of
R&D.
Key contacts in Bain & Company's Global Healthcare
practice:
Americas:
Patrick O'Hagan in Boston
Matthew Collier in San Francisco
Hernan Saenz in Dallas
Europe:
David Michels in Zurich
