Tutorial: Is Your Health Care Innovation Commercially Viable?

Investors use a number of criteria when deciding whether to invest in a new technology—scientists should know what they are.

When it comes to health care technology-based ventures, the emperor’s new clothes syndrome is well known: Enthusiastic engineers develop a promising new technology only to discover that the new technology is not commercially viable. Why does this happen? What is it that prevents otherwise knowledgeable and competent scientists from understanding how a new device, drug or treatment will work in the marketplace? In the end, it may be simply a matter of awareness. Few scientists know or even care how investors evaluate new healthcare technologies. In the pure world of scientific inquiry, too much interest in the business side of things feels impure to many. And yet, a better understanding of how industry assesses technological innovations can actually help scientists to broaden and contextualize their inquiries. Knowing how investors think can help scientists still in the early stages of research evaluate whether a promising technology has any reasonable chance of making it out of the lab and into hospitals and clinics.

The checklist in Table 1 and discussion below is a method of assessing health care technology taught to business school students. For researchers, it can act as a window into how investors assess the viability of health care technology ventures.

Table 1. Checklist of Issues in Health Care Technology Evaluation and Results for Sample Applications

Illustrative Cases of New Health Care Technologies

I will discuss the seven steps in Table 1—Issues in Health Care Technology Evaluation —in the context of two technological proposals. They respectively alleviate the suffering and expenses from burns and sleep deprivation. (To my knowledge, these ventures do not exist. I have created them for illustrative purposes only, and any resemblance to real ventures is accidental.)

Case A: Burn Management Technique

A new burn wound healing technique consisting of moist dressings, infused with a combination of existing drugs.

When the technique was used on rats, the burn wounds healed faster and with fewer infections than with conventional treatment. Scarring was not measured because a method for measuring the characteristics of scar tissue did not exist.

Although the technique used commonly available, low-cost items, it could be patented as a new use for these common items. The researcher published five articles on this subject in highly respected journals. No market size data were presented.

The researcher believed this technique may also be useful for healing other wounds, such as those created by surgery, accidents, or diseases. It may also be a new method for drug delivery, using the skin as the point of entry for drugs, rather than the mouth or a needle. No experiments have tested these ideas as yet. Moist dressings similar to this innovation earned $4.3 billion in 2012 revenues in the U.S. [1]

Case B: Sleep Deprivation Technique

A light technique has been developed for remedying the effects of sleep deprivation on travelers and night shift workers. It does not involve any chemical, surgical, or mechanical manipulation of the body. For travelers, the remedy requires exposure to light one hour a day, for six consecutive days, for reprogramming the brain. Its price was $3,000 per six-day treatment and the effects lasted for about a week. Night shift workers required weekly one-hour sessions, after an initial six-day reprogramming, at an annual cost of $6,000. The technique was extensively tested on animals and humans, including NASA astronauts. The part of the body affected by the technique was known and was not altered by the technology. Although the technique was very successful in restoring normal body functions to the sleep-deprived, its long-term effects were unknown.

The researcher had worked in this area for 20 years and published over 50 papers in well-respected journals.

The technique involved a new use for commonly available items. It thus may receive a new use type of patent. The device itself has fairly low costs but requires specially trained technicians. No market size data were presented.

Checklist for Evaluating New Technologies, Illustrated

1. Understanding the Black Box

The first step in a technological assessment is to determine if the scientific mechanisms underlying the technique are understood, a process commonly referred to as understanding the internal mechanisms of the “black box.”

In Case A, the burn wound technique, the black box remains sealed—the reasons for its efficacy are not understood. Wound healing is a process of growth. Its mysteries are as profound as those of how organisms grow.

Case B fared a little better. The researcher knew the location of the brain cells affected by the technique and had studied its impact on them. But here, too, the black box has not been cracked wide open. The biochemistry and mechanisms of sleep are complex; much remains to be learned about them and their response to the technique.

Many existing technological advances fail this black box test. For example, although mechanical and chemical techniques are widely used to reduce plaque deposits that block the flow of blood in arteries, there is all-too-little understanding of why these plaque deposits form. The long-term effects of these techniques on the re-formation of plaque deposits and other issue thus cannot be accurately predicted. Nevertheless, drugs or devices to reduce arterial plaque formations are widely used.

