Medical devices and diagnostics companies have historically taken a “backseat” to pharmaceutical and biotechnology companies both scientifically and financially. Historically regarded as little more than machine manufacturers and purveyors of consumer goods (Band-Aids, syringes, wheelchairs, and crutches), device companies were the Rodney Dangerfields of the life sciences industry. Put simply — they “got no respect.”
The recent advent of personalized medicine and wellness healthcare, coupled with innovations in miniaturization technology and software development, have forced industry analysts to reconsider the untapped potential of device and diagnostic companies. Attitudes toward device companies are rapidly changing, and many consider these companies to be the new source of innovation in the life sciences industry. In fact, device and diagnostic companies represent the fastest growing segment of the life sciences industry, with much of the growth taking place in drug delivery and combination devices.
Industry analysts estimate the size of the drug delivery device market to be approximately $80 billion, whereas the size of the combination products market is roughly $10 billion. Both sectors are predicted to grow by 10% to 15% annually over the next few years.
One company that is part of the vanguard of companies helping to ignite and reinvigorate the device and diagnostic sector is Medtronic. The 62-year-old company, the world’s largest medical device manufacturer, has long been recognized as a leader in the manufacture of devices in the areas of spinal degeneration and injuries, cardiology, neuromodulation, diabetes, and surgical technologies. Presently, Medtronic employs 40,000 people and has a global presence with operations in more than 120 countries in North America, Europe, Asia, Africa, and Latin America.
Stephen Oesterle, M.D., Medtronic’s senior VP for medicine and technology, primarily oversees development of new technology and innovation at the company. He joined Medtronic in 2002 after a distinguished career at Harvard Medical School where he was an associate professor of medicine and director of invasive cardiology services at Massachusetts General Hospital in Boston. Oesterle received his undergraduate degree from Harvard University and his medical degree from Yale University.
I had an opportunity to chat with him about the ongoing intersection of biotechnology and medical devices, new business opportunities, and the growth and future of the device and diagnostic industry.
Question: Until recently, many financial and industry analysts tended to ignore or dismiss device companies. Why do you think attitudes toward device companies are changing, and what makes these companies attractive for potential investment?
I believe many people previously viewed medical devices as appliances, not innovative medical products. I think the notion that devices are not innovative is beginning to change. This is because devices offer a unique opportunity to incorporate nanotechnology, information technology, biotechnology, or the controlled delivery of drugs and biologics into a single product. People are beginning to realize this, and that is why interest in devices has exploded in recent years. Good examples of innovation taking place in the devices industry include targeted, controlled delivery of monoclonal antibodies and stem cells, MEMS (microelectromechanical systems) implants, and drug-coated stents.
Another reason for interest in device companies is our business model. Unlike pharmaceutical and biotechnology companies, our product development cycles are in the range of three to eight years, and the regulatory hurdles that must be overcome for product approval are much less onerous. There is less risk and ROI is trending much higher than in the past.
Also, most devices like drug-coated stents and other implantable devices are earmarked for chronic and degenerative diseases. Because people are living longer in both developed and undeveloped markets and the incidence of chronic, degenerative diseases is growing suggest that enormous business opportunities will continue to exist for Medtronic. Last year, we treated almost 7 million people worldwide with our devices, and this trend will continue to grow for the foreseeable future.
Question: How does the product development process at device companies differ from those at pharmaceutical and biotechnology companies?
Pharmaceutical and biotechnology companies are willing and able to invest hundreds of millions of dollars into R&D and take high risks in the hopes of developing the next so-called blockbuster drugs. And, not surprisingly, the results of these efforts are highly unpredictable. In other words, failure is costly. This high-risk strategy of drug development can result in thin pipelines, something that is becoming commonplace at many large pharmaceutical and biotechnology companies.
In contrast, product pipelines at device companies are much more predictable, and the likelihood of success is much greater. When we set out to develop a device, there isn’t much ambiguity as to whether or not it will work. This allows us to maintain a rich and highly diversified product portfolio, which has contributed to the consistent double-digit growth that we have experienced.
Further, most of the interesting discoveries at pharmaceutical and biotechnology companies occur at the bench, whether in a company or at an academic institution. Then, attempts are made to translate the discovery into a clinically relevant therapeutic treatment for a condition or disease. Up to this point, physicians, who will ultimately prescribe the drugs, haven’t been involved in the development process. In marked contrast, most of the ideas and concepts for new devices at device companies mainly come from physicians who are looking to improve medical treatment and patient outcomes. Because the idea or concept was physician-initiated, physicians work hand-in-hand with company engineers at every stage of device development. And unlike drugs, you cannot write a prescription to use a medical device. Consequently, in the device world, our customers are primarily the physicians who use our devices and therapies.
