The MedTech Innovation Paradox

Why healthcare innovation is “built to fail” (and what investors can do to change it)

Author

Jake Hoffberg
July 06, 2023

When it comes to investing in medical technology (MedTech) companies, we have to deal with a rather strange paradox…

We’re entering a time where there’s never been more – and more exciting – advancements across the entire Life Sciences industry…

There’s never been a more important time to address the serious resistance all new technology – especially medical technology – faces as it seeks adoption.

That’s why today, as part of our investor education series, we’re going to take a look at...

The Technology Adoption Lifecycle

Back in the day, a man named Geoffrey Moore published a now seminal book on high-tech marketing called “Crossing the Chasm.”

And even though much of his work was published in the 90’s and early 2000’s (with revisions in the 2010’s), the core concepts presented have become a “bible” for bringing cutting-edge products to progressively larger markets

At the core of his book is a variation on something called the technology adoption lifecycle…

Which, according to Wikipedia is “a sociological model that describes the adoption or acceptance of a new product or innovation, according to the demographic and psychological characteristics of defined adopter groups.”

Over time, the technology is adopted as part of a normal “bell curve” distribution.

The first group of people to use a new product is called "innovators", followed by "early adopters".

Next come the early majority and late majority, and the last group to eventually adopt a product are called "Laggards" or "phobics."

But when it comes to what Geoffrey Mooore describes as disruptive or discontinuous innovations – which are products that require us to change our current mode of behavior or to modify other products and services we rely on…

Which is different from sustaining or continuous innovation – which is the normal upgrading of products that does not require us to change behavior…

There’s one major problem that has to be considered…

The Chasm!

According to Moore…

[T]he point of greatest peril in the development of a high-tech market lies in making the transition from an early market dominated by a few visionary customers to a mainstream market dominated by a large block of customers who are predominantly pragmatists in orientation.

The gap between these two markets, all too frequently ignored, is in fact so significant as to warrant being called a chasm, and crossing this chasm must be the primary focus of any long-term high-tech marketing plan.

A successful crossing is how high-tech fortunes are made; failure in the attempt is how they are lost.

And this Chasm Crossing Problem is even harder when it comes to MedTech markets.

Here’s why…

The MedTech Reaction Curve

In the world of high tech medical devices, there’s a special “chasm dynamic” we must be aware of.

This curve can be best characterized as a “Reaction Curve”...

The curve is is characterized by four stages:

  • Complacency/Marginalization – At first, the new technology is seen as an off-the-wall idea to a physician: quaint, but not a serious threat to the dominant worldview-perhaps a simple variant of some already known theory.
     

  • Ridicule – Complacency will fade as the new technology refuses to die, resulting in ridicule by those who laughingly see that it’s inconsistent with something they hold to be true.

  • Criticism – As the new technology gains acceptance, physicians who have held conflicting worldviews for some time, or who have their reputation invested in old paradigms, take off their gloves.

  • Acceptance – Finally, enough physicians and hospitals make the leap to the new paradigm that it gains psychological as well as intellectual acceptance.

But now comes the even bigger question when it comes to crossing the MedTech Chasm...

What has to happen for the technology to cross through all four stages to reach acceptance?

If you’ve been reading our coverage, you already know the answer is some version of “who will pay for this new technology?”

Without a solid reimbursement strategy (i.e. insurance is paying for it), emerging MedTech’s may find it challenging to generate the funding needed to successfully bring a product to market.

And as we’ve mentioned earlier, as more procedures shift to the cheaper Ambulatory Surgical Center (ASC) ecosystem, the cost of adopting fancy surgical robots will likely mean only well funded hospitals can adopt the tech…

...NOT the mass market majority that would be required to make a truly “hit” product.

But there’s another consideration we now must deal with…

The value of a medical device is ultimately linked to patient satisfaction and no longer simply dependent on the successful sale into hospital inventory.

What does this mean for
MedTech investors?

It means we have to be able to look past the marketing hype and instead focus on market adoption.

It’s not enough to simply have a functional product that solves a problem better than the existing solutions…

And it’s not enough to get a medical device through FDA clearance (which is a challenging task in itself already).

The solution has to meet a variety of different needs for all of the stakeholders involved – the patient, provider, and payer.