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The Coming Age of Strategic Innovation in Medical Device
August 28, 2018
Accelerating Development in a World of Growing Complexity
October 17, 2018
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The Financial Impact of Strategic Innovation

Market intel firm CB Insights recently published results from its survey of corporate strategy executives, illustrating the fact that 41% of executives say their firms are extremely at risk, or very at risk of disruption.  Perhaps no other industry is more vulnerable to disruption than medical device.

Let’s explore the confluence of market drivers that medical device companies face:

  • Demographics – U.S. populations are growing older and living longer.
  • Prevalence of Chronic Conditions – According to the CDC, 25% of adults age 45 to 64 now have two or more Chronic Conditions.  More than 70% of geriatrics have two or more Chronic Conditions with 10.5% having six or more.  Chronic Conditions consume ≈ 84% of U.S. healthcare expenditures (91% of prescriptions, 81% of hospital admissions and 76% of physician office visits).
  • Economics/Government Policy – Fee-for-service reimbursement is unsustainable.  More comprehensive models, such as Value-Based reimbursement, are inevitable.  Patient outcome-driven reimbursement is coming.
  • Technology – The Internet of Things (IoT) will eventually envelop the device industry.  The data explosion that will follow will establish the foundation for Evidence-Based Care, disrupting value propositions and obsoleting well-established, traditional sales models. 

The implications of this confluence of factors is that first movers that fully leverage these drivers will disrupt the current competitive landscape.  More importantly, these innovators will do more than disrupt the status quo; they’ll shift the ground beneath all of our feet.  Predicate modalities will not be able to compete on the new terms of consideration and a simple upgrade or retooling will likely do little to bridge this new chasm.

Unlike many other industries, medical device is also saddled with the responsibilities of serious regulatory compliance.  This introduces a non-negotiable time lag associated with new product development, hampering rapid, developmental responses to competitive disruptions.  Add the blinding, life-cycle speed of the electronic components that support IoT, and yet another layer of complexity is introduced.

Adopting Strategic Innovation can mitigate the risk of disruption and place your company in the competitive drivers seat.  Strategic Innovation is a market-driven approach to development that fully leverages a meticulous approach to Program Management combined with rigorous Design for Risk Management along the Critical Path.  While appearing counterintuitive on the surface, this approach has demonstrated faster development times while simultaneously scrubbing away developmental and business risk.

Speed to the right market segment, with the right device, while always important, will become mission critical in the not-to-distant future.  REV.1 Engineering’s mastery of Strategic Innovation has resulted in 2X Faster development and a series of highly successful exits for its clientele.  This focus sheds months, and in some cases years, off traditional approaches to medical device development. 

Below is a model that demonstrates the implications of gaining a single year in the marketplace by accelerating your commercial development using Strategic Innovation. The significant improvements in Net Present Value (NPV) and one’s Internal Rate of Return (IRR) clearly outweigh the comparatively small, incremental investment of embracing Strategic Innovation. Even flatlining the growth curve in Year 5 of this example doesn’t diminish the financial, strategic and competitive value Strategic Innovation can deliver to your endeavor.

Traditional, In-House DevelopmentStrategic Innovation Approach
Investment($2,000,000)Investment($2,500,000)
Income YR 1$0Income YR 1$500,000
Income YR 2$500,000Income YR 2$2,000,000
Income YR 3$2,000,000Income YR 3$4,000,000
Income YR 4$4,000,000Income YR 4$8,000,000
Income YR 5$8,000,000Income YR 5$8,000,000

Traditional, In-House Development; Net Present Value = $7,615,277, 10% Hurdle Rate, Internal Rate of Return (IRR) = 61%.

Strategic Innovation Approach; Net Present Value = $13,044,175, 10% Hurdle Rate, Internal Rate of Return (IRR) = 86%.

While taking the Strategic Innovation approach, in this case working with REV.1 Engineering, may require a slightly higher upfront investment, 2X Faster results in a $5,428,898 improvement in Net Present Value and a 25% higher Internal Rate of Return.

Calculation Key: NPV = {C YR1/(1+R)^1} + {C YR2/(1+R)^2} + {C YR2/(1+R)^3} + {C YR2/(1+R)^4} + {C YR2/(1+R)^5} – Investment.  C is expected income in current period, R is the required rate of return, or Hurdle Rate (in this example, 10%). Internal Rate of Return – The rate of return when the NPV is 0. 0 = Initial Investment + C1/(1+ IRR) + C2/(1+ IRR)^2 + C3/(1+ IRR)^3 + C4/(1+ IRR)^4 + C5/(1+ IRR)^5

All The Best,

Vice President of Strategic Development
REV.1 Engineering
terry@rev1engineering.com

© 2018, REV.1 Engineering.