Report: Medtech Firms Must Change Approach to Innovation

Medtech companies intent on succeeding in a new economy that rewards better care must change the way they innovate, a report from PricewaterhouseCoopers’ (PwC) Health Research Institute concludes.

The HRI report outlines ways in which medtech companies need to expand their approaches to innovation outside traditional research and development in order to remain competitive. According to the report, only 14 percent of medtech executives formally manage innovation activities, which is essential to creating new services and business models. And just 17 percent believe their companies are innovation pioneers. But 64 percent of executive surveyed view innovation as a competitive necessity and 81 percent believe it will be in five years.

“The innovation machine is not working like it used to,” PwC analysts note in the report. “Medtech companies prepare for an innovation makeover.” “Today adding nifty features to existing products is not enough to warrant a price increase. Customers—be they hospitals, accountable care organizations, or even individual consumers—now demand more in financial, convenience and health terms. Medtech companies must focus more on service and business model innovations that meet new industry demands rather than on incremental product improvements. If they don’t, they risk fierce threats from new players eager to claim a part of this $349 billion global market.”

The research includes a Web-based innovation scorecard that assesses companies based on leading practices in organizing, managing, and fostering innovation.

Innovation is critical to long-term success, but it can take many forms depending on a company’s culture, stakeholders, and customer-buying behaviors. The report identifies three ways medtech companies can create an innovation enging that will help them manage truly game-changing innovation and find new sources of revenue:

1. Be ambidextrous—Companies must operate as a “lean startup” while concurrently maintaining Lean Six Sigma discipline to sustain the core businesses.

2. Measure innovation in new ways—Companies must manage the innovation cycle differently than the operating cycle. “Companies need new methods for accounting and tracking the mechanics for fostering innovation at an operational level. Finance teams can play a role by applying a venture capital and portfolio management approach as opposed to a capital and operating approach,” the report asserts. “Build new forward-looking innovation metrics that are based on a realistic rate of advancement with a long-term investment window. This could include the number of initiatives that have moved forward toward development and a more generous project failure rate.”

3. Collaborate to get closer to the patient—Medtech companies must look increasingly to external customers, partners and even competitors to help them generate valuable insights and widen the funnel of ideas flowing into the organization. “Out of all health industry players, medtech companies arguable have had the least insight into patient outcomes and satisfaction. Their business-to-business relationships did not create a burning need to master patient or consumer understanding. To get closer to the patient, medtech companies must first understand the shifts that are motivating their health industry counterparts to act differently,” the report concludes.

“Historically, medtech innovation has relied on incremental improvement,” said Christopher Wasden, managing director and global healthcare innovation leader, PwC. “But ‘innovation’ needs redefining for an environment that rewards value – measured in affordable patient outcomes and customer satisfaction – over volume. True innovators learn from failure – fast, frequent, frugal failure. Medtech leaders need to change their business models, their corporate DNA, to embrace lean innovation beyond their core operations.”

Key report findings include:

• The value of a device is no longer solely in the product itself but in a company’s ability to help customers solve broader problems.
• New competitors are staking their claim – at least 18 companies have entered the medtech space and are driving innovation at the pace of technology.
• New integrated services and business models that address clinician and consumer needs are becoming more important.
• Medtech executives expect a higher level of innovation over the next three years but lack formal processes to achieve their goals for new services and business models.
• Medtech companies have been slower to apply new social, mobile, analytic, and cloud (also called SMAC) technologies than other industries.
• Medtech companies are looking to open innovation as a key approach to drive future growth.

“Three things are essential to transform today’s medtech companies for the future,” said PwC principal Ed Yu. “Embrace failure—create an innovation operating model that separates breakthrough and radical innovation from incremental innovation. Embrace the disease—select a target area and collaborate with health industry counterparts to get closer to the patient. Finally, measure innovation in new ways with forward-looking metrics and connect the dots for shareholders. That’s the formula for success.”

Thirty-five medtech companies participated in the study, with almost half reporting revenues in excess of $1 billion.