Scientists who cannot clearly explain their understanding of the ‘black box” to investors may well be indicating their own lack of clarity about the underlying mechanisms. As in any profession, an unclear or incoherent explanation is often a better indicator of the presenter’s fundamental lack of understanding of the subject than of the listener’s lack of intelligence.

2. Depth of Research

Because the black box test is frequently failed, the evaluation of new technologies should also consider the amount and quality of the underlying research as a surrogate for the understanding of its causal mechanisms.

In Case B, the researcher has studied the technique for many years, published the results widely, and experimented on many animals and human beings. The researcher in Case A, in contrast, has published far fewer articles, researched the problem for a shorter length of time, and experimented only with rats.

Case A, the wound healing innovation, raises a number of red flags. Because of its shorter history, this research has not been subjected to much peer review. Other scientists have not yet had their say about the technique’s efficacy. The use of rats as the only test animals is also of concern. Rat skin differs from human skin and rats are otherwise not ideal analogues to human burn victims. The researcher should use other animals whose skin is more similar to humans. If possible, a placebo trial of the techniques’ efficacy should be conducted on humans. (In placebo clinical trials, one group of subjects receives a placebo and the other the innovation.)

Case A may ultimately turn out to be a wonderful technique. But at present it is riskier than Case B because of the paucity of animal trials and published research and the absence of data about its effect on humans [2].

3. Downside Risks

All medical interventions cause some negative long-term consequences, because they interfere with our normal body functions. The human body is a beautifully balanced mechanism. Intervention with any one part will inevitably upset it elsewhere. Even aspirin, among the best known and most benign of drugs, was found to occasionally cause a serious children’s disease.

The long-term effects of both techniques are unknown, as is true of many other new medical technologies which are adopted after only a few years of experimentation. By permitting early adoption, government regulators explicitly accept the risks of the unknown for the therapeutic benefit that can be gained with more immediate use and the benefits of learning more about long-term consequences (although they increasingly request that manufacturers share the results of post-market surveillance and some countries post disease registries).

Technological assessment must consider the probability of discovering long-term problems with the techniques. In both Case A and Case B, problems are inevitable but they appear to be more likely in Case A, wound healing. The therapy in Case A invades the body and may alter an important bodily function. Because the therapy in Case B is relatively noninvasive, it has a lower probability of causing harm.

4. Financial Considerations

A critical issue in the analysis of a technological innovation is market acceptability. There are four aspects to this analysis.

Market Acceptability to Medical Personnel

Physicians and other medical personnel are reluctant to switch from familiar products that work well to new products with which they have no experience and for which efficacy is not yet completely proven. Technologies that are excessively innovative encounter difficulty in gaining market acceptance, particularly if they are invasive.

Financially Beneficial to Adopters?

The financial benefits depend on how providers are paid.

  • If payment is received from insurers on a fee-for-service (FFS) basis, adopters will benefit only in the technology has coverage by insurers: a code to trigger payment; and adequate payment [3].
  • If payment is for a bundle of care, the provider must be assured that the technology is cost-effective [4].
  • If payment is made by consumers, the provider must be assured that the item is attractive to them.

Many medical technologies are not reimbursed directly by either insurers or consumers (for example, imaging or anesthesia equipment). In these cases, the adopters, such as hospitals, must either receive FFS compensation for using the technology (e.g. Radiologists paid for interpreting images) or be convinced that the technology advances the standard of care through clinical evidence from key opinion leaders.

In these cases, there is no insurer coverage for sleep deprivation. The consumer will pay for it and there is scant evidence of market acceptability. Wound dressings typically do not receive direct payment from insurers and the consumer—a burn victim will not pay for it in countries with widespread health insurance. Nor are there separate coverage and coding protocols for applying wound dressings. Thus, the innovation must provide adopters with powerful evidence of cost effectiveness (the technology saves more than it costs by, for example, reducing the care personnel needed) or clinical effectiveness (substantial reductions in healing time, infectious, or scarring.

Technologies Which Create “Turf Warfare”

Innovations may be difficult to commercialize if they replace a politically powerful incumbent, such as a surgeon, who accounts for a significant fraction of a hospital’s revenues, with medical doctors or other specialists who do not generate as much revenue.

Among the technologies which created “turf warfare” were minimally invasive interventional cardiology techniques to reduce plaque, such as angioplasty or stents, which enabled medical doctors to replace a surgeon (who performed open heart bypass surgeries) and ultrasound techniques for removal of some “stones” which could be administered by a radiologist instead of a surgeon. In both cases, the surgeons mounted a strong public relations and clinical counter–offensive which delayed wide-spread adoption of these new techniques.

