Scott Nelson:    Hello, hello everyone.  Welcome to another edition of Medsider. This is your host, Scott Nelson, and Medsider, for those of you listening for the first time, is the program where you can learn from proven med tech and medical device experts. And on today’s program we’ve got two guests, the first one being Lars Thording, who’s the VP of Marketing and Public Affairs for Intralign, and then our second guest is Randel Richner, who’s a repeat performer, I guess, for lack of a better description, and Randel is the Executive VP of Advanced Analytics for Intralign, and that’s a recent change on Randel’s behalf, and we’ll certainly discuss that point. So, without further ado, welcome to the call, Lars and Randel.

Lars Thording: Thank you.

Randel Richner:       Thank you.

Scott Nelson:    Alright, let’s start off. I’m going to give you both the opportunity to briefly introduce yourselves as well as, Lars, you can give us a brief introduction to Intralign, and then Randel, maybe you can speak to Neocure and then the recent integration of Intralign and Neocure.

Randel Richner:       Sure. Sounds good. Go ahead, Lars.

Lars Thording: Yup. Yeah. So Scott, Intralign was formed very recently on December 31st of last year, so we’re a really young company. Our company has come together as various healthcare entrepreneurs across the healthcare spectrum that are all of us very engaged in trying to make conditions better for [00:01:25] healthcare, you know, and for hospitals particularly. So what you’ll find on the team at Intralign are folks that, including myself, if I can be so indiscreet, have been making a mark in the healthcare industry very recently through the work we’ve done with Stryker Sustainability Solutions, formerly Ascent, the first reprocessing company in the United States that ended up having a major impact in the industry and still does.

Saying goodbye to that challenge and taking on a new one, it was obvious to those of us that left Stryker Sustainability Solutions that we wanted to focus on another area in healthcare where there’s a great need to look at how do we reduce inefficiencies and create better opportunities for hospitals and healthcare providers in doing what they ought to be doing, mainly delivering the best care possible to our patient population. We’re going to get, I’m sure, more into this later on, but we honed in on major joint replacement as a key area, and Intralign was born out of the thought that we could make an impact there. So Randel and others joined us, and we formed Intralign at the end of the year last year.

In terms of my own background, other than having worked at establishing and building the first very successful and the biggest reprocessing company in the industry, I spent time as a pharma consultant and in academia prior to that. Randel, your background is a lot more impressive than that, so [00:03:01] I welcome you to just fill in the space.

Randel Richner:       Thank you, Lars. Well, yes, I started Neocure in 2006 from my previous role as a vice president at Boston Scientific. Our focus at Neocure was really to help new technologies and to help technologies to understand the reimbursement and payment platform, and opportunities and challenges in the United States looking at payment policy and where we could maximize price for technologies, how to present the value argument most effectively. And within that role, we built a very strong data analytics capability based on hospital data, cost data, using a large number of survey databases to actually really help our clients to understand, you know, provider economics and hospital economics, and where and how our technology really made an impact.

When Intralign executives approached us, it was a very interesting concept that they had seen our data and were very impressed by that, and looking at how we could provide the analytics platform for this new company, which would be involved in analytics as well as intelligent care design and also a physician assistant component to that. It was appealing to me from our background to be able to apply our analytics in a new way in a service delivery model for hospitals to really look at the impact of how you could change the dynamic of care using our analytic solutions. So for us it was a great opportunity to work with some seasoned professionals. And also looking at how the payment models are all changing where the hospitals are really going to have to be equipped to make a lot of hard decisions, and we can provide a lot of that information to them.

Scott Nelson:    Gotcha. I love the idea that you’re so data- and analytics-focused, because I think Lars, if I remember correctly in doing some of this research for this interview, I think you were quoted as saying—I’ve got it in front of me here—“Consultants leave this big fat report and two weeks later everything is back to normal.” I thought that was a great quote because that’s so…I’ve never operated under a consultant capacity within this space, but that quote rang true for me. And I would imagine, it’s probably safe to say that using data and analytics helps you kind of bring life to some of the processes and systems you’re recommending hospitals utilize, correct?

Lars Thording: Hey, Scott, [00:05:53] something that I’d like to add. We spent a lot of time over the last year or so going out there and talking with hospitals, talking with providers, and asking, what are some of the pain points that you have right now? We all know the challenges and I’m sure we’ll get back to that, Scott, but they all come back us with the same kind of answer and they’re saying, “We’re fed up with consultants that come in here and they have some fantastic ideas, some great concepts that we know are relevant to us, but the impact does not stay with us and it’s not substantial enough for us to make a real difference.”

Hospitals are facing very real problems about a bottom line that looks increasingly red and the lack of ability to control all the things that goes into creating that bottom line, so we are focused on from the beginning understanding this business to look at what can be a substantial and sustainable solution to hospitals. Those are keywords for us, and it’s based on these conversations. We went on a tour, Scott, basically, and listened to what are the key pain points here.

And Randel, you can pick this one up because I know you will. One issue for hospitals is the issue of big data, right? There’s too much of it. There’s a lot of it. There’s a lot of data in the healthcare sector. Hospitals have a lot of data, but they don’t have a great way utilizing it to make the types of decisions that they have to make today, which are almost entirely about, how do we create efficiencies within this double pinch of increasing patient numbers and reduced reimbursement?

So that’s what Randel has charged on right now with her team, how to solve the problem with big data, and on a backdrop, again, with hospitals having these challenges. And we want to make it real, and we don’t want to make it a fancy consulting deal with a nice bow on it. We want to make it substantial and sustainable for hospitals. That’s our ambition.

Scott Nelson:    Sure.

Randel Richner:       That was the real beauty of this for me, was that essentially putting the analytics function to work, that you actually are a partner with your hospital over time to really look at the episode of care. We’re ideally suited for that with our analytic capabilities to be able to look at the continuum of care from the community practice to the PCP to the referral to the base procedure to post-discharge care. As you know, all the payment frameworks are changing that are episodic in nature. The ACO kind of thing is looking at that overall payment construct and hospitals are going to be very challenged. They have a lot of data available to them, but being able to connect the dots to be able to look at that continuum and to actually be able to assign credit to a change in an outcome that is related to an intervention such as we are going to be doing in orthopedic delivery is something we can do with these three companies combined. And it’s pretty exciting. So it’s a tactical and practical application. It’s not just doing analysis of data.

Scott Nelson:    Sure. Sure. Makes a ton of sense. And if you’re listening to this, you’re thinking, “Okay, this all sounds good, but how is it impacting me if I’m in the medical device space?”

Lars Thording: Yeah.

Scott Nelson:    And the reason I wanted to have you guys on is because, I mean, you’re servicing hospitals, and we’re certainly going to get into more of the challenges that you’re seeing at the hospital level, but if you’re in medical devices anymore, you realize that it’s an incredibly competitive space. Your margins are most likely shrinking. You really, really need to learn how to partner with these hospitals, your customers, especially as more hospitals acquire physician practices. You better understand your customers, what they’re facing, and how you can best help them and partner with them moving forward other than just simply reducing price.

So, excited to kind of cover that in a little bit more detail, but let’s start out with some of the challenges, the problems that you see hospitals are facing in today’s environment. You touched on one of those in big data, but let’s cover some of the other challenges, and then also then talk a little bit about the unique service offerings that Intralign provides. So, big data, on that note, you already mentioned that challenge, but in regard to big data, is it just simply too much information or is it, how do we apply all this information in order to help reduce cost and improve quality of care?

Lars Thording: You know, I think, Scott, that the issue of data pertains to how does the hospital answer through the challenges that they’re faced with right now. Fundamentally though, the wakeup call for hospitals and providers is that they’re seeing these two developments that are putting them in a pinch. So we all know that reimbursement is going down and the hospitals are experiencing this in individual treatment areas and they’re seeing that they can just not keep going along doing the same things as they have been doing. Their systems are not built for it. At the same time, from the other side comes increased enrolment in federal healthcare programs and increasing patient population in general. That’s certainly the case in major joint replacement. And between these two things, more customers coming to the shop and less money coming in from reimbursement sources to cover it is really why I think the hospitals and providers, that their systems are not optimized for delivering these services in an efficient manner.

