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How low can you go? Creating value with cheap medical devices

7:51 am by | 0 Comments

In the world of high tech gadgetry, consumers are spoiled by the practical implications of Moore’s Law, namely that processing power doubles in 18 months at the same cost. Today’s $500 iPhone packs the same computing punch as did all of NASA’s computers combined back in 1969. The relatively low price tag for powerful computing has expanded the market for personal electronics such as smart phones and iPads to the global middle class, endangering pedestrians and annoying commuters around the world.

With all of the electronics embedded in medical devices, one might expect Moore’s Law to reign over med tech, too, but this is not exactly the case. In some mature device product categories, such as pacemakers, prices are indeed being forced down (but only incrementally). This is primarily a function of increasingly frugal purchasers and intense competition than the availability of ever cheaper components.

In a presentation in Davos at the recent World Economic Forum, Medtronic CEO Omar Ishrak threatened to disrupt his own pacemaker business by developing a 10X cheaper version with the same basic functionality (Moore’s Law in action). It is too early to say whether Ishrak, seeing cheap competition looming, is taking a “if you can’t beat ‘em, join ‘em” approach, or whether he’s sending subliminal “we will crush you so don’t bother” signals to potential low-priced market entrants. Or maybe Ishrak believes Medtronic can contain these low-cost devices to their burgeoning emerging markets business and not cannibalize their existing sales to resume top line growth. Time will tell.

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Medtronic may be able to play the price disruption game, but we ask ourselves whether the small emerging med-tech company can achieve success (and funding) with a “tons cheaper” value proposition. In theory, any company starting fresh with design and manufacturing should be able to take advantage of Moore’s law in a way that the big guys with vast installed bases and capital investments can’t. The opportunity for success is there, but not every company or technology is cut out to win at price-cutting.

For med-tech entrepreneurs out there considering the price disruption route, we have developed a little self-scoring quiz to help you determine your chances of success. Simply answer Yes or No to the following questions:

1. Is your device dramatically cheaper than alternatives? Not 10% cheaper, we are talking 5-10x cheaper. A little cheaper gets lost in the noise, and entrenched players can easily play your price game and win. You might as well price 10% higher and make your life easier.

2. Does your technology open up a substantial new market? Remember if you are 10x cheaper you just shrunk the existing market by 10x (e.g. a once attractive $300M market is now a non-fundable $30M market), not to mention the difficulties of dislodging an entrenched competitor. A new market might be geographic, for example developing countries; read about Daktari Diagnostics doing just that in a previous S2N blog. The home market is also a pie-expanding opportunity, for example NxStage Medical’s home hemodialysis technology.

3. Can you get to market on a lean capital diet? If your target market is the US and the regulatory path is PMA, which on average costs $75-$100M to obtain, then better to stick with the high-unit-price approach to building the billion dollar market opportunity you will need to have in your roadshow presentation to raise money.

4. Do you relish the idea of running a commercial entity? If you are a price-disrupter chasing new markets with your low-cost gadget, chances are good you will have to demonstrate not just technical and clinical effectiveness but also market effectiveness. Imaging is an area ripe for Moore’s Law inspired disruption, and companies like MobiSante are out there trying to prove customer demand for dramatically smaller and cheaper equipment. Check out their cool smart-phone based ultrasound device.

Now for the self-scoring: “Yes” answers are worth 100 points, and “No” answers are worth zero. If you don’t understand the question, you get zero points. Add up all your points. The grading curve is very hard; a perfect score of 400 can still fail, but at least you have a shot.

S2N co-founder and techno-geek Tim Kofol contributed to this article.

[Photo from Flickr user cdsessums]

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Amy Siegel

By Amy Siegel S2N Health

Amy Siegel is the co-founder of S2N Health, which provides emerging med tech companies with business strategy and marketing services to support successful fundraising, partnering, product development and commercialization. Amy brings 15 years of med tech strategic marketing and business development experience to S2N Health, having held VP roles in two emerging med tech companies and consulted for dozens of large and small healthcare companies and investors with the firms Health Advances and Monitor Company. Amy earned her B.A. and M.A. from Tufts University.
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