Medtronic buys Cardiocom: Are medical product companies finally serious about business model evolution?

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A Lifepak 12 Biphasic defibrillator produced by Medtronic.

Article Highlights

  • The great thing about medical product companies getting into the services business is that this will radically impact the way they view innovation

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  • A migration by medical products companies into services would almost certainly be associated by a far more serious dive into digital health

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  • It’s been very hard for pharmas to leave their comfort zone of selling products

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Today’s news of Medtronic's purchase of Cardiocom – described by the WSJ as a “closely held disease management and patient-monitoring firm” — seems unusually significant, and speaks to an important way medical product companies may be trying to respond to seismic shifts in the healthcare landscape.

The basic challenge faced by medical products companies is that they’re trying to sell expensive products into an environment that’s increasing concerned about the cost of care, and in which key stakeholders are aggressively looking for opportunities to bring the costs down, and avoid unnecessary expenditures.

Medical products companies in particular (and keep in mind, I work at one) are frequently attacked for being part of the problem, rather than part of the solution.  Medical products are typically cited as one of the few areas where innovation has driven costs up, rather than down; while this view isn’t universally shared (e.g. see this smart rebuttal by Scott Gottlieb and Josh Makower), few would disagree that medical product companies are feeling increasingly squeezed, and compelled to robustly demonstrate the value of their products – financial as well as humanistic.

One answer to this challenge is for medical product companies to move up the chain, so to speak, and into some kind of specialized healthcare services.  Medtronic, for example, seeks to focus initially on heart failure – a designated area of interest for Medicare, which penalizes hospitals with high readmission rates for this diagnosis.  Medtronic also apparently hopes to enter other areas such as diabetes as well.

In pursuing this path, Medtronic is following a handful of other companies, such as DaVita, which has deliberately evolved from a dialysis company to a broader integrated service provider, catalyzed by the 2012 purchase of (technically merger with) physician group Healthcare Partners.

The macro arguments for this can be found on page 54 of this recent Credit Suisse report from Michael Mauboussin et al., which highlights the declining economic return of pharmaceuticals from 2002 to 2012; during this period, returns from the providers and services sector have held relatively steady.  The authors observe, “A critical change appears to be the transition of profits from the innovation side in favor of generic manufacturers and downstream providers of services, care, and coverage.”

In my mind, the great thing about medical product companies contemplating getting into the services business – especially if they start owning some of the risk (initially for aspects of chronic disease management, say) – is that this will radically impact the way they view innovation.  Rather than asking themselves whether they can convince an external party of the monumental value the latest product, they’ll have to convince themselves – presumably early in a product’s development – that a particular idea truly makes economic sense.  I suspect that as the interests of medical products companies and other stakeholders become more aligned, we’ll start to see much more of the cost-reducing innovation we’ve seen in so many other areas.

It’s also likely that such a migration by medical products companies into services would almost certainly be associated by a far more serious dive into digital health, as companies would be increasingly concerned with outcomes, and the more granular assessment and optimization of patient response to therapy.

So why hasn’t this happened yet?  Because traditionally, it’s been very hard for pharmas to leave their comfort zone of selling products – even the idea of a pharma company selling a solution rather than a pill seems to be much-discussed but seldom-actualized.  At least one industry leader has told me that the root cause stems from the same reason companion diagnostics have struggled – at the end of the day, pharma companies don’t want to give up their margins.

The question is, at what point is selling expensive stand-alone products no longer tenable?  At least some executives are clearly beginning to worry that this time may be fast-approaching.
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David
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