And I’m not saying anything other than what the hospitals would say themselves. So the real problem for them, and they’ll provide [00:11:55] great color to that as well, they have been talking with them about it, is that they’re sort of siloed in the way that they look at, how do we bring patients through these processes in an efficient and high-quality manner? And there’s a lack of transparency and there’s a lack of control of that process.

So what the hospitals are looking for, what you’re asking about, is how do we leverage information about what takes place? In other words, what devices are being used? Are we incurring costs? Why is it that quality is being impacted? All that data which exists in overabundance at the hospital, how do we organize and utilize that in an efficient manner? Which is not very academic, by the way, Scott. It’s just a matter of making sure that data is being used for the specific purpose of making decisions and not just sort of sitting there or being available without the purpose of optimizing [00:12:52] system processes. And that’s I think in a short way what the problem is as experienced by hospitals and also the role of data in terms of answering that challenge or resolving that problem.

Scott Nelson:    Got it.

Lars Thording: If that makes sense.

Scott Nelson:    No, it does, and I loved your analogy of more customers coming to the shop but a decreased amount of money coming into the cash register, I guess. I’m kind of paraphrasing there a little bit, but that’s a great analogy. Were you going to add something there, Randel?

Randel Richner:       No, it’s just that manufacturers are going to be really challenged, there’s no question about it, to differentiate their product in this environment. And again, the ones that can, that can really show that it’s going to make an impact somewhere on cost and quality, those are the ones that are going to win as usual. So, even in this model, I think the distinction that we have is the first assists that are actually going to be staffing the procedures, and that’s going to be important to have that kind of opportunity again to show how the technology can work or not in an improved manner, with the right people within the perioperative event too.

Scott Nelson:    Mm-hmm.

Randel Richner:       So the combination of the two is going to be win-win.

Scott Nelson:    Got it. And when you look at those two components, cost and quality, and then using hopefully data and analytics to help create more efficiencies, I guess, and understand what’s going on to help fix some of these problems, is one do you think more important than the other in terms of the view of the hospital, cost versus quality?

Randel Richner:       That’s a very good question. Again, because of the payment model now that it’s a risk-sharing model, that there’s going to be a greater emphasis on quality metrics and how those are captured and which ones are going to driving the payment opportunities. And it’s going to be a shared model between the provider, the payer and the physician, so that dynamic is going to clearly be driven by quality outcomes. There’s no question about that in my mind. But which quality metric is going to be the most important in the orthopedic space and for those procedures, and how again the products that are used during that procedure are going to be important as well as the followup and the other variables that all contribute to a quality patient outcome.

Lars Thording: Let me supplement that a little bit. That’s sort of a different level here. You’re putting it to the test here, cost versus quality. I think the real situation for hospitals as well as for American healthcare in general is that we never want to be in a situation where we sacrifice quality for the ability to treat the numbers of patients, right?

Scott Nelson:    Yeah.

Lars Thording: And that’s the challenge for healthcare, is the challenge for hospitals – they don’t want to stop admitting patients in the front door and they also don’t want to sacrifice quality. So how do you achieve both at the same time? How do you achieve volume and how do you sustain quality? It sounds like a tradeoff but the fact is neither the hospital nor our healthcare system in general should ever have to make that choice.

Scott Nelson:    Sure.

Lars Thording: And that’s where the key—so how do you avoid that tradeoff? You avoid that tradeoff by looking at where do you have inefficiencies in the delivery system, and is there a way on a global scale, given what Randel is talking about in terms of different new reimbursement practices as well as new hospital models, including ACOs and increasing physician [00:16:42] hold situations with hospitals? How do you accomplish that, right?

Scott Nelson:    Yeah.

Lars Thording: And the political discussion is a very real thing for the hospital, is a very real thing for the surgeon, but I also think it’s a very real thing for all of us that are part of American healthcare. We don’t want to make that tradeoff, so the injection point for us all to discuss is, are there inefficiencies in the system, and if so, how can we identify them and remedy them? We try to be very practical about it in terms of designing the offering that Intralign is coming out with, and Randel has already spoken to what some of the components of our solution to that catch-22, how that looks.

Scott Nelson:    Yeah…

Randel Richner:       You know, so I think…

Scott Nelson:    Oh, go ahead. I’m sorry.

Randel Richner:       I’m sorry. To summarize very briefly the Intralign model that we haven’t really articulated yet, first is the analytics platform. The second is what’s called intelligent care design, which is the human factor of engineering, really looking at how the patient moves through the system and capturing sort of also some inefficiencies associated with that. The third element of this is the intraoperative first assist stafft that would be working with the hospital as well. And then, the analytics platform sort of wraps around all of this to capture those things along the way.

But the intelligent care design, this is looking at, you know, [00:18:12] can sometimes be overused but…

Scott Nelson:    Uh-huh.

Randel Richner:       …it’s that same kind of process of really looking at efficiencies of movement of patients, again, through the system, and where those are most easily impacted for change.

Scott Nelson:    Right. And I’d like you to go into those three kind of categories that you just mentioned…

Randel Richner:       Mm-hmm.

Scott Nelson:    …the advanced analytics, intelligent care design and kind of the surgical first assistant I think is what you call it. I want to get into that, but I love the idea, Lars, that you brought up, the tradeoff cost versus quality, because the bottom line is, in a sense, the entire American…everyone who considers or calls themselves an American citizen or lives in the United States most likely understands the fact that we’ve got a healthcare system that’s broken. It’s too, I mean, [laughs] everything costs way, way too much money, but at the same time, if you have a family member that gets sick or needs some sort of surgery or some sort of procedure, you don’t want quality to kind of take a second role or second place next to cost at that particular hospital, that particular clinic. So it’s a great point, and I love the fact that you brought that up.

And this provides a perfect transition to what you just mentioned, Randel, that if I’m a hospital, if you’re presenting to me at the hospital level, I understand, okay, we’ve got these issues, cost and quality, and we don’t want to make the tradeoff here at ABC Hospital, what do you suggest? And so help me, help the audience, understand those three different service lines that Intralign offers. And if you could provide an example of each of those, that’d be great.

Lars Thording: So, Scott, the most immediate impact that a hospital will see right now from Intralign’s services is what Randel mentioned before, namely, our surgical first assist program, our intraoperative support program. Through this program, we offer the hospital the ability to take the surgical first assist off their payroll, take them off the cost sheet.

Scott Nelson:    Okay.

Lars Thording: We’ll hire them on. We’ll train them. We’ll make them equipped to form better value within the intraoperative episode as Randel was illustrating before. And, I mean, the backdrop from this, and this is unfortunately not a very clean situation, is there are tons of different types of practices among hospitals depending on state, depending on what type of hospital in terms of how they’re using surgical first assist, but the bottom line is the surgical first assist is the surgeon’s right-hand helper during the intraoperative episode where clinical quality is ensured as well as where procurement decisions are made, utilization decisions are made.

So by inserting Intralign surgical first assist, there are four different types of effects that the hospital can experience immediately out of the gate today, and that is, number one, more consistent quality of the clinical support provided, because of highly-trained surgical first assists that come in and can deliver this quality at the same level every time. Number two is lower administrative hassle and cost for the hospitals because they no longer have those SFAs, those surgical first assists on staff. That is entirely our [00:21:46].

Number three is increased throughput. So we can actually document that using our surgical first assist reduces the time it takes to go through a surgery procedure in major joint, and that increased throughput [00:22:03] which is exactly what we were just talking about, namely, increased number of patients, how can you handle that with only so many resources. And then, finally, the fourth thing is more appropriate utilization decisions about implant type, size, disposables involved in the surgery and so forth. So those four things are the effects of utilizing Intralign surgical first assist, and it’s a very direct impact that our program offers.

The advanced analytics and intelligent care design solutions that we’re offering as well, as you will appreciate, Scott, this is a very new company so we’re still developing those resources, but what we know we can [00:22:46] act through the surgical first assist model is the ability for analytics to have the hospitals better understand how and why they’re using their resources so that they can go in and pinpoint this is where we can create improvements. And the intelligent care design model, as Randel was describing before, is essentially a matter of mapping out the intraoperative process at first, but eventually the entire episode of care for major joint and later on other things, to look at how do we optimize the process in terms of human interactions, interactions between humans and [00:23:2] develop that through the use of physical space and so forth.