Neither of these cases creates turf-warfare issues.

Technologies Which Require New Personnel, Sites

Technologies that employ existing personnel, such as the wound healing one used, in familiar hospital settings, are preferable to those that require a new category of specially trained sleep technicians in new sites.

Technologies Which Create Product and/or Customer Pipeline

Both technologies can create new pipelines; the wound healer will likely be continually updated with improved therapies, and may be used for drug-delivery, while the sleep deprivation techniques could create buyers who treat people with other sleep–enhancing techniques, such as remedies for sleep apnea.

Market Size and Ease of Penetrating It

Technologies that treat a sizeable market are preferable to others, all other things being equal. The size of the market for a wound-healing therapy reached $16 billion in 2011 while the sleep apnea market was worth $4 billion in 2010.

There are no estimates of the size of the sleep disturbance market. How would you derive these data? See Table 2 below for some clues.

Table 2. Deriving Market Size: Example for Sleep Deprivation

A) Think of all cases where sleep-deprivation might cause serious harm. Below are my ideas:

  1. Utilities, especially nuclear reactors
  2. High security locations-prisons, police and fire stations
  3. Powerful people who are “jet lagged” – globetrotting executives and diplomats
  4. Other

B) Estimate the number of locations; people involved (I Googled for the numbers below):

  1. U.S. nuclear utilities – 65 with 104 reactors; 120,000
  2. State prisons – 1,200; 270,000 guards
  3. U.S. Police stations – 12,500; 593,00
  4. U.S. fire stations – 30,125; 1.1 million
  5. High income individuals – 750,000
  6. Diplomats = 265 missions; about 20,000 people

C) Estimate the value they might attach to avoiding a calamity and/or the cost to them for paying the company’s prices:

  1. Utility (assuming 1⁄4 workers are night shifts) = 30,000 x $6,000 = $180 million
  2. Prisons (assuming 1⁄4 workers are night shift) = 67,500 x $6,000 = $405 million
  3. Police (1/4 night shift) = 148,000 x $6,000 = $888 million
  4. Fire (1/4 night shift) = 275,000 x $6,000 = $1.55 billion
  5. High income (1/5 travelers) = 150,000 x $3,000 = $450 million
  6. Diplomats (assume 1/5 travelers) = 4,000 x $3,000 = $12 million

Total U.S. market size, excluding military = $3.5 billion 

Both technologies have large U.S. markets. But the sleep technology requires new sales channels to a fragmented customer base. The wound dressing, in contrast, would be sold to existing customers (burn centers; military; and hospitals) through existing sales channels. Because the customer base is considerably less fragmented for wound dressings, sales costs will exhibit economies of scale.

From a market acceptability perspective, the wound dressing dominates. Although it is early stage, it addresses a larger, existing market and uses existing facilities and personnel. The sleep deprivation market size is unknown and it requires new facilities and trained staff.

The attractiveness of both is diminished by their payment status. The wound dressing has no direct insurer coverage. If it costs more than existing dressings, it will be adopted only with substantial, costly evidence of cost, effectiveness and/or efficacy. The sleep deprivation technology is likely to be paid by its users and there is no evidence about their willingness to pay; but wound dressings, on the other hand, are already paid for.

On the other hand the direct payers who will pay for the sleep enhancing therapy are likely to pay more than the payers for burns, which are likely to be tight-fisted governmental military and fire insurers and Medicaid (because fires are more prevalent in low-income areas).

5. Regulatory Issues

Regulatory problems multiply when the black box is tightly shut, the science is a mile wide and an inch deep, and downside risks are substantial. Also enhancing the likelihood of difficulty in the regulatory process are the availability of alternative technologies and the seriousness of the underlying problem.

It is unclear in both cases whether the technologies will require regulatory clearance. Wound dressings are already widely used and the sleep technology is non-invasive. But, if the dressing were used as a new drug delivery vehicle, FDA clearance would likely be required. And, if the sleep device appears to alter brain function, the FDA will require evidence of safety and efficacy. (Medical device innovations that can be “grandfathered” because they relate to a predecessor technology are generally more quickly cleared by the FDA through the 510k process.)

