The medical device industry is poised for a seismic evolution over the next decade with the emerging nexus of healthcare and AI-enabled devices that will fuel the next generation of healthcare delivery. Every stakeholder needs to prepare to think, operate, and be different, or risk becoming obsolete, says industry vets Alex Gorsky and Rick Anderson.
Visionary medical device industry thought leaders Alex Gorsky, former Chairman and CEO of Johnson & Johnson, and Rick Anderson, Chairman and Founding Managing Director of Revival Healthcare Capital, who have known and worked together for more than 20 years, recently shared their thought-provoking perspective on the seismic fact that the device and healthcare industry are at an unprecedented innovation inflection point. During a keynote panel at the recent LSI USA ‘24 Emerging Medtech Summit in Dana Point, CA, moderated by Roger Brooks of RBrooks Group, the pair explained that one critical factor for change is the exponential growth of artificial intelligence (AI). This game-changing evolution is already impacting the traditionally slow-moving healthcare and medtech space, with much still to be learned, but with repercussions that will be felt by every industry stakeholder. Challenging the conventional wisdom and rules of the road in the device industry will require players to think, operate, and fund differently, said the pair.
The two speakers called upon the audience of medtech innovators to understand that the integration of new technologies, namely AI, are already profoundly directing the future of the device industry and healthcare in game-changing ways. The powerful technological innovation, that includes machine learning algorithms, predictive analytics, artificial neural networks, cloud-based language and signal processing, data mining, and virtual simulation, is anticipated to go above and beyond the transformational reshaping that the world experienced three decades ago with the launch of the World Wide Web. The pace of investment in healthcare AI is also growing rapidly, from $20 billion in 2023 to a forecasted $188 billion by 2030, according to a recent report by KPMG.
But, the industry veterans also offered encouraging advice for innovators, on what they can do to prepare and elevate their funding game in the face of this unprecedented innovation. Spoiler alert: it will involve building new and different partnerships.
Gorsky, who served for more than three decades at the world’s largest healthcare company, Johnson & Johnson (J&J), including as Chairman and CEO, explained to the LSI ’24 audience that a new world has emerged at the nexus of healthcare and innovative new medical device and other technologies such as AI. “The shifts we will see over the next 10 years will eclipse everything we’ve seen over the last 35 years,” he predicts.
Anderson, Chairman and Founding Managing Director of Revival Healthcare Capital, supported Gorsky’s view by noting that in the past few years, the device space has reached the intersection where technology is meeting the unsustainable cost pressures of global health systems. Hospital CEOs are dealing with staffing shortages, fundamental cost structures increasing by about 35%, and other inefficiencies and crises that became vastly worse during the pandemic. And, this ever-more-challenging hospital environment will make things difficult for device manufacturers. Gorsky notes that meanwhile, device reimbursement goes up only 1%-2%. “Do the math on that, it just doesn’t work,” he says.
It’s apparent that the current trajectory of complex factors impacting the medtech and healthcare ecosystem, topped off by an aging population and increased prevalence of costly chronic diseases, is unsustainable long term. “Hospitals are having to rethink how they change the way they deliver care, while improving quality, monitoring the cost side, and utilize new tools in ways to help them become more effective, more efficient. Hospitals are not just going to ‘save’ themselves out of this challenging situation,” adds Gorsky.
But, the promise of innovation, and the inspiring people and companies involved, is like a bright beacon of light in this storm. Gorsky asked the audience to imagine if they were in the same room 10 years ago. “At that time, how often would we use the word ‘cure’ versus ‘treat’? Today, we’re literally on the cusp of seeing that,” he says. “Our ability to now go in and actually fix, repair, turn off, turn on, or certainly adapt, we never had that possibility.”
As the medtech ecosystem knows, he continues, this level of life-impacting innovation, increasingly powered by AI, requires a significant amount of investment and fundamental translational research, clinical development and regulatory oversight done in the right way, and a sound commercial infrastructure to make it work.
“Therein lies one of the biggest challenges, because you’re going to see demand increasing, you’re going to see an explosion of new science and new technologies, where the bar around reimbursement, clinical differentiation, and costs, is going to be higher because of the pressure in the system,” says Gorsky. “At the same time, when you look at the potential outcome that we have with this innovation, it’s quite significant.”
Anderson described that this pressured environment, and the advent of game-changing technology like AI, is creating opportunities to fund extraordinary technology in a different way.
“What’s emerging are strange bedfellow partners, in the way that we think about innovation, with the tech that’s coming from outside of healthcare that’s going to impact the healthcare space over the next 10 years, to Alex’s point,” he says. “I think we’re at this beautiful new era, where there’s going to be a tipping point in the way that we do it as compared to the traditional venture capital model of Series A, Series B, and so on.”
