Medical Devices — what does great look like?

One of the frameworks we use at TDM is what we call “ Good, Better, Best” and thanks to Jess Bell-Allen, the below video is going to time walk through this framework as it relates to medical devices.

This framework has dual purposes. Often we will share them with portfolio companies to help shape their strategic thinking, but often they are produced in industries we might want to be building our own capability and muscle on. We make investment decisions collaboratively and as a team, and so often as generalists, these frameworks really help not only get people up the curve on an industry or business they might not know much about, but also allow for a better discussion as opportunities arise.

In this case, Jess did a deep dive on medical devices, and under this framework as you will see, it is really easy to get a sense of what are the key ingredients that go into making the good and importantly great companies of the category globally.

If you prefer to digest information more visually, below is a abridged transcript with key slides included;

Ed: Let’s dive into medical devices and here Jess really is our resident expert and drove this piece of work — to start with let’s peel back a layer and how based on your research, you’ve identified a common platform for assessment of great medical device businesses.

Jess: We look at healthcare, consumer, technology and something that we love about medical devices in particular is that we’re seeing a real convergence towards effectively the epicenter or the intersection of those three circles of competence. A lot of this framework that we’ll run through highlights this. The focus was on looking at a range of case studies within the space, those that are performing particularly well or perhaps not so well, to try and identify and understand the key contributors to success and develop this framework that we can then use to assess and look at medical device companies as we build out and continue to bunker down on our domain expertise in this space.

What we were able to identify is these four key buckets, depicted in this fly wheel type format

1/Product development and technology
2/Access — how easy is it for the patient to get their hands on this device.
3/Education — includes the point of view of the patient and physician, the clinical side and also payers and regulatory bodies. Within the healthcare space, there are a lot of people within ecosystem that you have to consider in developing these devices.
4/Go-to-market — how you communicate and get in front of your consumers.

Ed: Is it worth touching on just why you’ve depicted it as a flywheel?

Jess: They’re not necessarily discrete separate items and they all feed into each other as well as enforce each other, but it was our best attempt to categorise and pull out these key elements.

For example, let’s start with product development and technology. The better device you have and data you can extract from that, the better situation or evidence you have to go forward to regulators and payers to get better regulatory and reimbursement outcomes, thereby improving access for the patient.

A big piece of that too is education, so leveraging that data appropriately and getting the education resources out there for all parties within the ecosystem. Then also creating and shifting with that towards a model that’s more direct -to-consumer given that patients these days are more empowered to inform themselves of their own treatment alternatives with the access to all this information out there. So how can you leverage that to have this direct one-on-one and ongoing relationship with the consumer? Once you have that, you can then, in turn, feed that back into product development and technology because you can access those patients, learn what they like or don’t like about the product or the device, and use that to inform ongoing development.

Ed: There are obviously some really key metrics and data points that each of these four buckets have. And the purpose of our “what does great look like” framework is to go into each of these more deeply, and we will do so. To lay a baseline, I’d love to get your view on the five category leaders, and a quick snapshot for reference.

Jess: We identified medical device players that we were familiar with, had been following for a while at various stages of maturity and also very stages or degrees of success that they’d experienced. But I think the key thing underpinning our decision here really speaks to the concept of “one mission, one platform” — all of these devices are essentially singular device companies that are really addressing one particular cause. Let’s quickly step through them.

Dexcom are a leader in the space of continuous glucose monitoring. Diabetes patients at the moment are users, but you can see down the line how everyone could effectively become one.

Align Technology’s Invisalign system has had incredible success there and most would be aware of the product

iRhythm is a wearable device and what they’re doing is continuous cardiac monitoring, redefining the way cardiac arrhythmias are diagnosed and reducing the burden on clinicians.

Tactile medical is the leader in the development of at-home therapy devices for the treatment of lymphedema. What they’re doing is interesting in that they’re taking away a lot of the friction for the patient by having to visit a physician frequently for massage and draining of the lymphatic systems, rather than now with this device, they can sit at home and do that themselves in the comfort and privacy of their own home.

Inogen is a market leader in the development of portable oxygen concentrators — delivering oxygen to those with oxygen deficiencies in a means that’s much easier to get around rather than carrying around a mask and a big oxygen tank.