While wounds and sleep disorders are serious problems, regulatory hurdles are likely to be more quickly overcome for a drug that promises to treat life-threatening diseases, like AIDS, than for either of these two technologies. Indeed, the FDA modified its clinical trials requirements and switched to accelerated approval with “surrogate markers” that test changes in a patient’s biochemistry instead of waiting for longer periods to test the efficacy of AIDS drugs or other innovations for serious problems [5]. Technologies with unmet needs for serious problems qualify for “accelerated approval” and/or “rolling review” under which the FDA reviews submissions as evidence is produced rather than waiting for an entire application.

6. Potential Competition from Other Technologies

Biotechnology may render the wound-healing technique in Case A obsolete through the development of an effective, controllable human growth hormone that promotes wound healing or the development of cheap, effective methods of growing and grafting human skin onto wounds. As for Case B, a drug may be or device may be discovered that safely and effectively regulates the sleep cycle. Presently, technologies competing with the wound-healing technique are at more advanced stages of development than those competing with the sleep deprivation therapy.

Consideration of potentially competitive technologies should embrace a broad range of alternatives. Although competitors are frequently defined as similar technologies, competition often emanates from products that use entirely different technologies from the one being evaluated. For example, endometriosis, in which excess tissue in the uterus causes infertility and other problems, was first treated with a major surgical procedure. The invention of new medical devices enabled much less invasive procedures through small incisions in the navel. But surgery will ultimately prove unnecessary if a drug eliminates the problem and invasive surgery may be made obsolete through non-invasive surgical techniques, such as ultrasound. Thus, the technological modalities used to treat the disease ranged from a scalpel and operating room equipment, to a new medical device to a biochemical compound. Sometimes, a new service may provide competition to the technology being considered. For example, widespread improvement in sanitation and personal hygiene would likely reduce the need for technologies that treat medical problems caused by lack of sanitation, such as Hepatitis.

7. Likelihood of Obtaining a Patient

Issued by the United States Patent and Trademark Office, patents grant property rights to the inventor, usually for 20 years from the date of application. Patents are granted for inventions that are “useful, novel, nonobvious” and feasible. Effective only in the United States, patents may be extended or adjusted on request.

Patents are desirable because they exclude others from making, using, or selling the invention. Large firms are alleged to use patent litigation to weaken innovators who lack the sizeable war chests needed to conduct legal battles. But small firms can prevail. For example, Dr. Bruce Saffran, an MD/PhD, won a $432 million patent infringement lawsuit against Boston Scientific.

There are three types of patents: design, utility, and plant. Design patents are used for “anyone who invents a new, original, and ornamental design for an article of manufacture;” utility patents are available to those who “invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof;” and plant patents are for someone who discovers, invents, or “asexually reproduces any distinct and new variety of plant.”

In 2013, the U.S Supreme Court ruled that naturally occurring human genes cannot be patented because they are a “product of nature,” meaning that they cannot be claimed as a human invention. But it also permitted patents based on laboratory reconstructions of human DNA, known as complementary DNAs, or cDNAs. The main impact of the ruling on diagnostics companies will be to make it harder to gain exclusive control of DNA information. Companies will need to do more work to nail down their intellectual property—such as by patenting primers, probes, and testing methods.

The strength of the sleep-deprivation patent will likely exceed that of the wound healing one because it is probably among the first patents for that use. Experienced lawyers in filing patent applications and, separately, in litigating patent infringement suits should be key members of the team commercializing a technology.

8. Production Considerations

Considerable difficulties frequently occur in the production of many medical technologies. Quality control problems in manufacturing drugs and devices, difficulties in producing a consistent and stable material in biomaterials production, and a variety of complications in scaling up the production of biotechnology products from the laboratory to a large factory have all occurred. For example, Genzyme, a Massachusetts pharmaceutical firm, was forced to delay distribution of an orphan drug because of repeated problems in manufacturing in its Allston, Mass., plant and in that of a contract manufacturing site. An FDA inspection found drugs contaminated with stainless steel fragments and rubber from vial stoppers.

The technologies in Cases A and B are unlikely to incur major production problems because they are composed of readily available items. In many other technologies, production considerations are more substantial. Key issues include: do manufacturing procedures already exist? Is sufficient manufacturing capacity already present? Has the scaling up of the technology’s manufacturing process been demonstrated? Do existing manufacturers have clean records with regulatory authorities about the quality of their manufacturing process? A “no” answer to any of these questions should be addressed to obviate potential production problems.