Scott Nelson:    Got it. And so the surgical first assist, these are people in the operating room, are they nurses, medical assistants, physician’s assistants? Do they fall under a certain umbrella in terms of their licensure?

Lars Thording: They’re typically certified physician assistants, but they can have other educational and degree backgrounds as well, and some of them are physicians themselves.

Scott Nelson:    Okay.

Lars Thording: It’s a [00:23:55] function. So in the intraoperative space, you have the surgeon and you have the scrub techs, but you usually have the surgical first assist that plays a major role in assisting the surgeon clinically during the joint implant, but also in terms of everything else that goes into that process such as utilization decisions and so forth.

Scott Nelson:    Got it. Okay. And so from the hospital perspective they’re saying, “Okay, we’ve got existing staff on board already that’s in the OR with our surgeons doing these joint cases or helping with these joint cases,” why would they consider the Intralign surgical first assist? Is it because the Intralign surgical first assists—it’s kind of hard work to kind of say that three times in a row. I’m not sure I’d be able to do that. [Laughs]

Randel Richner:       Mm-hmm.

Scott Nelson:    Is it because the Intralign surgical first assists are so specialized and they understand intelligent care design, analytics, etc.?

Lars Thording: So, again, Scott, unfortunately, it gets a little bit complicated to discuss what the situation is at hospitals right now…

Scott Nelson:    Sure.

Lars Thording: …because some hospitals use these and a lot others use them less frequently. For some hospitals, it’s a matter of utilizing the surgeon’s physician assistant that that surgeon is also using in clinic and taking them with them into the surgery space, so they’re just not…

Scott Nelson:    Got it.

Lars Thording: They’re just not trained at the same level and utilized exclusively for the intraoperative space. So it’s a less specialized type of function. So what we’re trying to say is if you specialize this function, if you create the right level of education about things, then you get that higher and more consistent level of quality and you get the ability for the hospital to make sure that there are no inefficiencies created in that space.

Scott Nelson:    Okay. Okay.

Lars Thording: Make sense?

Scott Nelson:    Yeah. No, that does. So for example, if a hospital didn’t have or maybe it was someone inconsistent in regard to whether or not they included surgical first assist in their joint cases currently, they could consider bringing on the Intralign team in order to help establish whether…you know, maybe there are things that their surgeons are doing within the case that could be improved upon in terms of quality or maybe there are just different inefficiencies in the case that are leading to increased costs, that kind of thing? Am I going down the right path there?

Lars Thording: You are, and some of these things we’re still learning how to precisely deliver solutions on.

Scott Nelson:    Got it.

Lars Thording: What remains though, Scott, is that the surgeon is the one that needs to make the decision in these situations. So this is not about reducing the ability of the surgeon to make the right clinical choice in any given situation. That needs to reside with the surgeon. The surgical first assist though, while right now is a somewhat inconsistent player in that space, making consistent what that person can provide and also helping the surgeon, empowering the surgeon, if you will, in his or her decision-making, we think will create some major improvements.

Scott Nelson:    Gotcha. Okay. No, that makes sense. And then, Randel, you mentioned this earlier, and you did as well, the idea of intelligent care design in kind of tracking a patient through the system, is there something common that you see where there are a lot of inefficiencies at the hospital level or within the healthcare system in terms of kind of that idea of care design? I mean, do you see certain trends where a lot of hospitals are missing the mark or a lot of health systems are missing the mark?

Randel Richner:       Oh, I think everyone recognizes the way to look at process improvement in some sense within the hospital environment, and the fact that we’re narrowing our focus on one therapeutic area and one sort of category of patients moving through the system is going to clearly provide some obvious fixes in the systems…

Scott Nelson:    Mm-hmm.

Randel Richner:       …I think fairly rapidly. And the fact that we’re partnering with the hospitals that really this is not…again, going back to that old…in the beginning of the conversation about a consulting model, this is not that…we’re really going to be a service partner with them with ensuring the risk and being there with them over time. And I think, you know, Friday I was at a meeting with hospital finance people, and they were talking about how this one coding type of requirement was required in over…they tracked it to 37 different times for a two-day hospital stay where this had to be replicated over and over again was completely and utterly redundant.

Scott Nelson:    Hmm.

Randel Richner:       It’s a simple example, but looking even about how the history and physical is conducted, how that patient is then efficiently moved to the OR suite based on their clinical parameters and this kind of thing, is there some way to make that more efficiently happen.

Scott Nelson:    Mm-hmm.

Randel Richner:       And this is what these people are experts at that are part of our team. They’ve been doing this for many years in emergency rooms and looking at efficiencies there, and they are now applying all those skills to the orthopedic event in the hospital. And combined with the physician assistants and our analytics function, we’ll be able to talk to the patients on the patient level to get information on their satisfaction and outcomes as well as efficiently moving them through, and then having the physician assistant in the operative suite with the surgeon. So all that combined is a very attractive model to a hospital to look at how they can improve their services.

Scott Nelson:    Right, right. And it’s easy to use the word, you know, “partner with the hospital,” but in a sense, and without knowing a ton about Intralign, it really does seem like it’s very much a partnership sort of role, because it’s  not like you’re presenting this 30-some-odd page report on how to best, you know…

Randel Richner:       No.

Scott Nelson:    …reduce cost and improve quality, and then it’s like, “Here you go,” and you’re off to another hospital to help them try to do the same thing. There are definitely a lot of service lines where you’re actually playing an active role and seeing that throughput.

Randel Richner:       Right.

Lars Thording: And that’s the idea, Scott. No reports, no products, just solutions.

Randel Richner:       Mm-hmm.

Scott Nelson:    Sure. Yup. And so with your experience with Stryker Sustainability Solutions, you’ve in a sense been doing this for quite some time because, I mean, when did Stryker acquire Ascent?

Lars Thording: End of year 2009.

Scott Nelson:    Okay. And you helped build Ascent, correct?

Lars Thording: I did not help personally build Ascent. I was a part of the executive team for the last few years up to the acquisition by Stryker.

Scott Nelson:    Gotcha, but, I guess, my point being that you have a history of kind of doing this with Ascent and then Stryker and helping hospitals reduce costs.

Lars Thording: Our heritage, Scott, is exactly that…

Scott Nelson:    Mm-hmm.

Lars Thording: …which is what I was trying to get at at the beginning. We’re healthcare entrepreneurs that are looking at, how can we make healthcare function better by challenging some of the assumptions that are out there? And I think that just bringing that back to the med tech industry and others as well, this is a situation where nobody that plays a role in healthcare can get away with business as usual.

Scott Nelson:    Right.

Lars Thording: And I think the way that we’re seeing ourselves is as enablers of that particular development. But Randel and her team as well as the folks that are involved in intelligent care design and the surgical first assist folks are a part of this I think broader team now that they’ve joined together and saying, “Okay, how can we continue the track of really disrupting practices in healthcare and enabling hospitals and other key providers in terms of getting through the next step.” It goes for med tech companies as well.

Scott Nelson:    Mm-hmm.

Lars Thording: And you know this, Scott, better than anybody, that they also cannot survive with business as usual. They also have to, just like the surgeons are today, the orthopedic surgeons are going to have…they’re looking at themselves, they’re asking, “So, how am I going to do this in the future?” Hospitals are looking at, “Okay, we can’t keep doing things like we have. How are we changing things?” And med tech companies are facing the same kind of challenge.

Scott Nelson:    Yup. Yup, there’s no doubt. And I keep sort of repeating this, but I love the idea that what you guys are doing, it’s not just kind of fluffy…I think you guys have your…well, you’ve [laughs] got graduate work in your past…

Randel Richner:       [Laughs]

Scott Nelson:    …my point being that it’s not fluffy MBA type of stuff. It’s actually very practical, very tactical sort of things that you’re bringing to the table.

Randel Richner:       Yes.

Scott Nelson:    So, no, that’s great stuff. We talked about a lot, and in kind of reaching towards a conclusion here, one, is there something that we haven’t discussed that you’d like to cover? And then two, looking two, three, four, five years into the future, where do you see this going as quality becomes much more important in terms of hospitals getting paid and physicians getting paid? What do you see over the course of the next several years in healthcare?

Randel Richner:       Go ahead, Lars. Go ahead.