Ed: Let’s get into this because what in fact, great does look like across these four buckets is fascinating. Let’s start with product development technology.

Jess: Product development and technology is an obvious place to start especially given that we’re looking at medical devices which are fundamentally about the product and the tech within the product. What we’ve seen in more recent years is that there’s been this real evolution away from purely dumb hardware to this ecosystem of both hardware, software, and data and analytics and creating a holistic device that really caters to the full journey of the patient.

We identified these five main areas of product development and technology; Continuous innovation, meaning continuously innovating on what that product looks like. Here we’re probably speaking more to the hardware, making that more usable, more user friendly and leveraging that stakeholder feedback to inform innovation. Great companies in the medical device space are really good at tapping into that such that the product is consistently catering to the needs of the patient.

Next software and data analytics are really, again, building out that ecosystem, creating those actionable insights, which benefit all the stakeholders, whether that be the patient, the physician, the payer, the medical device company, themselves, and the device and data security to ensure patient privacy. This then feeds in again to this idea of the consumerization of devices, which speaks mostly to leveraging the hardware data, software, and analytics, but also the connectivity. This means the ability to look at the results that are being reported out of your device on a mobile phone, your iPhone, your apple watch, just in a means that’s very interactive throughout most points of your life. What this fundamentally results in is a high level of R&D expenditure.

You see, particularly in early stages, that R&D as a percentage of sales for these companies can be up to 20% on average for a long period of time, as they continue to invest in these developments. Some of the efficiency that then comes through is in digital manufacturing where, by focusing on better automating and catered to mass production, the medical device companies can reduce gross margins and then leverage that to invest in further.

Ed: They’re all interlinked to some degree. It’s not viewing these in isolation.

Jess: The best way to look at it is through this Venn diagram:

You have hardware, software, data, and analytics, and everything else plays around that, but really the best medical device companies are operating at the center of those three circles and adopting the mentality of being a digital technology company operating across all those three things.

Ed: It’s a really interesting diagram and it reminds me of what the best consumer device companies have done. Many people probably have had no touch points with a medical device, so to speak, but the consumerization that you’ve already talked to, whether it be an apple watch or a whoop, they all wearing, or a continuous glucose monitor that I’ve got on, you can see how this framework is really attached to each of these successful companies.

Jess: Dexcom have done a phenomenal job of that whereby rather than just saying we do continuous glucose monitoring, they’ve being really thoughtful of the ecosystem and the products they can build out around that to create this really great customer experience.

Historically if you’re a diabetic, you have to prick your finger every couple of hours, draw blood, test that, which is an incredibly non-user friendly, non-patient friendly experience. To be able to develop a device with connectivity to your iPhone is consistent with the broader consumer desire to track what we’re doing and how our health is performing and broader wellness throughout life. This is really a trend that these medical devices are following such that you now have users that are not diabetics that are using products such as the Dexcom CGM. You can see how that then unlocks a number of markets for these types of medical device companies.

Ed: It’s probably worth touching on, and you’ve mentioned it a couple of times, the level of R&D over time, because it is a really key metric to look at.

Jess: That’s right. I think obviously we’re getting used to seeing high R&D spend levels having spent a lot of time in tech investing, so it’s not something we’re unfamiliar with. However, it’s not always something that is very favorably perceived by Australian markets who are perhaps a little more risk averse. With these devices, however, if you want to invest to create best-in-class medical devices, you have to really invest in R&D. You can see historically in the chart below that 10 years ago Dexcom were investing almost 45% up to close to 50% in R&D.

That’s obviously tapered over time as they’ve achieved efficiencies and matured, but you can see that at the earliest stages of their development, these companies are spending a lot of money in R&D. While this is at the sacrifice of margin or profit, it really sets up for growth further down the line.

It’s this weird negative that you operate in for a period of time, but a fast inflection and uptake on your revenue growth further down the line, given that you have that early R&D investment, you built the muscle for that continuous innovation and continue to improve on it and gain efficiencies.

Ed: Seeing these two visually really reminds me of software investing.

