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The next 10 years in MedTech
Ron Dollens, former CEO and president of Indianapolis-based Guidant Corporation, has recently been appointed to 3i’s venture capital advisory board. iSIGHT talks to 3i’s newest board member about investment trends in the medical technology sector, significant industry developments and his views on the future of the US healthcare sector.
iSIGHT: The medical industry is cyclical when it comes to mergers and acquisitions, regularly going through periods of frantic consolidation activity followed by languid lulls. How would you characterise the current mergers and acquisitions (M&A) climate?
RD: There has been a huge amount of incremental cash made available to the domestic life science industry, with the one time encouragement to repatriate foreign profits at a substantially discounted US tax rate. That financial flexibility will be seen as a great asset as companies evaluate growth alternatives, especially acquisitions, in this climate of slowing organic growth due to pressures across healthcare systems globally.
If one looks at the pharmaceutical companies with US Medicare pricing pressures, large uninsured patient population and expiring patents, they will need to more aggressively evaluate growth from M&A activity, and possibly re-evaluate where medical technology fits within their portfolio. You can control your own destiny with organic, internal growth, but when you look at how much pharmaceutical companies have spent on clinical trials and the development phase of compounds, there is proportionately less basic research going on today than in the past. They are becoming more dependent on strategic relationships, such as with the biotech firms, for truly novel therapies.
iSIGHT: How important are private equity firms as financiers and architects of mergers and acquisitions?
RD: I aggregate private equity and venture capital together into a risk capital pool. The situation that the life sciences industry – both pharmaceutical and medical technology – has put itself into is an absolute dependence on the private company for growth. Most of the scientific breakthroughs are coming from early-stage emerging companies. The larger companies are not putting much of their own capital at risk, but will pay a premium to acquire a company once the product or therapy becomes proven.
The competitiveness of the life science sector depends on expertise in product approval through the regulatory bodies, and ones ability for market development and product promotion. The major players seem to have identified the most consistent aspects of success; designing and implementing clinical trials, blanketing the industry with salespeople, market development and limitless manufacturing. Scale is much more predictable than breakthrough science.
iSIGHT: What do you believe are the key drivers of investment in medical companies right now? Which segment is the hottest?
RD: If you’re asking which segment has the greatest chance of success, it comes down to the greatest clinical need. The more critical the condition, the greater the incentive there is to innovate. The second factor is the pathway between the physician and patient. Does a new product or therapy work within the same pathway or does it require a new one to develop? If so, that adds to the risk. If it works within the same pathway, it’s more desirable.
The harder question is the payment system: does it encourage new therapies to come forward? When angioplasty was developed, the fact that the patient could continue to see an interventional cardiologist before going to the cardiac surgeon was hugely important because it offered the patient insight into the new procedure. The angioplasty procedure received reimbursement approval and experienced a huge growth rate because it had all the funnels: a critical condition (pre-heart attack), a huge clinical need, enormous numbers and use of the same established pathways. If you look at the companies that provide angioplasty therapies, they are very profitable.
Cardiology and orthopaedics are the bellwether for the industry; they receive the largest capitalisations, the highest growth rates and play into key demographics.
Neurovascular therapy for stroke patients is a new frontier. The whole integration of technology is becoming predominant and will be even more so in the future.
iSIGHT: What would you say is the most significant development in medical technology over the past 10 years?
RD: The greatest advancement depends on where you are in the delivery of health care. In places like Africa, for example, clean water and diagnostic equipment are the most necessary and significant tools.
Within the medical technology sector, I put more emphasis on therapeutics than diagnostics. From a therapeutic standpoint, cardiac treatments, drug-coated stents, implantable pumps and defibrillators, and orthopaedic implants, as a group, have all made a tremendous impact.
Whenever there is a new technological breakthrough, the industry is much more forgiving about unforeseen flaws and problems. We give the innovators a break. But if someone comes forth with a new version of a drug-coated stent, we are much more demanding because we are thoroughly familiar with it compared to when the product first hit the market. 
iSIGHT: Where do you see medical technology headed over the next 10 years?