We are certainly cognizant of conflict of interest concerns. The fact is, unlike many pharmaceutical and biotechnology companies, physician-industry collaboration is critical, and we compensate physicians for their intellectual property or patents for the devices that we develop. Invariably there will be a royalty stream to physicians, something you almost never see at pharmaceutical and biotechnology companies. We have voluntarily posted quarterly on our website our payments above $5,000 to physicians, so that is additional transparency.
Finally, our sales force requires a lot of technical training to ensure devices are calibrated and functioning correctly before and after implementation. This places an enormous training burden on us as compared with pharmaceutical and biotechnology companies. Put simply, we can’t write a prescription for a pacemaker, hand it to a patient, and then tell them to go get one.
Question: The interest and popularity of combination medical devices (CMDs) has steadily grown over the last decade. What factors have contributed to an increased interest in CMDs?
The continuing convergence of biotechnology, electronics, and medical devices is primarily responsible for increased interest in CMDs. While CMDs such as drug-eluting cardiovascular stents have received a lot of attention, they are probably the least complex (i.e. mostly placing a small molecule onto a polymer). Some of the interesting things we are working on look at developing CMDs that contain biologics and biotechnology component parts. For example, we are working with a company called Neurologix to develop a combination product that will deliver a gene product into the brain of patients with Parkinson’s disease. Hopefully, direct delivery of the gene product into the brain should help alleviate many symptoms of the disease.
About 20% of our revenue comes from combination products (with cardiovascular stents being just one of our products). Looking to the future, we are investing in studies for combination devices that contain recombinant bone morphogenic protein for possible use in spine surgery, cleft palette repair, and other applications where bone formation is desired. Also, we have a product in Phase 2 clinical testing that delivers consensus interferon to patients with Hepatitis C who previously failed other treatments. We also have a collaboration with Genzyme to develop devices to target the delivery of stem cells to various organs and tissues.
At Medtronic, we see combination devices that deliver biotechnology drugs as a large part of our growth going forward. siRNA (small ribonucleic acid) was a discovery worthy of a Nobel Prize in 2006, and we believe it has real potential to be a therapeutic in the next decade. Additionally, sometime in the next two decades we will use cell therapy to restore organ function in places like the heart. The key to success for all of these products is combination of therapeutic agents with a device that can deliver them in a targeted and controlled fashion.
Question: What are some of the major challenges or hurdles that must be overcome when developing combination products?
One of the major hurdles in combination product development is navigating the regulatory approval pathway. The quickest and most straightforward route to gain regulatory approval of a new CMD is to build it using previously approved component parts. This strategy wasn’t employed when Medtronic’s first drug-eluting stents were created; neither the drug nor the polymer used to build the device had previously been approved by the agency. Consequently, both individual components had to be thoroughly vetted before the agency granted regulatory approval for the device. Had we used an approved polymer or drug, it would have been much easier to convince the FDA the device was safe and efficacious, and regulatory approval would have been faster.
The strategy of using previously approved components to build combination products offers a much more predictable regulatory approval process and a quicker time to market. It also substantially reduces the regulatory risks associated with new product development.
Finally, some companies recognize combination products as an opportunity to rejuvenate or extend the life cycle of certain drugs by combining them with a novel proprietary delivery system. While we know that some pharmaceutical companies may be interested in this approach, it isn’t part of our overall business strategy. In fact, we have never had this type of conversation with any of our pharmaceutical partners. Our goal isn’t to add more money to the healthcare system by taking drugs that would otherwise be made generic and making them proprietary once again. Instead, we want to make drugs more effective with fewer side effects by targeting, controlling, and improving their delivery. We like to think of ourselves as innovators, not simply a company that can help to resuscitate or rejuvenate drugs nearing a patent cliff.
Question: Many life sciences companies contend that it is getting increasingly difficult to garner FDA approval for their products. Has Medtronic encountered any difficulties gaining regulatory approval for its products including CMDs?
First, to say that it may be getting harder to garner regulatory approval for CMDs would suggest that there has been a lot of it done before. We are still working closely and collegially with the FDA to figure out how to best approve combination devices. But, to answer the question — No, I don’t think it is getting harder, and I don’t think approval of combination products is an issue at the agency.
Further, I don’t think that any of the perceived roadblocks for approval for combination devices are at the regulatory level. It is more likely that they exist at the scientific level. That is, combination devices are becoming increasingly complex and device companies as well as the agency are struggling to figure out how to effectively regulate these products to ensure safety and efficacy.
Question: How does Medtronic innovate?
We are a large company and invest over $1.6 billion per year in R&D to develop new products. However, between 80% and 85% is spent on development as compared with research.
Most of our innovation comes from external sources, and it varies from business to business. For example, in our implantable electronic devices business (pacing and neuromodulation) we do invest internal resources to improve components like microchips, circuit boards, batteries, and software that we use to manufacture our products, mainly because we invented them.
