By Nick Cordaro
The entrepreneurial pathway for innovation is rarely a straight line, nor does it often return quick results. Large companies teach their entrepreneurial employees methods to upwardly manage and incorporate soft persuasion to move their vision forward; young companies, however, often chance their entire future on one idea while struggling to make payroll. Regardless of the size of the organization, the excitement and thrill of innovation is a passion.
So, why is innovation in healthcare so problematic?
The good news is that innovation is alive in healthcare—with a multitude of new devices invented each year. The bad news is the increasing difficulty in receiving insurance reimbursement for these commercialized innovations. In the medical device industry, margins that would typically fund research and development have eroded because of implant price cuts—down as much as 50% in the last eight to 10 years—paired with elevated regulations.
Furthermore, insurance companies tend to label many proven technologies as “investigational” and thus not subject to reimbursement. Hospital administrators deny physicians the opportunity to use new technologies because they are not reimbursed by insurance, even though physicians are often participating in studies to prove the efficacy of those same technologies that were denied. Ultimately, this leaves little margin for innovation or the risk that comes with it.
Restrictive Ability to Field Test and Pivot
Innovators are reminded of the benefits of testing products early and often to quickly evolve the product at early stages until the user needs are fully met. Field testing and pivoting projects early are feasible in an unregulated environment, but how is this achieved in healthcare?
Well, in 1976, Congress enacted the Medical Device Amendments, leading to today’s requirements for 510(k) clearances. These clearances are only to be granted for medical devices shown to be equivalent to historical devices.
Without a proper predicate device, a full premarket approval (PMA) is often necessary to conduct a scientific and regulatory review to evaluate the safety and effectiveness of the product. And without a highly experienced team of professionals, it is nearly impossible to navigate a new product through the labyrinth of regulatory requirements while carefully balancing user needs, project inputs, patient risks, and financial obligations. Critical, pivotal project moves must be carefully guided by engineers and scientists while carefully incorporating feedback from the end users.
So, why are some companies and their innovations failing?
Funding or Chasing Bad Ideas
Without proper research and talent, companies may not select the best proposal to pursue. After all, funding venues require experienced minds and business acumen for project selection. Common mistakes made include the inability to acknowledge project failure, unrecoverable costs, and the wisdom to move on with a fresh approach or new idea.
Good Ideas Lacking Management Support and Funding
Sometimes it’s difficult for an organization to realize a profitable or revolutionary idea when presented. This recognition is often difficult within large organizations, particularly when the innovation will cannibalize existing business.
However, there is value to renovating a company’s portfolio, especially before a competitor’s innovation renders existing technology obsolete. Additionally, many new projects come from a person or team not experienced in driving an innovative idea to a successful outcome. What, however, are the pathways forward?
Innovation has mostly surfaced through smaller companies that are agile and must take risks to survive. One trend which might signal a new path for innovation is the public-private collaborations between academia and industry. Universities are becoming proactive by developing entrepreneurship programs and establishing incubators that provide research and development, create intellectual property, and are actively looking for licensing and commercialization partners.
Further, medical research has always heavily leveraged academic institutions with extensive research and development endowments. Now, universities have taken a more advanced step in supporting research and development by leveraging their intellectual property for commercialization and additional revenue streams.
In the venture capital arena, more deals are coming from the incubation of academic institutions’ intellectual property portfolios, which provides a longer runway for commercialization and strengthens the confidence of funders. Outside of academia, the difficulty is getting an acceptable rate of return out of an investment. After all, Class II medical devices that are 510(k)-cleared take 12 to 24 months just to get to alpha launch.
In fact, vendors may spend more than $1 million on development and $500,000 to $1 million in production inventory. The result? A $1.5 million to $2 million investment over 12 to 24 months before a single dollar is seen.
Not surprisingly, many venture groups don’t see the return as attractive. Although Class III devices with clinical trials offer a greater opportunity for innovation, they encompass a much more expensive investment with no guarantee of reimbursement.
Look at history and you’ll see countless organizations that are no longer in business because they failed to innovate. So, how do companies overcome the barriers mentioned above?
Well, for starters, many successful organizations have created an environment where seasoned industry veterans from multiple disciplines come together with the next generation of talented innovators. This is often done in an incubator and accelerator setting that brings together technology, industry expertise, funding, and entrepreneurs to commercialize ideas and intellectual property.
In conclusion, it is easy to become discouraged while attempting to bring healthcare innovation forward. Teams will experience failures, but as all great innovators know, it is essential to recognize that such challenges provide critical feedback—often necessary to take the next step toward success. And bringing innovation to healthcare is a worthwhile pursuit since it ultimately brings value and prosperity to all lives.
Nick Cordaro is the CEO of Watershed Idea Foundry, an idea foundry created by Fountainhead Investment Partners that focuses on biomedical growth and innovation. Watershed’s purpose is to forge promising ideas into viable intellectual property and products ready for the marketplace, ultimately creating profitable businesses, bringing together industry experts from around the world to guide entrepreneurial ideas.