Jess: Absolutely! Healthcare and medical devices in particular are really a confluence of all our learnings from the software and technology side and the consumer side and we’re really seeing this come through. What’s interesting is that given the complexity of regulation and the fact that you do have a number of customers being the payers, the physician, the patient, that uptick and pick up in your revenue growth on the back of early investment comes a little later down the line.

Ed: In terms of product development and technology, here is a quick peer comparison:

Jess: Looking at Dexcom and Align, they’re pretty much all green. Both of them have done really great jobs in terms of this continuous product innovation, building out that software and data analytics, the ecosystem, connectivity. You can see this in their patents, Dexcom has 566 and Align has 951. If you look across the rest of them, they’re much lower. They’ve really invested not only in R&D, but in protecting it as well which reinforces their lead there too.

Ed: The second bucket is access. Again, I think it’s worth just having that high level information as to what does great access look like.

Jess: We talked before about how the buckets weren’t necessarily discrete. I think access and go to market are the two that are probably most difficult to pull apart. In regard to access, what we really try and focus on is how easy is it for the patient or the physician to get their hands on this product? A lot of that really does come down to the relationships with payers, which are the insurance companies and the reimbursement strategies and the teams and resources that these medical device companies build to position themselves well to have favourable reimbursement policies such that patients can afford the product.

Some of the biggest challenges in these spaces is that they’re complex medical devices that have, as we’ve seen, taken a lot of R&D to invest in and develop, so they’re expensive and so this reimbursement piece is really important in terms of unlocking access to patients. Finally, it’s about how do these companies think about not only getting the device in the hands of their patients, but tracking the patient journey as well?

Ed: Could you provide an example of a business that has provided great access to their product?

Jess: Tactile Medical have done this incredibly well. What really stands out is that they’ve had consistent strong reimbursement engagement from payers and this is really a function of having a large team — there’s over 100 people in their reimbursement strategy team and they’ve got relationships with over 1000 payers. They’ve really focused on being super knowledgeable and engaged and knowing who these payers are so that they can position themselves best to continue to gain the reimbursement levels they need such that their patients have access to the product.

They’ve got a payer relations group, which is more the relationships with insurance and then a reimbursement operations groups. This is a US company and it’s hard sometimes here in Australia to wrap our heads around the complexity of the US system. We talk about wanting to take friction out of the patient experience and the US system puts a tonne of friction in. This in-house reimbursement group at Tactile have taken that on and said, we want to limit the friction as much as possible so that the ultimate end patient experience is as frictionless as possible. They take on and carry out a lot of the reimbursement process from initial order to final bill, including all the paperwork, insurance, verification, authorization. They have a whole team that does that rather than laying the burden on the physician and the patient, which really drives greater adoption.

Physicians are going to be more inclined to prescribe this device because it’s less work for them and patients are going to be happy to adopt it because it’s less work as well. The relationships they have with these payers have obviously really helped them to be able to execute on that. They’ve got an 85%+ approval rate for their patients in getting approval for funding for their product.

Ed: This really plays into customer experience, one of the foundational stones that we talked of right at the top in terms of what the great companies across any industry look like.

Jess: Exactly right and I think that’s hyper complex in medical devices and the healthcare space given your customer is multifold, it’s not just the end patient. That’s what these great companies do. They really build up the resources, understand the system, have people on the ground, have the relationships and that really is what positions them well to be able to provide access.

Ed: Yes, That’s a wonderful insight. Again, let’s just whip around a quick peer comparison across the five medical device leaders and how they stack up when it comes to access.

Jess: Dexcom is an example of best in class for patient access. What Dexcom have been doing recently is pursuing the pharmacy channel. Previously they went through a classic medical device channel in the US known as the DME channel, which is far more burdensome from a paperwork and regulatory perspective. By opening it up to the pharmacy channel, they’re making it a lot easier for patients to get access. In regards to reimbursement achievements, Dexcom again, has done well in terms of positioning themselves there. Another piece is that there are medical guidelines which define what devices or treatment options are presented to patients. If these medical device companies can do a good job of informing the ecosystem of the benefits of the product and really building in and pushing for it to be a first line form a treatment, then again, that’s going to improve access for the patient and fundamentally, then it all really boils down to affordability. Affordability can be a particularly challenging one when you’re dealing with expensive devices. But again, and consistent with the theme of what we’ve been talking through where everything feeds into each other, that’s really contingent on reimbursement as well.