RD: You have to first look at why the technologies of today are so readily accepted and why they are successful. By that measure, cardiology and orthopaedics have the highest growth rates and growth margins. The reasons are simple: they have a high clinical need and a desirable demographic. The patient flow is such that the appropriate
physician gets to see them early in the process to make the decision on the best treatment modality. The reimbursement is in place so that providers have the incentive to use these new therapies.
Because the risk is low for cardiology and orthopaedics, they will continue to be refined and developed over the next decade. So what is the next horizon for them? We’ve seen integration of pharmacological agents and we will continue to see that pursued. There will be ongoing emphasis on providing information technology into those devices –
sophisticated electronics, like minicomputers. Physiological and biological sensor technology will advance and will be added. In the future there will be a lot of closed loop systems where all the clinician has to do is scan the outside of the body to download all the relevant data. There is a lot of headroom for further progress in these categories.
We’ve not seen great inroads with the neurovascular area like we have with cardiology and orthopaedics, but there is a great need. A lot of people suffer strokes and other neurological disorders. There are a number of companies working on catheter-based innovations, implantable electro-stimulation and neuromodulation. But it is still very early in that process. We need to understand those pathways better. Another area that presents an opportunity is obesity. I can see noninvasive implantable devices that attach a
funnel at the top of the stomach to simulate fullness. Electro-stimulation of the stomach may have potential as well.
iSIGHT: You have been an astute observer of the drug and device convergence issue. How do you gauge its effect on the US health care industry?
RD: The drug industry has largely gotten out of the medical device field. Even so, it is easy for device manufacturers to partner with pharmaceutical companies. Those strategic relationships are easy to forge because the drug makers see it as adding business without making much of an investment.
The question going forward is whether those therapies are important and whether the drug-device aspect becomes the new definition of a product. If it’s about understanding clinical trials and influencing health policy, the divide vanishes and big pharma gets back into the medical technology business.
iSIGHT: What is your view on the state of healthcare in the US right now?
RD: It’s in a state of flux in terms of the type of health policy that is going forward and the underlying statement that national policy is the number-one strategic issue for
the healthcare industry.
Today the US has a healthcare system that is largely financed by employers, but they are not mandated to do so. The system goes back to a time of wage and price controls in the 1940s, when employers added health insurance as a benefit to attract workers. In recent years, however, employers have lost their enthusiasm for providing healthcare to employees because it has become a huge financial burden. Healthcare is now one of the fastestgrowing line items and they can’t control it.
The indigent and senior populations are taken care of by the government with Medicaid and Medicare, but there are between 40 million and 45 million people without health insurance. This doesn’t mean that people are denied health services, but it is prohibitively expensive for uninsured individuals to finance their own healthcare.
In terms of outcomes, the US has a phenomenal system; most of the innovation in medical technology originates here. That’s because we have a market-based private sector that encourages novel therapies and technologies to come forward. Individuals and groups with risk capital have the opportunity to get higher than normal returns on investment. In medical technology, we estimate that 20% of all product development comes from risk capital by private equity companies. This healthcare structure allows them to make those investments and get those returns.
iSIGHT: What do you see as some of the most important developments taking place in terms of policy and regulation?
RD: There is strong support for a universal healthcare system, but not one that is tied to a single payer, government-run program. It is an idea that almost everyone would
aspire to, but how do you mix a universal health system with the market-based, private sector approach that encourages innovation?
The idea that comes closest is a voucher system that would utilise private sector implementation, but would have a freestanding taxing system and a value- added tax of 1%. This ensures that everyone is covered and employers can free themselves of health care expenditures.
iSIGHT: New and emerging programmes like Medicare Part D drug coverage and health savings accounts that require employees to buy their own health insurance are launching a consumerism movement in US healthcare. How do you see this trend evolving?
RD: The driver of this activity is the employer, who needs to have the employee pick up a bigger piece of the bill. With that comes a more significant piece of the ownership. Consumers should have more choices – a cafeteria style of benefits. They have a personal investment into the process, so if they choose a product or service that ends up costing more, it’s still more tolerable than when an insurer doubles the cost of healthcare. Giving the consumer a bigger stake should actually result in better outcomes because they will become smarter purchasers of health services. They’re already doing this with their other purchasing decisions; healthcare doesn’t have to be any different. They will no longer abdicate their health to the clinician, but they will need to have sufficient information in order to make the smartest decisions.