Lars Thording: No, you go, Randel.

Randel Richner:       No, I think to us…it’s the central time for us to be playing at the table together with our hospital and payer and physician partners, and the patients as well. I mean, so everybody play a part in what’s going to happen next. Things are being, you know, like 2014, there’s going to be a whole change in how, you know, required changes in data capture, we’re going to go through [00:34:31]. All kinds of things are going to be happening soon, and this is the time to finally make the right reforms that we need for delivery of care based on the right principles, which is about quality care and sharing risk to obtain a positive patient outcome. And for me this is very exciting, and I think we’re starting with orthopedics, but I think it’s very clear that we can replicate this model in other therapeutic areas starting with cardiology next too.

Scott Nelson:    Mm-hmm.

Randel Richner:       So everyone is going to have to play a part in thinking about how to deliver care more efficiently, and this is the time.

Scott Nelson:    Mm-hmm.

Randel Richner:       So, yeah, and go ahead, Lars.

Lars Thording: Well, it’s hard to after that but, Scott, is that within a two- to three-year timeframe, Intralign is going to become a major player as an enabler in this transitioning process that both hospitals and surgeons are going to have to go through. And I suspect that as med tech companies and group purchasing organizations and others also start taking steps towards real reform, we’re all going to be talking about how to enhance efficiencies and how to focus more appropriately on the quality of care as it happens while it’s being delivered that will become a vehicle for that discourse going forward and a big part of the solution.

Scott Nelson:    Right. Yeah, there’s no doubt that Intralign is at…it appears that that’s kind of the beginning of this wave here. And, I mean, it really comes to a point when you hear, you know, like Omar, the CEO of Medtronic, Omar Ishrak, I mean, he seems very, very vocal about Medtronic’s take on partnering with payers, for example, on medical device development, for example. I mean, that could be an idea worth exploring as well. But I love the fact that you’re so focused on not only just increasing efficiencies and reducing cost, but also helping to improve the quality of care as well.

So let’s go ahead and leave, I mean, if you have nothing else to add, we’re going to leave it at that. But for those listening that want to learn more about Intralign and what you folks bring to the table, where would you direct them?

Lars Thording: They should go to our website www.intralign.com.

Scott Nelson:    Gotcha. That’s I-N-T-R-A-L-I-G-N dot com, correct?

Lars Thording: Yes, correct.

Scott Nelson:    Got it. And this is kind of a side note, but for those listening that want…you two have incredibly impressive backgrounds. You’ve been involved with healthcare for such a long time. But for those listening that want to like maybe just get a better idea of…because most of my audience listening are people actively involved in the med tech/medical device world, but for those listening that want to get a better idea, maybe a little sampling of…want to learn more about healthcare, about, like you mentioned, intelligent care design, the idea of where a patient goes from beginning to end, that kind of thing, are there any resources that either of you would recommend?

Randel Richner:       Oh, geez. [Laughs]

Scott Nelson:    [Laughs]

Lars Thording: Specifically for intelligent care design, Scott, or…?

Scott Nelson:    No, just anything in general, you know, for those listening that… And the reason I ask that question is, you know, 10-plus years ago when I first got into the device space, resources or even just learning more about service offerings that a company like Intralign offers, that would have been extremely helpful to be, you know, as in a sales and marketing role within a medical device company, just learn more about what a hospital goes through and what the patient life cycle looks like within the healthcare system, that kind of thing. So I’m not sure if anything comes to mind, but just thought I’d throw that question out.

Lars Thording: Scott, I think the reason why we’re at a disadvantage here is that the pieces that we have put together to form this particular solution are at the forefront of what is being done in healthcare.

Scott Nelson:    Mm-hmm.

Lars Thording: So there are very few documented resource banks out there that can inform anybody specifically about combined human factor and Six Sigma development processes.

Scott Nelson:    Yup.

Lars Thording: We’re trying to look at a sector that is dissatisfied with solutions that they have been served up, and in terms of a resource bank, that’s what a resource bank will show you, right?

Scott Nelson:    Mm-hmm.

Lars Thording: Those things that have been provided for healthcare in the past. And so that’s why we’re a little bit at a disadvantage. I’d encourage anybody listening though to look at when you’re finding resources that speak about process improvement as well as utilization of analytics and support in the operating room, keep asking the same question, namely, are you getting substantial and sustainable results from this?

Scott Nelson:    Mm-hmm.

Lars Thording: In other words, stealing your words, Scott, is there any fluff in this, right?

Scott Nelson:    [Laughs] Yeah. Yeah.

Lars Thording: And assess your resources based on that.

Scott Nelson:    Got it.

Randel Richner:       But I have to say—I’m going to give a really, really wonkish answer. First, I think Health Affairs is sort of that bellwether of what everyone relies on in terms of a monthly publication or whatever that keeps you one step above of what the people that are managing the purse strings read every day and rely on. The other is HFMA is also very good, which is Healthcare Financing Management Association, that gives you the trends and issues associated with hospital management. But then, the last is the New York Times and the Wall Street Journal.

Scott Nelson:    [Laughs]

Randel Richner:       [Laughs] You know, just reading and pulling it all together and constantly thinking about where things are moving. I mean, that’s what it is…

Scott Nelson:    Yeah.

Randel Richner:       …and those are the places I rely on all the time.

Scott Nelson:    And what was the first one you mentioned, Randel?

Randel Richner:       Health Affairs.

Scott Nelson:    Oh, Health Affairs. Got it. I thought you said Health Fairs. Health Affairs, got it.

Randel Richner:       Oops. [Laughs] No.

Scott Nelson:    Got it. Cool. No, that’s good stuff.

Randel Richner:       Yeah.

Scott Nelson:    And Lars, to your point, I mean it speaks to the idea that Intralign and you guys are, like I said before, kind of on the front side of this wave, because of the fact that there isn’t really a whole lot of data. Maybe that’s an idea for you guys to have like a resource bank of case studies as Intralign grows…

Randel Richner:       Yeah.

Scott Nelson:    …you know, down the road.

Randel Richner:       Yeah.

Scott Nelson:    I imagine that you’d have some pretty remarkable case studies put together. But let’s go ahead and end it there. I can’t thank you enough for coming on, and for those listening that didn’t catch it the first time, Intralign.com, I-N-T-R-A-LI-G-N dot com. You can go learn more about this young company that’s doing some interesting things in the world of healthcare. Lars and Randel, thanks again for coming on. Really appreciate it.

Lars Thording: Thank you, Scott.

Randel Richner:       Thank you.

Scott Nelson:    And I’ll have you hold on the line there, but that’s it for now, folks. And again, if you’ve stuck with this the whole way, remember that you can catch all of these Medsider interviews on iTunes as well or Stitcher Radio. Just do a search for Medsider and those two options will come up. So, anyway, thanks so much for your listening attention. Until the next episode of Medsider, everyone. Take care.

[End of Recording]

Scott Nelson:    Hello, hello everyone.  It’s Scott Nelson, and welcome to another edition of Medsider, the program where you can learn from experience and proven medical device/med tech experts on your own terms without going to school. And on today’s call we have Matt Dolan, who is a senior research analyst for Roth Capital Partners. Matt’s been involved in covering the medical device industry for about 10 years. He’s been with Roth Capital for about six years. His investment news has been cited in Barron’s, Investor’s Business Daily, Wall Street Transcript, Forbes, and Business Week in addition to a few others. So without further ado, welcome to the call Matt. Really appreciate you coming on the program.

Matt Dolan:      Thanks, Scott.

Scott Nelson:    Alright. So, on today’s call we’re going to cover the medical device tax. In particular, we’re going to focus on a really, really good report, which I’ll link to in the show notes, that Matt helped put together covering the medical device tax and its potential implications. So the three main kind of umbrella subjects that we’re going to talk about is, first and foremost, the impact of the med tech industry on the economy as well as the healthcare system overall, and then we’ll probably spend a little bit more time even talking about the other two points. Is the 2.3% medical device tax justifiable? And then third, what are the potential negative ramifications of the medical device tax? But before we dig into those three points, Matt, we’re coming off the election this past Tuesday, with Obama being reelected, in your opinion, is there still a chance that the device tax can be repealed?