Ed: A massive piece of the puzzle for all these medical device companies is education, which we often associate with biotech companies and clinical trials. How does education fit into this framework when it comes to devices?

Jess: I think education is really important when it comes to medical devices.

Gathering real-world evidence and matching up new devices against existing forms of treatment and proving that it’s a more effective and better patient experience is really important to drive, not only patient adoption, physician adoption, but again, those regulatory and reimbursement outcomes. If you can prove that the device is more favorable and is going to be more broadly used, then everyone’s more willing to engage with it.

Ed: This must be hard for these medical device companies.

Jess: Yes, really hard because research is expensive. Again, this ties into your R&D, but there are creative ways that some of these companies have gone about doing that. It’s not just the research side, it’s the advisory boards and the KOL (Key Opinion Leaders) and being really thoughtful about that network of high profile people with experience in this space who can really influence in a one to many fashion and push the product and the education.

Ed: Let’s touch on a best in class case study when it comes to education.

Jess: Align have been really thoughtful about bringing that education to the ultimate prescribing physician in this case, the orthodontist or the dentist, very early into their journey. One thing they do is these research award programs which as a first step is leveraging universities and people studying to bring awareness to the product, but also creating a bigger volume of data around the way it’s performing.

What’s most interesting is what they’ve done in terms of creating a module on Invisalign in university orthodontic programs so that these orthodontists are coming out to practice already trained and informed and well versed in the Align product and what it does.

Ed: So Jess, just like previous categories, let’s just have a quick peer comparison whip around when it comes to education.

Jess: What first stands out to me when I look at this is the amount of red, which just really speaks to how challenging it is to build up this body of research and evidence and provide access points and touch points for education. Both Dexcom and Align have done quite a good job here. We’ve touched on how Align have inserted themselves early into the physician education journey but I think what’s particularly interesting as well with Dexcom is that not only have they done the clinical evidence piece to prove out the product and the way it works, but the economic evidence. This can be really important again from the reimbursement standpoint, because by proving that the device not only has better outcomes for the patient, but a more economical outcome versus other alternatives is obviously a favourable data point to put in front of these payers that are covering the cost of a lot of these devices.

Ed: As often is the case, it’s easy to touch on what people are doing well, but let’s to go straight down to Inogen, what’s been the friction for them to succeed in or around the education piece?

Jess: It’s hard to say because they’ve got more peer reviewed clinical studies than any other provider in their space, but it’s a particularly challenging space, being the portable oxygen concentrator space. ResMed more recently dropped that piece of their business because it was uneconomical. Part of it is insufficient education. They haven’t built out the muscle and the resources to execute on that and so they’re not really getting in front of early stage physicians and they haven’t been able to build those proponents for the product from the advisory board or KOL standpoint. While they have this great body of clinical evidence, the economic piece is perhaps lacking, and that’s what’s made it more challenging from the reimbursement side of things.

Ed: It’s worth reflecting that under affordability and access, Inogen had a big red circle as well and so those two are certainly interlinked.

Ed: The last piece that we want to touch on here is the go to market. What does that look like for these great medical device companies?

Jess: Consistent with the theme we’ve touched on, go to market is really evolving in the same way as consumer businesses. Fundamentally, it’s meeting the patient where they want to be met. Do they want to consult a doctor because that’s traditional and comfortable and makes you feel like you’ve done all the right things and tick the right boxes, or do you just want to go pick it up at the pharmacy, which is the route Dexcom are now taking? Being cognizant of your patient, your patient cohorts and segments and geographies, and being mindful about where they want to get the product, marketing to them in that way and building up that direct to consumer awareness is really important too. We’ve seen a lot more of that with this theme of greater patient empowerment in their treatment outcomes. You now have patients coming to doctors saying they want a Dexcom device, and that’s because they’ve done such an incredible job of marketing direct to the patient, as best in class product.

Secondly, with strategic partnerships, as we’ve touched on, it’s a really big ecosystem. As these medical devices venture more into the tech and connectivity space, you’ve got the big players like Apple and Google, doing a lot in this space too to push this health and wellness agenda. Some companies have done a really great job of being mindful of that and plugging into that and I think that’s the way to go — to be an ecosystem player with your one mission, one platform focus, and plug into the rest to build this more holistic approach rather than try and cover everything.