Ultimately we have to look at the policy implications of consumerism – whether it would move the system away from a market-based sector. The voucher system idea for universal coverage has a chance to gain legs. My only concern is that wherever we land, there continues to be incentive to expand and innovate, to develop new therapies. It only resides in the US and the process is very fragile.
iSIGHT: You’ve had a long career in the medical technology sector. What would you consider to be your most important contribution to date and why?
RD: I’d say being chairman of the Healthcare Leadership Council. It has been my mission to get the medical industry to understand that health policy will dictate whether this business continues to be interesting. Getting clearance from the Food and Drug Administration is one part of it, but overall the payment side will direct the market. The Centers for Medicare and Medicaid Services’ approach to funding health services will be much more influential than the biological end of it.
When I look at where the industry is focused, it is much different than five years ago. The cost of providing healthcare has risen dramatically to the point where it now represents 15% of the gross domestic product – higher than anywhere else in the world. General Motors considers sky-high healthcare costs to be its most pressing problem. The system is fragile. Life sciences will continue to be a player, but when you have 20% of all products being financed by money managers, the dynamics that make it an interesting business could conceivably move toward another, more compelling market. As the saying goes, ‘We’ll never know the innovation that didn’t happen’.
iSIGHT: And finally, what haven’t you accomplished yet that you still want to do?
RD: I am currently on the speaking circuit to get people to understand that the same set of dynamics that affects their consumer lives are in play around their healthcare lives. Where should society spend innovation dollars if not for health?
We need intellectual capital and human capital to follow financial capital. Human capital is the source of all creativity. Even for all of the dot-com sector’s difficulties, they had a lot of human capital and intellectual capital going in its direction. As a result, they have had some success.
Healthcare needs the best and brightest people in order to attract the kind of financial capital the industry needs to continue to grow. Those in the industry must understand that if new therapies are to continue coming forth, it must have the right conditions for that to happen.
Ronald W. Dollens is the newest appointee to 3i’s venture capital advisory board. Dollens recently retired as president and CEO of Indianapolis-based Guidant Corporation, a Fortune 500 company acquired earlier this year by Boston Scientific in a $27 billion transaction.
He headed Guidant – a global manufacturer of cardiovascular devices – since the company’s formation in 1994, after it split from Indianapolis drug manufacturer Eli Lilly and Company. Under Dollens’ leadership, Guidant grew to generate $3.2 billion in revenues and more than 12,000 employees. It has major operations in California, Minnesota, Texas, Washington, Puerto Rico and Ireland.
Guidant is widely credited as the pioneer in devising the implantable defibrillator, a revolutionary device despite being hampered by sporadic mechanical problems. The company’s latest product, the Vitality HE implantable cardioverter defibrillator, entered the market in October 2005.
Over the course of his tenure at Guidant, Dollens worked to create an “entrepreneurial culture,” in which employees, investors and communities shared in the company’s success. The corporate structure was designed to provide the resources of a large organisation while preserving the “innovative environment” of a smaller company.
As the result of Dollens’ efforts, Guidant received many accolades from the media, recognising the company as a desirable place to work, a responsible corporate citizen
and as an overall well-run operation. Among its many awards are: Business Ethics magazine’s 100 Best Corporate Citizens in the US; Barron’s 500 Best-Performing Companies; Fortune’s 100 Best Companies to Work for in the US and US’ Most Admired Companies; IndustryWeek magazine’s 100 Best-Managed Companies in the world; and international recognition for Best Place to Work in Europe, Belgium, Germany, United Kingdom, Italy, Ireland and Puerto Rico.
Dollens’ individual honours include being named one of Worth magazine’s 50 Best CEOs and Ernst & Young’s Entrepreneur of the Year – CEO of the Outstanding Indiana
Enterprise Award.
Prior to forming Guidant, Dollens held several positions at Eli Lilly and Company during his 22 year tenure, including president of its Medical Devices and Diagnostics Division. He also held senior executive titles at California-based Advanced Cardiovascular Systems.
Though officially retired, Dollens remains active on the speaker circuit, addressing attendees at medical industry conferences around the world. He is also the non-executive
chairman of the board for Kinetic Concepts Inc and a director of ABIOMED Corp.