In their article “Disruptive Technologies: Catching the Wave”, Bower and Christensen argue that incumbent firms have difficulty commercializing new disruptive technologies that initially appeal only to a limited number of customers. Incumbents may not be able to effectively identify the next generation technologies, nor develop them properly, because their firms are aligned to serve the needs of their existing customer base. The model asserts that new entrants are better positioned to develop rapidly the new technology, bringing it to a level of maturity that ultimately allows the new firm to address the mainstream customers of the incumbent firm, effectively overtaking the latter in their own markets. However, the medical technology industry challenges this model and the advantages it bestows on new entrants.
While incumbents stay operationally close to their mainstream customer physicians, as Bower and Christensen propose, medical technology firms do spend considerable strategic resources on a small minority of visionary and key opinion leader physicians. These firms recognize that the physician community is conservative in its adoption of new technologies, and that the evolution of patient care is initiated at academic medical centers before diffusing into the mainstream community, a process that can take 7-12 years. I would therefore contend that firms are adept at observing the emerging clinical trends, one of which may spark the next disruptive innovation. Whether a firm is organizationally capable of taking a calculated gamble and investing directly in one or more of these new technologies will ultimately depend on the culture and risk profile of the firm. Overall, though, I believe that, in the medical technology industry, the incumbent firm will worry less about being unseated by a new entrant, largely due to the significant entry barriers in this heavily regulated industry.
By definition, disruptive innovations in health care correspond to technologies for which there are no substantial equivalents. Therefore, companies must seek regulatory approval from the Food and Drug Administration (FDA) using the Pre-Market Approval (PMA) application process. Applicants must demonstrate the safety and effectiveness of their device for each specific clinical application (“indication” or “intended use”) using bench-top, pre-clinical (animal) and clinical (human) trial data.[1] This clinical trial work, per indication, can easily add three to five years to the already committed technology development time, at additional cost of $10-20 million per year.
Assuming that a firm was to obtain regulatory approval, it would then need to generate evidence to convince the Center for Medicare and Medicaid Services to issue a billing code for the new procedure and the third-party payers (e.g. Medicaid, private insurance firms) to reimburse physicians for performing the procedure. A positive coverage decision from insurers can easily take several more years for disruptive technologies, which are likely to be more costly, yet lack the long-term outcome evidence justifying their use over the cheaper existing methods. While a small venture-capital backed firm may have the financial resources to execute these steps, they will lack the experience and tacit knowledge required to successfully maneuver through the, often bureaucratic and political, regulatory and reimbursement systems, let alone scale-up for full production and distribution. Similarly, the new entrant’s financiers will want to see a return-on-investment on a time horizon which is shorter than the time needed to reach the mass market.
In contrast with Bower and Christensen’s example of the computer industry, the factors presented here pose significant entry barriers – in cost and time – for new entrants in the regulated health care industry. Time affords incumbents the opportunity to respond competitively. On the other hand, new entrants’ inexperience in navigating these obstacles, coupled with their investors’ desire to cash out, increases the probability that an incumbent, with the experience to commercialize the new medical technologies will take the opportunity to become a strategic partner, or owner, of the new entrant, as its disruptive technology matures and starts to threaten the incumbent’s existing technology markets.
[1] A. Yustein, “The FDA’s Process of Regulatory Premarket Review for New Medical Devices.” Gastroenterology & Hepatology Annual Review, Vol. 1, June 2006, p.142-144.
Uncategorized innovation, medtech
. I am really enjoying his analysis of our new (early 2000′s) economy; Professor Reich does a great job explaining how the things that we love as consumers — like the great deals we’ll get tomorrow on Black Friday — end up affecting us as the workers that make these products. If you wonder why you work harder in today’s technology-enabled society, you may also enjoy this book.