The last two areas are really just being mindful of integrating your customer feedback into product and development, which is part of the circle we touched on earlier. Something that I think is really important, and this again, is something Dexcom has done really well, is this patient community piece. How do you get your patients and build that consumer love that you see for a lot of consumer products? How do you do that such that your patients are going out and espousing the product? It’s effectively free marketing for you.

Ed: Putting that consumer hat on, it’s almost the exact same playbook as Lululemon.

Jess: Absolutely. This is where I get most excited about medical devices having done perhaps more in the consumer space historically, is that you are really seeing this convergence. It’s no longer an excuse that the healthcare space is antiquated and behind. They have no choice now, but to step up and meet the consumer expectations that they’re experiencing in all industries, because that’s just what we expect to get today.

Ed: There’s a consumerization of medical devices as there is in the enterprise SAAS. Dexcom is the clear leader here as you’ve touched on.

Jess: Yes, I touched on this pharmacy channel unlock for them which is something they’ve been pursuing more recently and view that as a potentially quite large channel down the line. It just removes a lot of that friction of the patient experience.

You can see in the chart above, through the DME channel, it’s three to four weeks to get the product while through the pharmacy channel, it’s one to two days and so people like non-diabetics can easily access these devices now, and it’s completely broadening their perspective patient base. For the people who desperately have to use it every day as part of their treatment as a diabetic, they can now pop out to the pharmacy rather than having to run through this DME process.

Ed: Let’s now touch on Align who have also done this really well. When I think of Invisalign, I think of it as a D2C company.

Jess: They’ve done an unreal job. The whole experience is quite brilliant in that you have a platform you can log into that monitors the movement of your teeth.

They’ve been really incredible in bringing the patient in and then retaining them throughout the entire patient journey, such that the patient is consistently having this one-on-one touch point with Invisalign.

Ed: This probably plays into that very first slide that we talked about in terms of product development. That’s a great use case for data and analytics, meeting software, meeting hardware for the consumer on a minute by minute basis to interact with.

Jess: Exactly. If you think about their product in a grossly simplified way, it’s effectively a fancy mouth guard. There’s only so far you can go with the hardware and then you effectively hit a point where the innovation really has to be around that consumer engagement, the software, the data analytics, and how you engage the patient in that ongoing patient journey.

Ed: The last peer comparison whip around what are your key takeaways here.

Jess: Again, Dexcom and Align have done an incredible job. You can see too that the SG&A as a percentage of revenue doesn’t necessarily have to be high. If you pursue these direct to consumer strategies, there’s of course going to be some investment, but what you get is that the patients keep coming back to you without you having to invest in bringing them back. What’s really allowed Dexcom to have that low SG&A spend is that they’ve built this patient community called Dexcom warriors, which are users of the Dexcom continuous glucose monitor who loved the product and have signed up to be effectively ambassadors for the product. Nick Jonas is one, he’s a celebrity, but most of them are everyday people. It’s free marketing for the product and they’ve been able to really engender that patient love such that people are going out and doing that of their own accord.

Ed: Boil this all down for us Jess and summarise the key takeaways

Jess: We went through a lot of content and as you go through it all, it feeds into each other so it can be hard to desegregate and pick and choose what pieces are fundamentally most important. If we wanted to very simply run through the key factors for success for these medical device companies, it fundamentally boils down to the following:

Continuous product innovation is incredibly important and informing that innovation around evolving stakeholder needs and wants and employing best in class technology is what you need to do to be a leading medical device company. But you can have the best device in the world, if you don’t have effective distribution, if you don’t have the regulatory relationships, the reimbursement and the channel set up to meet the patient where they want to be met, you’re going to face challenges. If we look at maintaining a defensible position as a leading medical device company, you really have to have both that continuous product innovation and effective distribution, so you have the best product in market and the patients can get access to it pretty easily.

If you enjoyed this, you might want to check out some other TDM insights. The best place to find them is on our website, or across our social channels. We’ve just finished another series of our podcast ‘Scaling Up’ and interviewed some incredible guests. You can subscribe to that on Spotify or across other podcasting channels.