Conclusions

What are your conclusions about the two new technologies?

To my mind, the wound dressing dominates the sleep deprivation one because of its stronger financial prospects. While their market size is roughly equal, the sleep technology will require setting up entirely new sales force, marketing strategy, and facilities/personnel. It is thus financially riskier.

Although neither technologies pose significant downside risks or regulatory and/or production hurdles, the wound technology may require substantially more evidence of its clinical efficacy and/or cost effectiveness, thus delaying its commercialization. During this phase, existing competitors may pre-empt the market because the technology merely combines existing products. Strong patent protection is a key asset.

If I could invest in only one of these two, the wound dressing would be my choice. But if I could invest in a wide variety of medical technologies, these two would likely be superseded by new technologies that are more important in their clinical impact and more novel in their formulation and from which adopters more clearly benefit financially.

Caveat: The Limits of Peer Review

If I could invest in only one of these two, the wound dressing would be my choice. But if I could invest in a wide variety of medical technologies, these two would likely be superseded by new technologies that are more important in their clinical impact and more novel in their formulation and from which adopters more clearly benefit financially.

Some important medical discoveries were actively opposed by the inventors’ peers. For example, the promoter of the use of ether as an anesthetic was so reviled by his peers that he committed suicide. They ignored his immensely important suggestion, which subsequently greatly reduced the pain of surgery and ultimately, but belatedly, enabled the development of many surgical procedures. This sad story was more recently repeated with Judah Folkmann, an eminent Harvard Medical School professor, whose belief that cancerous tumors contained agents which encouraged growth of blood vessels in other tumors (angiogenesis) was so reviled that he resigned from his role as surgeon in chief of Boston Children’s Hospital and did not receive any National Institutes of Health grants for a considerable period. But, subsequently, his important observations lead to the development of Avastin and other important anti-angiogenesis agents.

Medicine is a relatively immature science. Unlike the physical sciences, whose science is so powerful that practitioners could predict the existence of and ultimately discover Higgs boson, the so-called God particle, medicine has few universally valid and proven laws. Although the science of biology became enormously more powerful as a result of the discovery of DNA’s structure, much still remains to be learned. Consequently, medical research is more subject to fads and peer pressure than other, better-established areas of scientific research.

It is thus undesirable to rely solely on peer review for technology assessment. To the extent possible, investors and managers must inform themselves about the technology and its potential and limitations as illustrated in the checklist in Table 1.

References

  1. Ziff Medical Devices Business Plan.
  2. For more on the design and conduct of such trials, see Regina E. Herzlinger, “ABC Pharmaceuticals,” HBS No. 193-168, Rev. April 2012 (Boston: Harvard Business School, 2010).
  3. For more, see Regina E. Herzlinger and Jo Elle Slurzberg, “Note on Health Insurance Coverage, Coding, and Payment,” HBS No. 313-042, Rev. 2013 (Boston: Harvard Business School, 2006).
  4. For more, see Regina E. Herzlinger and Charles C. Huang, “Note on Bundled Payment in Health Care,” HBS No. 312-032, Rev. 2013 (Boston: Harvard Business School, 2013).
  5. Food and Drug Administration Press Release, “New Rules to Speed the Approval Process of Drugs for Patients with Serious or Life-Threatening Illnesses such as AIDS, Cancer, and Alzheimer’s Disease,” Washington, DC, December 8, 1992.

Adapted from “Evaluating the Commercial Viability of New Health Care Technologies” (HBS No. 313-070, Rev. 2013, Boston: Harvard Business School Publishing, 2013) used in Prof. Herzlinger’s course and forth coming text book on Innovating in Health Care. Companion case studies which enable application of this framework include “ABC Pharmaceuticals” (HBS No. 313-041, Rev. 2013, Boston: Harvard Business School Publishing, 2013), “Medtronic: Patient Management Initiative (A)” (HBS No. 302-005, Rev. 2013, Boston: Harvard Business School Publishing), “Note on Health Insurance Coverage, Coding, and Payment Initiative” (HBS No. 313-042, Rev. 2013, Boston: Harvard Business School Publishing, 2013), “Note on Pharmaceutical Reimbursement in the U.S.” (HBS No. 313-074, Rev. 2013, Boston: Harvard Business School Publishing, 2013) materials used in her Harvard Business School MBA course “Innovating Health Care.” It is reprinted by permission of HBS Publishing.