Matt Dolan:      I think there’s always a chance. Probability is certainly down since Tuesday night. There’s talk of a possible delay simply because the guidelines needed to implement the tax haven’t been released yet. Those are anticipated in the very near term. It sounds like the IRS was sitting on a number of these different types of guidelines until the election in an effort to not make this a political issue or something that would become a discussion within the election cycle. So now that that’s behind us, I do think we’ll the guidelines shortly. I think there is a possibility of a delay. I think repeal is less probable, but I think a delay does give us the chance to have a continued discussion on what you mentioned earlier, the premise of the tax and the possibility at least of a repeal. So it’s not the best-case scenario for the industry, but I think continues the discussion and keeps that door open.

Scott Nelson:    Gotcha. And through my understanding, it looks like there’s House support for the repeal but in the Senate it would be a little bit more challenging and there may be some needed senators on the Democratic side that would need to reach across the aisle and agree to maybe either change the device tax or repeal it altogether. Is that correct?

Matt Dolan:      Yeah, absolutely. Actually, the repeal concept has passed the House a number of times but hits a roadblock in the Senate. There are some Senate Democrats that have expressed potential support for the repeal of the tax. You can guess who they might be given some of the constituencies in certain key states to the medical device industry. So it’s not going to take a vast majority of the Democrats to come over, but certainly there has been some bipartisan support to potentially repeal the tax, so I do think the discussion is still alive despite the presidential results and we’ll see how things play out here. There are a number of tax reform bills that need to get pushed through Congress here in this lame duck session, and it seems that that would be an appropriate piece of legislation to possibly tie something around the medical device tax too.

Scott Nelson:    Gotcha. Okay, so with that said, let’s dig into the first point and quickly discuss the impact of the med tech industry on the economy overall as well as the healthcare system. I thought it was interesting that you started off the report talking a little bit about some of the stats. Well, let’s just talk through some of these stats in that the US med tech industry—I’m looking at your report now—ships 136 billion dollars in product, 8.5 billion dollars in salaries and employs well over 400,000 individuals in looking at its impact on the economy overall. And in reading some of the pieces recently that have come out post election, it seems like the response amongst politicians is that if we could position the repeal of the device tax not necessarily from ObamaCare but more so as its impact on the economy and from a job loss perspective, we may have a better chance of possibly repealing that. But it’s interesting that you started off the report that way. And when you did your research, what were some of the things that stood out in regard to the med tech industry’s impact on the economy and healthcare system overall?

Matt Dolan:      Sure. Maybe it’ll be helpful to give a little background on why this report came together. We only had a few weeks really to do a number of the analyses that you see throughout the report in advance of our presentation in Washington.

Scott Nelson:    Sure.

Matt Dolan:      And in that process we had the chance to speak with many medical device executives throughout the industry who had also spent some time on Capitol Hill having these discussions with their representatives. So we had the chance to kind of hear how those discussions had proceeded, what they had learned, what some of the positives and negatives were, and a lot of the perceptions, what those perceptions were in DC as well. So in this report we tried to really answer a lot of those questions without having them be required to be asked, and the first premise was, what’s the state of the med tech space today prior to looking forward to the Affordable Care Act and the effect of the medical device tax.

And obviously some of the things you mentioned, those are stats that have been thrown around a lot in the last year in this discussion, but we really wanted to show that the med tech industry is not a part of the cost problem. There’s a study that shows on a percentage basis the spend on medical devices has not really changed over the last couple of decades. We feel that disability is down by 25%, and obviously, death rates and life expectancy have been improved from the patient’s perspective because of these devices as well. And then using some of the more political buzzwords, certainly medical device companies are responsible for a lot of innovation, a lot of job creation. At above average rates they add to local, state and federal economies and those types of things.

So it’s really a very positive industry that is facing a very tough time here going into 2013. As managers evaluate the impact of the tax, certainly jobs are either being cut or certainly new hires are not coming into the fray, and other projects more on the R and D side of things are being either evaluated or cut altogether as well. So yeah, the innovation concept and the employment concept are both right in the crosshairs of this medical device tax.

Scott Nelson:    Gotcha. And some of those stats that you’ve mentioned in the report, death rates down 16%, life expectancy increased by over 3 years, disability down 25%, etc., those are some interesting stats when you consider, from a devil’s advocate perspective, someone might say, “Well, medical device companies just want to make money. They want to innovate new products. Obviously, there’s an increased cost of goods with those new products, higher cost of the healthcare system, and that burden then falls on the taxpayer.” But I think some of those stats in the report kind of speak to the fallacies in that argument.

Matt Dolan:      Yeah, there’s certainly a need for more cost effectiveness going forward now than ever before, but medical device spending relative to the overall spend on healthcare is a very small number. It’s 5 or 6% of expenditures within the US. So what we wanted to show is that it’s not becoming a bigger proportion. But I do think things have changed. You can’t just come with a better mousetrap or a product that’s only safe and efficacious. I do think you need to be able to add that cost effectiveness argument to the equation as we look at the future of the medical device industry.

Scott Nelson:    Right. Without a doubt. So with that said, let’s move into kind of the second bullet point in regard to trying to answer the question. Is the 2.3% device tax justifiable? Does it make sense? And in the report you outlined a nice analysis or a nice argument in regard to the fact that more patients in theory will be covered by ObamaCare, but what percentage of those patients will actually benefit from medical device? Can you speak to that?

Matt Dolan:      Sure. So one of the arguments we heard coming from the Hill prior to us spending time in DC was that one of the premises behind the medical device tax was that medical device companies would benefit from a higher number of patients being ensured, effectively, and we tried to slice and dice that concept in a couple of different ways. One is the one you mentioned, and we looked at just a handful of medical device products, heart valves, ICDs, stents, some orthopedic implants, some of the more common devices that are used out there today, and we looked at the average age of a patient receiving that device, and that was well into the 60s or even 70s for certain products. In comparison, when we took a look at some statistics around the uninsured, you see that almost 90% of them are under 55 and another I think about 80% are under 45 years old. So we’re really talking about two primarily different groups here that are coming into the insurance system as opposed to those that typically use a medical device, and we thought that was a pretty striking comparison as one example.

Scott Nelson:    Right, right. I’m looking at the stats here in the report. Eighty percent of uninsured patients are under 45 years old and 88% are under 55, so well below the average device user, which you just mentioned. I think cardiac stents, the average age is 62, ICDs 60, heart valves 70, etc. So that’s a really powerful statistic.

Matt Dolan:      Yeah, and I’d also add that a lot of these patients, if we’re talking about clinically necessary treatments, a lot of these uninsured patients are getting treated either way. If you come into the ER, the product is still being used whether the patient’s insured or not, especially in more of an emergent situation. So knowing a number of physicians in my family, I think that’s a big argument from the doctor’s side of things, is that even though they’re not insured there are a lot of treatments that take place on someone else’s docket, so to speak.

Scott Nelson:    Right, right. And another very valid point too that you outlined in this report is the fact that hospital purchasing or procurement departments, that environment is only going to get worse. When you look at the average customer of a device company, especially as more hospitals acquire physician practices, it’s a hospital, and just because of ObamaCare it’s not like they’re going to open up the books and begin to accept higher prices. In fact, likely they’ll try to begin to continue to ask for lower pricing from device companies in return for their reduced margins.

Matt Dolan:      Yeah, absolutely, and one of the thoughts that we had heard, again leading into this analysis, was that more insured patients means that hospitals should be getting paid on every patient. Then the question becomes, at what reimbursement rate? And I think that’s something that is going to constrain their purchasing power as opposed to improve it as we go into next year. We did a survey of medical device companies indicating what they were hearing from the field. Over three quarters of those companies expect hospital purchasing to be worse. We’ve anecdotally spoken with GPOs and other hospital systems and the feedback again has been consistent that they’re looking to cut their purchasing behavior in the next year and beyond as a result of the evolving healthcare environment. So this is just a small piece of the argument saying, “Look, if medical device companies are going to benefit from this apparent windfall,” and that’s kind of the term that’s been thrown around consistently in this discussion, “this windfall of patients coming into the system that are now insured, wouldn’t hospital spending potentially be looking more favorable as a result?” And in fact, in this analysis, we found that the opposite was true.