He notes that the majority of innovation in device and diagnostics is incremental, and it always has been. His view is that the market is going to bifurcate into incremental and transformative technologies. “You’ll have truly transformational enabling technology, that’s smart, delivers incredible patient benefit, but also has an economic storyline, and payers are already embracing that,” he says. (Digital health and AI technology are prime examples; for details see LSI’s recent market report, “The Global Digital Surgery Technologies Market.”)
“And we’re going to have transformational business models to support that. I think it’s a challenge, but it’s also a huge opportunity,” he continues.
Gorsky notes that some of these disruptive technologies take $300 million to $400 million in investment over five years, while large mergers and acquisitions (M&A) are quite challenged in today’s environment. “It will take a different way of thinking about funding to get there. There can be other ways to collaborate and help innovative companies achieve that goal, knowing in particular that some of these new technologies are no longer just a $25 million or $30 million program,” he says. “But, I would submit to you that these new technologies such as AI are going to be fundamental to breakthroughs in biopharma and medtech, in a very important way, over the next 10 years.”
One innovative and collaborative funding model that Anderson cites is a build-to-buy strategy and a pre-negotiated exit. “Imagine a world as a small company where you and your investors knew five years from now what your exit will be. You don’t have to raise money during the next five years, you’re just driving your company to success, for transformational technology development,” he says. “It takes that kind of focus and effort to bring technology to the market more efficiently, more effectively, than the traditional way that we do it today. There are emerging partnerships happening between strategics and investors, where investors put the money in for the next five years in a thoughtful way, with a pre-negotiated exit. Would it not be better to partner earlier, using private capital, plus the strategic capabilities, plus the entrepreneurial spirit, with the operating tempo of a startup company? That’s different than the way we’ve done it in the past,” he continues. (An example of this type of venture model is Ajax Health, which in December 2023 established Cortex, an atrial fibrillation ablation technology company, with a $90 million investment led by KKR and Hellman & Friedman.)
Gorsky notes that importantly, the quality of the partner for innovators to consider in this scenario is so critical. “Frankly, that can sometimes supersede just the dollar signs,” he says. “What do you bring to the party, are you going to add value in other ways that are ultimately going to help accelerate our team? Does my team trust you, or is it a constant back and forth negotiation on each and every decision? Are we actually collaborating, both with skin in the game, with clear milestones that we’re working on together in a very collaborative way trying to achieve? Those are the kinds of partnerships more than ever that we’re in, where we both win, or perhaps we don’t, but we will have learned a lot through that partnership,” he continues.
Anderson explains that the CEO of a small company that wants to be part of a build-a-buy relationship with a large strategic like J&J or Medtronic, for example, their tasks are different. “They still have to drive their agenda. But they’re doing that, because they know we’re building a company, a technology, a healthy market, that we’re going to put into their bag five years from now. That takes an entirely different thought model, than the traditional one where small companies are running as fast and as lean as they can,” he says.
As they wrapped up the keynote session, Gorsky and Anderson both offered poignant food for thought. “If all of us in this room, you and your companies, aren’t thinking about how do I build those skills, how do I build those capabilities, beyond what has traditionally been seen in the medtech world, you may have a nice little runway of about three years, but, I guarantee in 10 years, it’s going to change dramatically,” says Gorsky.
“Enabling tech will become the focus of medtech 10 years from now, as compared to hardware implants and all that stuff,” adds Anderson. “So if you’re working on a ‘dumb’ device, that’s not connected or communicating, that you plan to bring to the market 10 years from now, you’re probably going to have a difficult slog. Looking at our future, I’m excited about the possibilities for our space, because we’ve got this convergence between healthcare and advanced technology like we’ve never seen before. We should be enablers of that. We should not try to fight it, we should lean into it, to enable the next generation of healthcare.”
Alex Gorsky served for more than three decades at the world’s largest healthcare company, Johnson & Johnson (J&J), including as Chairman and CEO, and Executive Chairman, before retiring in 2022. He currently sits on the boards of Apple, IBM, JPMorganChase, NewYork-Presbyterian Hospital, and the Travis Manion Foundation, as well as the Wharton School of the University of Pennsylvania Board of Advisors, among other advisory roles. Under Gorsky’s leadership, J&J’s market cap grew from nearly $180 billion to more than $470 billion. Gorsky graduated from the United States Military Academy and received an M.B.A. from the Wharton School of the University of Pennsylvania.
Rick Anderson, Chairman and Founding Managing Director of Revival Healthcare Capital, has nearly 35 years of senior executive leadership experience in the device industry. Prior to founding Revival, he served as Chairman of the Board and CEO of ConvaTec PLC, Managing Director at PTV Healthcare Capital, Company Group Chairman at Johnson & Johnson, and Worldwide Franchise Chairman at Cordis Corporation, among other U.S. and global board leadership, sales, sales management, and marketing management roles. Rick holds a B.B.A. in Marketing from Mississippi State University, and he served five years in the U.S. Army, where he obtained the rank of captain.
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