Josh Makower, MD, CEO and founder of ExploraMed Development.

The US medical device industry is increasingly focusing on how to reinvigorate innovation, and US companies are seeking new entrepreneurial models, both culturally and corporately, as they grapple with how to make that happen within their own organizations. It can be done, says entrepreneur Josh Makower, MD. He is CEO and founder of ExploraMed Development and cofounder of Stanford’s Biodesign Innovation Program. Makower spoke candidly about innovation in a Q&A with Monali Patel at Frost & Sullivan’s Medical Devices, 2011, conference in March. Patel is Frost & Sullivan’s vice president of research for healthcare and life sciences.

A possible blueprint
Makower was part of a group that once started a program at Pfizer called the Strategic Innovation Group, which he says was designed to support an entrepreneurial approach to innovation within the large company. “That exercise was the basis for what we do at Biodesign at Stanford and what I do for a career now,” he said. “We were successful in identifying opportunities. Where we failed was that the organization had a difficult time putting substantial resources behind the project.” He said the company faced the challenge of getting people focused on the program. “Most of the disruptive things we had were not only disruptive to the marketplace, they were also disruptive internally. They competed with projects and personnel time and focus on things that the business was supposed to be doing.” Makower said that although there were a few things that “wound up getting tossed over the fence, none of them really succeeded in the way that we hoped that they would. That is why I became an entrepreneur.”

Makower, though, sees the opportunities rather than the hurdles. “It is a free market, and if an idea has value and you can raise the money for it, you can make it happen. There are some very powerful, successful models out there at big companies doing this in various degrees. He points to an example at Johnson & Johnson. “They have basically created a venture capital organization within their four walls that invests in new technologies and entrepreneurs. They dedicate themselves to be partners just like the VCs do.”

Makower said that such an arrangement provides the medical device giant with a tremendous advantage and gives them a huge leg up on opportunities. “It also makes them smarter about what opportunities are out there. While it is an arm’s length relationship and [J&J] never owns more than 20% of the business, I think it’s a very successful model and they’ve done a great job with it.”

He praised this model, and said that he would encourage anyone from big companies to consider an investment arm structured in this way. “It’s the easiest thing to do to set aside some money and then let the disruption happen outside. If you get an earlier heads up on it, you should be able to take it at a better price or faster than your competitors if you take advantage of your own investment. That’s one way.” He cautioned that if companies try to do out-of-the box innovation, the company must be committed and must be prepared for it to be extremely expensive. “It’s also extremely risky. When you invest all of your resources in one completely outside-the-box project, it had better work,” he said.

When asked how he measured the success of an entrepreneurial venture, his answer was simple: “I measure success based on how many patients we treat.” He added that it is important that the product be sustainable. The challenge for an internal incubator group, he said, is trying to figure out how to measure those successes. “Strategically, it can be very difficult to get them. Organizationally, some of the desire to be able to claim success is itself a little bit toxic because in a perfect world, whatever you started would get picked up by others in the organization and hopefully at the end of it, no one could figure out who was responsible for that success. There are always project leaders and people who need to take credit for it.” There are ways to do it, he said, but it really starts at the top. “You have to have leaders of the organization who are willing to set aside resources and willing to take these risks.”

Impediments to innovation
Within the context of healthcare reform legislation, Makower said there are three elements of the particular bill that are of great concern to medical innovators:  comparative effectiveness, the medical device tax, and the Sunshine Act provisions.

Comparative effectiveness. The big challenge with comparative effectiveness is how it will be used, and medical innovators are watching it closely. “In a general sense, comparative effectiveness is a good idea,” said Makower. “We should know how things compare and what their effectiveness is. We should be able to make informed decisions and we should do research; however, if a nascent technology or procedure is expected upon its onset introduction into the marketplace to be compared against the gold standard on the same metrics that the gold standard has traditionally been measured by, then we’re doomed to failure and we’re really going to go backward.” He noted that many of the greatest advances in medicine have been made in things that he said didn’t change the endpoints. “In fact,” he said, “sometimes the endpoints get a little bit worse. We’ve all been willing to accept, for example, that while angioplasty may not be as durable as a coronary artery bypass procedure, everybody would most likely elect for an angioplasty first before we go have our chest cracked open.” Makower said that if the existing therapies that are in the marketplace get deceptive standards for how performance is measured, “then we are really at a severe disadvantage for innovation.”  Most innovations, he pointed out, come with more subjective measures, including quality of life. He cautioned that industry and regulators need to be very careful and apply that standard only to therapies that have been around for so long that they are fully developed. “We need to give new technologies a pass up until they get to that stage.”

The medical device tax. Makower echoed many of the concerns that have surrounded the healthcare reform bill’s tax from its inception. “The idea of taxing companies that are not profitable is the part that is really devastating to medical innovation. If there is going to be a tax, let it be a tax on profits, and not a tax on revenue because as most people know, early-stage medical device companies need to get to revenues of about $75 million before they can achieve some level of profitability.” Up until that time, he said, they are living on the lifeline of investment from venture capital or some other source. For innovators to be put in a situation where they need to raise more investment “just to pay the government for the privilege of selling our products here at no profit does not make sense,” he said. “That needs to be fixed and I’m hoping there will be at least a modification of deadlines to make a carve-out for small companies with a certain amount of revenue.”

The Sunshine Act. Although Makower supports the spirit of the Sunshine Act, he comes down hard on its low threshold for payments to physicians and equates the burden to a tax. “It substantially limits our ability to learn what our problems are and make improvements. We have to work with physicians. We have to pay them for their time. To view paying them for their time as a bad thing is a problem.” He emphasized that he fully supports disclosure. “The part of the Act that is very disturbing is that it goes down to the $10 level. The immense cost of administering this is tremendous. It’s just like a tax on innovation. The line is drawn too low.” He noted that such a low threshold actually distorts what actually drives human behavior. “Physicians are much more concerned with their image and academic position than they are swayed by whether someone bought them a sandwich. We need to reset that expectation and get to something more reasonable.”