Scott Nelson:    Sure. Yeah. And I think you kind of used it as a case study when looking at the State of Massachusetts and kind of their universal healthcare program dating back to, I can’t remember it exactly, maybe early 2000 or mid-2000, I can’t remember. But I thought that was a really interesting example of looking at a state that kind of has instituted something similar to ObamaCare as it is today and the impact, have medical devices really seen a windfall in a state that has introduced something similar to ObamaCare? And based on your analysis, it looks like the answer is no.

Matt Dolan:      Yeah, exactly. And again, leading into this report, we found there’s just a lot of talk back and forth about, “We think there will be a benefit or windfall,” “We think there won’t be,” but there wasn’t a lot of data around it. And we got some feedback from a couple of the medical device advocacy groups, including MDMA, which is one of the groups based in DC, and they had just begun starting this discussion coincidentally at the time when we were doing our research, and Massachusetts as you said legislated their universal healthcare program in 2006, and then it was slowly implemented through 2011. So we thought it’d be interesting to say, “Although it’s not exactly the same as the Affordable Care Act, how did medical device businesses fare in Massachusetts relative to the rest of the country, again, under that same premise? Hey, if there’s going to be a windfall associated with universal healthcare, that’s something we should see in this particular state, and then use the rest of the country as a comparison.” We only had a few weeks to put this together but we still had almost 5 billion dollars of revenue represented in our analysis, and eight of nine companies had negative comparison. So then the listeners can go in and see our report, but we continue on and show the actual growth rates for each of those companies in Massachusetts versus the rest of the US and you can see the discrepancy is not only just neutral but actually quite negative.

                           And we looked at another group of Northeastern states to control for any geographical differences, and again that was true. So this is a fairly small sample, but I do think the industry is going to continue to dig into this. And this is probably the most compelling piece of the report or probably the freshest data that was available in the report that we put out, again, this past September for our time in DC.

Scott Nelson:    Right, right. And like you said, even though it’s a relatively small sample size, I just think it’s really interesting because prior to reading to this report, as you mentioned, there’s a lot of opinion going on back and forth, I mean there’s a lot of that in the report that you put together [00:17:08] and I thought the kind of the case study and when looking at Massachusetts was fascinating. And even to that point, the PCI procedure [00:17:17] or the percutaneous coronary interventions, a heart cath, coronary stents or a coronary angioplasty procedure, I thought that was really interesting when you compare the State of Massachusetts versus the rest of the United States. You’d think there’d be more patients available for heart caths in Massachusetts, but in reality they were down I think 4% looking at 2004 through 2010, where the rest of the US was down 1%. Does that sound familiar?

Matt Dolan:      Yeah.

Scott Nelson:    Yeah.

Matt Dolan:      No, that’s exactly right. I think that’s a nice example because it looks at volume as opposed to revenue, so it takes out any effect that pricing may have within a particular product category. Yeah, and I think PCIs are certainly a medically necessary procedure, and I think it speaks to some of the points we made earlier about these patients are getting treated whether you like it or not, and why would there be a benefit especially within the medically necessary side of the industry?

Scott Nelson:    Gotcha. Gotcha. Great stuff. And then let’s now transition to kind of the third point and discuss kind of the potential negative ramifications should this device tax continue on without any sort of repeal or adjustments to it, first and foremost being the top line nature of the tax. And can you discuss briefly kind of the average earning decline, the small caps versus large caps that you…?

Matt Dolan:      Sure, yeah. Yeah, so a lot of people here, 2.3% of revenue, and it seems like a fairly small number, but you have to imagine that a lot of these companies, their operating margins are in the maybe 10% range, 10 to 20% for the industry for those companies that are profitable, and frankly, the smaller entities out there often aren’t profitable. They’re trying to develop some new innovative device to help treatments be safer and more cost-effective, so there’s a lot of investment associated with that. Most companies don’t get profitable until their revenues exceed a hundred million dollars, and I think under the basis of this tax the small companies take the biggest hit. And you can see in our report, the large companies, the average hit to their profits was about 4%. The small companies, the average hit to their profits was about 34%. So it’s a huge difference.

                           Now, granted there are some companies in that small group that aren’t making a ton of money, so the percentage might be a little bit misleading, but I think the concept is still the same that a 230-basis-point hit to your profits is a very big deal to the viability of a company, and that’s why we’ve seen so many companies proactively go out and already cut jobs in advance of this or we’ve seen hiring freezes in a number of companies as well.

Scott Nelson:    Sure. Absolutely. And I struggle, even researching this, I’ve done other interviews, one with Steve Ferguson, for example, the Chairman of Cook, in regard to the device tax, and Cook have been very vocal about it, but I still struggle to figure out why was this implemented as a top line tax on profits? I don’t quite see how there’s any justification. Have you been able to figure out any rationale as to why it was implemented this way?

Matt Dolan:      I’ve heard a number of rationales, I mean, even through our process there were five or six opinions thrown out there. The obvious one is this windfall concept. Frankly, I think that there was a need to pay for the Affordable Care Act on an aggregate basis, and I think the legislators came together and said, “How are we going to pay for this? Let’s look at the different industries that are options.” They came up with some dollar amounts. And as you remember, the device tax was actually supposed to be higher and it was trimmed back to a degree.

I certainly don’t think this was a scientific decision where they said, “Look, you guys are going to benefit by X amount, and therefore, we’re going to tax you by Y.” But this was more of something where, “Hey, we have to pay for the bill. Let’s find a way to do it,” and the justification would be, “Hey, there’s a windfall of patients coming through the door now that these medical device companies are going to benefit from.” I think that premise was really derived within the pharmaceutical industry, which makes a lot more sense. You have more insured that can be on some sort of drug therapy that maybe previously weren’t. And reflecting on the conversation you and I have already had, I think that may be a little bit flawed in terms of applying that same logic to the medical industry.

So I think that was the primary reason. There are other suspicions out there that we probably don’t need to go into in this interview, but I think that’s the way it works, is they find a way to pay for it. And in a lot of our discussions on the Hill, you couldn’t have this discussion around the premise of the medical device tax without leading into a discussion of how we’re going to pay for the bill in its entirety. So both of those questions need to be answered before we can find any type of possible resolution or repeal.

Scott Nelson:    Gotcha. Very good. And coming off of that pretty significant negative impact to most companies, and even if you look at a 4% hit to large caps and, looking at your numbers in the report, roughly a 34% negative impact to small-cap companies, and a whole host of negative ramifications from cuts in R and D, job cuts, less hiring, and then even the impacts on patients, can you speak to a couple of those that really stand out when you were putting together this report and speaking about it on the Hill?

Matt Dolan:      Yeah, I think one of the things we try to suggest is that you’re not only looking at just the dollars associated with a certain tax rate but also, what are the opportunity costs of this tax? And you mentioned two of the ones that we thought were most important to a political discussion, and one was the employment picture. And we did run a survey in the couple of weeks that we had leading up to this presentation to support our discussion on hiring, and we also did that on R and D spending, R and D spending being a proxy for innovation within an industry. So on the jobs side, I think the biggest takeaway was that more than 80% of companies said that they were either cutting jobs or they would hold back on hiring new employees as a result of the device tax. So in this whole unemployment discussion on a national basis, I think that has a real resonating effect in the political environment.

                           On the R and D side, we asked the same question and more than three quarters of companies said that they would either cut current jobs or forgo new projects as a result of the device tax. So, clearly, a heavy, heavy impact, and these were bigger surveys than the one we mentioned earlier in Massachusetts. I think aggregate revenues were well into the 40-billion-dollar-a-year-type range for the jobs survey and pretty close on the R and D side as well. So this is a very fair I think representation of where the industry stands today.

Scott Nelson:    Right. So with all of that said, I think anyone that reads your report, the conclusions are pretty telling, looking at the device tax. In your opinion, is there some sort of middle ground that we can come to when looking at for the betterment of the country, the domestic United States, in helping to pay for ObamaCare? In your opinion, do you think the device industry should kind of pony up to a certain degree or do you think this device tax should be repealed altogether?

Matt Dolan:      I think it should be repealed altogether, and this is not just because we follow this industry closely and are tied to it in a way. But I think if you really look at the premise behind this tax, the justification is very hard to come by, and frankly, I don’t think there’s a massive amount of discussion around some of the points that we made throughout this report. They’re very telling. So if we’re just looking at the premise of the tax, I think there’s something here that needs to be done. The next step in that question, in that discussion, is how do we pay for it?