In contrast, almost all innovation in our spine business is external, and most of it occurs in collaboration with orthopaedic and neurosurgeons. In our diabetes business, we collaborate with a large number of small companies focused on pump design and insulin delivery systems. Much innovation in our cardiovascular division is through business development, mergers, and acquisitions.
We have a three-part investment strategy which includes a $100 million internal venture fund to incubate those projects which are worthy of research but may not fit neatly into one of our current therapeutic areas. We have around $320 million in investments with 60 early-stage technology companies, which gives us visibility into emerging medical technology. Of course, we also are well positioned with a strong balance sheet to make tuck-in acquisitions of later-stage external technology to add to our current portfolio.
Question: Treatments for chronic degenerative diseases like MS, Alzheimer’s, Parkinson’s, Huntington’s, and others have long been in the purview of pharmaceutical and biotechnology companies. Do you think medical devices companies have a role to play in developing treatments for these types of diseases?
A major focus at Medtronic is developing implantable devices to treat chronic, degenerative neurological diseases. There is an enormous opportunity for growth in this area as people continue to live longer. However, one of the major roadblocks in developing treatments for chronic, neurodegenerative diseases like Alzheimer’s, Huntington’s, and Parkinson’s is the challenge of delivery across the blood brain barrier.
While some systemically delivered small molecule drugs can traverse the blood brain barrier and reach targets in the brain and central nervous system (CNS), biomemtic drugs like therapeutic proteins, monoclonal antibodies (mAbs), peptides, and small interfering RNA (siRNA) cannot. Recognizing this, we developed implantable pacing electrodes (to electrically stimulate the brain and CNS) and catheters (hooked to infusion pumps) that mediate controlled local delivery of mAbs and siRNA across the blood brain barrier. For example, we developed a catheter-based device that can be used to directly deliver mAbs against amyloid plaque into the brains of patients with Alzheimer’s.
Another good example is a joint venture that we have with Alnylam Pharmaceuticals in which we developed a device to deliver siRNA molecules (that silence the gene thought to cause Huntington’s disease) across the blood brain barrier into brains of primates. This is significant because nobody has previously demonstrated that RNAi could be used in a clinically effective way. Initial results suggest that this may be an effective way to knock down the Huntington protein in a significant way.
We firmly believe that combination products that deliver biotechnology products in a controlled and target way are the answer to treating chronic, degenerative neurological diseases.
Question: Does Medtronic view pharmaceutical and biotechnology companies as competitors or potential partners to develop treatments for certain therapeutic indications?
For many years I have held the belief that biologics will ultimately replace small molecules as therapeutic agents of choice. Unfortunately, all of these molecules, whether they are proteins, peptides, stem cells, or genes, require some form of controlled, targeted, local delivery.
Local delivery allows you to use less drug at the right dose in the right place at the right time. This helps to avoid some of the pitfalls of systemic delivery (oral or parenteral), which include drug peaks and troughs and untoward side effects. That said, we believe our combination devices can help pharmaceutical and biotechnology companies realize the full potential of their products. With this in mind, it should come as no surprise that we have frequent conversations with many large pharmaceutical and biotechnology companies about ways to deliver both small and large molecules to their respective targets. Many companies don’t think about alternative delivery schemes other than systemic delivery or ingestion. However, if you are able to make the cognitive leap, it makes sense to treat disease whether it is glioblastoma, heart failure, or degenerative disc disease using catheters designed to deliver drugs in a targeted and local way.
Pharmaceutical and biotechnology companies are very good at discovering new drugs. And while we don’t have the hubris to even think we compete with them in drug discovery, we believe we can serve as a catalyst and help these companies deliver their drugs in an effective and therapeutically beneficial way. I anticipate that during the next 20 years or so, Medtronic will have a plethora of joint ventures with major pharmaceutical companies, established biotechnology companies, and even small biotechnology startups.
Question: Do you think the life sciences industry landscape will look much different 10 years from now?
No. I don’t think that the industry is going to look much different 10 years from now than it does today. Pharmaceutical companies certainly aren’t going to go away. There is still a lot of room for small molecules in the industry. However, the lines between biotech and pharma are beginning to blur. Like us, most pharmaceutical companies have realized that biotechnology is really hard, and devices may be necessary to realize their full potential. To that end, their business model, which is more than 100 years old and based on a patient filling a prescription, is going to have to change for them to remain competitive. It is pretty difficult for a patient to get a prescription to directly deliver anti-amyloid mAbs to the brain.
I firmly believe that in the next 20 or 30 years, biotechnology will be at the forefront of modern medical practice. And, combination devices will be fundamentally important in helping to deliver these molecules to patients. Without them, the therapeutic benefits of many potentially lifesaving biologics may never be fully realized.