Scott Nelson:    Right.

Matt Dolan:      And that’s something that’s well beyond my area of expertise and role here in this discussion. I think they do need to find a way to come up with the 30 billion or so dollars that are allotted to revenue from the device tax, but I think the key thing in justifying finding another revenue source really comes from this opportunity cost concept. If you think about the jobs lost, the innovation, the cost effectiveness within the healthcare industry, there’s a lot of benefit that is going to be sucked out of the industry as a result of the device tax, and that’s very clear based on this survey we put together.

Scott Nelson:    Right.

Matt Dolan:      So I think that’s something that again is hard to quantify and it takes us back to more of an anecdotal discussion, but I think that’s really the premise that needs to be used to go forward. Now, whether it’s a complete repeal or some type of balanced compromise or a tiered structure where the smaller companies are less impacted than the larger, I don’t know. Those are all things that have been thrown around. Frankly, I don’t think the probability of any of these is much above 50% at this point. I think it’s still a bit of a long shot. But the discussion I think is still ongoing. There is some bipartisan support, which I think is encouraging to some degree, and we’ll see how it plays out. We should learn more here in the coming months.

Scott Nelson:    Yeah. Yeah. It should definitely be interesting. I think all of us that are in the device industry, especially after reading a lot of really solid data in your report, it’s like, wow, I mean this thing makes hardly any sense at all. It’s really hard to put your hands around how this was envisioned in terms of its [00:28:22] to the device industry. But anyway, as we reach towards a conclusion, Matt, even covering kind of med tech/medical device industry for roughly 10 years—I mentioned that kind of in the intro—what keeps you up at night, if there’s something that does other than your young kids? [Laughs]

Matt Dolan:      Yeah, 4-month-old at home kept me up last night.

Scott Nelson:    Yeah, [laughs] that’s right. That’s right.

Matt Dolan:      [Laughs]

Scott Nelson:    And specific to the device industry, is there anything that keeps you up at night? And then, on the flipside, the air that we’re in right now, are there also a lot of opportunities for those device companies that can adapt and change quickly? What’s your take on that as we kind of conclude this discussion?

Matt Dolan:      No, I think we’re definitely at a turning point in the industry. Our healthcare is changing, right?

Scott Nelson:    Mm-hmm.

Matt Dolan:      As I mentioned, my dad was a physician, my brother-in-law is an anesthesiologist, so we’ve got our hand on the pulse of the industry from a physician’s perspective who’s dealing with healthcare on a daily basis. A lot of these doctors are becoming employees of hospitals and that’s having a huge effect on how medical device companies, pharma companies, etc. are able to interact with physicians, are able to sell into hospitals and GPOs and so forth. So there’s certainly a change afoot here in the industry.

As I mentioned earlier, cost effectiveness is going to be huge. I think we’ve got a little better visibility onto the regulatory side of the equation, and now the cost side is going to become much more a piece of the discussion in the next few years. Specifically, on the reimbursement side, if we can get better clarity out of CMS as we now appear to have out of the FDA, I think that’ll help the industry move forward. But generally, I think the underlying market is not going to be as robust as it was. I still definitely think there’s room for new innovative products to come in and provide nice growth opportunities, better ways of treating patients that are less impactful and keeps them healthier and more active longer. So I think those ideas will continue to succeed, but it is in the face of a more difficult environment, so it’ll be an interesting time. And I think you just add to the number of variables required to have a successful medical device and a successful business plan around that device.

Scott Nelson:    Yeah. Yeah. I couldn’t agree with you any more in regard to those kinds of concluding thoughts. So, Matt, real quick, if the audience wants to learn a little bit more about you or about Roth Capital Partners, where would you have them go?

Matt Dolan:      Yeah, so the report we mentioned is on our website. There’s a link called Press Room, and if you look on September 17th there’s a link to the report on the impact of the ACA on the medical device industry, so I’d recommend checking that out. My contact information is on the website under the Research tab and feel free to reach out if anyone wants to have another discussion. This has been something that we’ve invested a fair amount of time and effort into and it’s definitely an area we’re going to remain interested in to see how it unfolds here.

Scott Nelson:    Gotcha. Very good. And in the show notes, as I mentioned, I’ll link directly to the report on the Roth Capital website as well as Matt’s profile if you want to potentially read a little bit more about his work at Roth Capital Partners. So Matt, thanks a ton. I’ll have you hold on the line, but thanks again for your willingness to do this and speak about this report that you put together. And as I mentioned earlier, there have been a lot of opinions and back and forth about the device tax but not a whole lot of data, and this certainly meets that need in terms of real hard data, albeit on a relatively short notice, real hard data that speaks to the potential negative ramifications should this device tax proceed forward. So thanks again, Matt. I really appreciate it.

Matt Dolan:      Alright, man. Thank you.

Scott Nelson:    Alright, I’ll have you hold on the line. But again, thanks everyone for listening to the latest Medsider interview. Again, all these interviews are on iTunes. If you do an iTunes search for medical device or Medsider, podcasts will pop up. You can subscribe for free. We’re also on Stitcher Radio. That’s S-T-I-T-C-H-E-R, Stitcher Radio, as well. So a couple of different options to consume these [00:33:01] interviews [00:33:02]. Thanks for your listening attention and until the next episode of Medsider, everyone, take care.

[End of Recording]

Scott Nelson:    Hello, hello everyone.  It’s Scott Nelson, and welcome to another edition of Medsider, the place where you can learn from med tech and medical device experts on your own terms without going to school, and on today’s show we have Tim Gleeson, who’s the CEO of Novasyte. Thanks, Tim, for coming on. Really appreciate it.

Tim Gleeson:    Yeah, thanks for having me.

Scott Nelson:    Alright, Tim. First, can you give us a little bit of background about you, and then tell us a little bit more about Novasyte?

Tim Gleeson:    Yeah, sure. So my background is a pretty typical sales management background. I was with a business sales environment in New York City for a couple of years, and then moved into med device sales with a large company. I’m not sure if we can say the name of the companies out loud?

Scott Nelson:    Yeah, that’s fine. That’s fine.

Tim Gleeson:    Fantastic, yes. I was with Covidien for many years in the sales ranks, and then was promoted out to the West Coast here in Southern California in sales management. And as we went through some pretty big GPO swings and some pretty big IDN plays, bringing on multiple products at once, we were constantly tasked with trying to figure out how to [00:01:14] educate and manage conversions. So we spent a lot of time on sales and sales management educating end users on how to use our products. And even though they were low-tech in some instances and moderately technical in others, we would spend upwards of 40% of our year educating.

And so, you know, we looked at—and we being my business partner Joe Andrew and I, and Joe’s going to join the call here a moment—but we looked at opportunities to fill a need that we had, and that was provide a reputable, reliable brand representative to support education events when the customer says yes. And as it’s evolved, our business has gone from just when the customer says yes to all the way down the line to when the FDA says, “Hey, you need to pull this product off the shelf.” So today we’re pretty excited about our business and where it is, but that’s really the backdoor on how we got to where we are.

Scott Nelson:    Gotcha. And I certainly want to dig in to some of the unique value propositions that you guys offer through Novasyte, but let’s first start with your background because I want to touch on that. You left, and I’m looking at your LinkedIn profile right now, what appeared to be a very successful career within Covidien, kind of moving up the ranks from a territory manager role to regional manager and you won several awards as regional manager of the year. You could have gone on but you saw enough of a need to branch out and start Novasyte. Was there a trigger event there…

Tim Gleeson:    Yeah.

Scott Nelson:    …or have you always had an entrepreneurial flair that you couldn’t resist making a move?

Tim Gleeson:    You know, it’s funny, I think I always had an entrepreneurial flair. I grew up originally in Australia with a father who was very entrepreneurial [00:02:58] and in up-selling what was one of the largest diagnostics companies in Australia to a large organization here in the US, which brought us to the US. But I think, from an entrepreneurial standpoint, I’ve always been fascinated with growing something, building something and having that sort of the foundation for what you do on a daily basis. And I think, if you really look at [00:03:25] the Covidien role, which was a very corporate-driven role and a fantastic opportunity to learn a tremendous amount, but I wasn’t necessarily interested in jumping in line with a number of other people who were in front of me who had a very similar look, profile and experience, and then basically have to battle it out to the top. Joe and I were battling each other every year, number one and number two spot, whether it be for sales or sales management, so I knew at some point Joe and I were going to have to battle each other to get that next job.

And so I, really for me, I think the big thing for me as we went through this was focusing on, okay, if I’m going to work 60, 70, sometimes 80 hours a week, how am I going to do that? And how am I going to make sure that we’re trying to figure out—where do we get the best bang for your buck? And if you have to put in that blood, sweat and tears, are you wanting to do that for somebody else and build somebody else’s treasure or you want to do it for yourself? And so I think there was always a need and a desire for both Joe and I to be entrepreneurial, but I think as much as anything it was finding the right itch to scratch, finding the right need. And I think for me, and I’ll let Joe answer here in a second, for me, the biggest thing that drove me towards starting Novasyte was I was about to go down and live in San Diego for two or three months, I had a very large health system down there that said yes to four products, and I had a brand new baby at home.

And while we were having great years, as I said, being in the number one and number two spot, we were constantly going into these non-revenue-generating tasks like education. So that night I got up at about three in the morning in a very Jerry Maguire-ish moment and typed out a business plan, which to be honest, now looking back, it’s about 40 pages long and it has some gibberish and some ranting there, but still the essence of the concept holds true, and that is providing sales organizations the right talent at the right location but making sure that they are both brand representatives and clinically sound. And so that really was what drove me, was the idea of here I was again going on the road to go and educate the end user on how to use four new products. And I’ll hand it to Joe to chime in here. Joe, what was your thought process on leaving and jumping off?

Joe Andrew:     You know, it was definitely not a decision that was made lightly [00:06:05] very comfortable in the career I created [00:06:08] over 15 years. I’ve been in sales since school and in middle management, so to speak, but the opportunity, [00:06:18] I think you said back, the need that Tim and I identified was there and we lived it every day, so we knew there was a market for it, we just needed to know if it was a Covidien-centric issue or if it was a global issue, and luckily for us it’s a global issue, this need for having peer-to-peer education in times when economic times are the way they are. We provide a definite value when needed, and then we’re not there when we’re not needed.

Scott Nelson:    Sure. Very good. And the reason I even ask that question is, and you guys both I would presume would agree with this statement in that some of the best entrepreneurs are sales folks that are in the trenches in the field, see needs and want to meet those needs. And so that’s the reason I even ask that, is for those sales folks that are listening to this interview and have sort of that burning desire to build something on their own with their own blood, sweat and tears as you mentioned, Tim. I think it’s great for them to hear your story and why eventually you pulled the trigger.

So moving on, I want to hone in and I want to build a case for the needs and challenges that you guys first identified and maybe are still identifying to this day, but for those listening that have an experience what a typical conversion process looks like with a certain medical device or a certain medical product, let’s get into that and what challenges that creates for a device company that’s dealing with a system-wide conversion or a hospital-wide conversion at the local level. Can you expand on that a little bit?

Tim Gleeson:    Yeah, and obviously Joe and I have, before Novasyte, many years experience getting it right and getting it wrong, so I think as we’ve gone through this process we’ve really learned how to best add value to organizations. But I think when you look at the customer dynamics today, very few organizations are stand-alone facilities making purchasing decisions today, and I think that’s pretty important to talk about because the dynamics of the customer and the way the customer buys have changed and they’re changing quite rapidly. There’s always the discussion of GPOs buying and sort of driving some utilization, but we’re seeing more and more that shift to a health systems discussion where it’s an IDN top-down.  So I think when you talk about a house-wide conversion, I think what you need to talk about first is the front end. Okay, how does the product get introduced to that facility? And if the product is being decided by the executive level to be acquired, then it’s a very different discussion than if you’d trialed the product in every facility locally and you’d gotten by it.

So there are two different ways to look at it. One is sort of, “Hey, we’re going to adopt this product, get on board,” and the other one is, “Hey, let’s try the product and let’s see if you like it.” So I think those are two things that are changing pretty quickly, but house-wide conversions are notoriously—they’re labor-intensive, they’re time-consuming, they drain a lot of resources, and from all of the companies that we work with, you really probably three to four weeks of planning before you go into a house-wide conversion. And that house-wide conversion, just like it says, it starts in the basement and can go all the way to the ceiling, and that’s [00:09:47] generally the competent areas, and everybody in between those two areas needs to know exactly how the product works [00:09:53] if there are any issues. And that’s where the device company comes in, and that’s where they have to figure out, how are we going to do this education? How are we going to manage this plan?

So I think from our perspective there is a difference in the way that customers are buying today, but a house-wide conversion really is getting in on the ground level, building the resource plan, and the resource plan consists of a company like Novasyte coming in to support or, alternatively, utilizing your sales force, which again is why we started Novasyte, because of the under-utilization of sales doing selling activities, and then from there, really it is somewhat of a dance. There’s a lot of coordination with the facility, a lot of coordination with the resources, products distribution. You really want to make sure that you’re not just sort of showing up and hoping that this works, and really I think that’s where the skill comes in. A good conversion prevents all of the troubles and all of the fires that show up 30, 60, 90 days out post-conversion. So you should plan on the front end, you prevent any failure on the back end. And Joe, I’ll let you chime in there. Joe?

Joe Andrew:     Well said, Tim, and the clinician to clinician from my point of view is something that’s really taking on in regard to peer-to-peer education, and in what we’ve seen, a successful by-product is the fact that when we go back in into the hospital they know our clinician’s faces, they trust the feedback and the [00:11:28] channel, and you’re going to get post-conversions. It’s not only the front end and middle but it’s [00:11:32] post-go-live. We had three customers last week tell us, “These conversions went well up front but three weeks later we lost the deal or three months later we lost the deal because of the poor followup.” So we offer all those different points of reference for our customers.

Scott Nelson:    Right. So a typical process, and in my experience this is what typically happens, and Tim you touched on it briefly, in a medical device company in today’s age where they’re being squeezed on a lot of different fronts from the medical device tax to an uncertain regulatory pathway to the increased costs of getting a 510(k) or a PMA approved, etc., there are all of these different cost squeezes. So they’re looking at their traditional sales model and saying, “Okay, we’ve got to have a salesperson, a territory manager in the field driving conversions,” but is their time best spent going out and hunting per se or handling the conversion, from that time when the customer says, “Yes, we want to convert. We’re good with the pricing. We’re out of contract with our current vendor,” etc.? That whole process from when they say yes to all of the planning that goes from educating all of the nurses and staff on a floor or whatever capacity your device is used in, to handling Q&A after the conversion, all of that stuff, is that best suited for a salesperson, which happens in my experience most of the time, or is that best suited for a team of clinical reps? Is that best suited to outsource to a company like Novasyte? I’m not even sure [00:13:14] if there are other companies that offer your kind of services, but that whole aspect—and what are you seeing in the field, today, when you’re talking to device companies that are going through these challenges, and if we dedicate these tasks, these conversion educational tasks to a salesperson, is that their best use of time? What are you seeing?

Tim Gleeson:    Right. Well, you’ve asked a lot there…

Scott Nelson:    [Laughs]

Tim Gleeson:    …but I think from a couple of observations, and if I understand it correctly, what is the best way to get a customer educated on board and support it, right?

Scott Nelson:    Mm-hmm.

Tim Gleeson:    And whether that be insourcing it with your sales force or insourcing it with a full-time clinical team or outsourcing it—we like to call it partnering—with a company like Novasyte? And to our knowledge there isn’t a [00:14:03] tremendous amount of companies out there that do what we do, which thankfully gives us a little bit of a green field space, but well, I think when you look at the pricing pressures in the device and diagnostic space today, the 2.3% med device tax alone is a huge sort of gray cloud that organizations are trying to figure out what to do. On the assumption that Obama does win again and the 2.3% med device diagnostic tax does go into effect, there is effectively 25 to 30% less gross margin for organizations to work with. So you’re talking about one element of the next 12 to 18 months is going to add increased pricing pressures. Regulatory approval – increasingly, increasingly difficult. I think it’s becoming not only very difficult to get it but very costly to get it. So you’re seeing a decrease in VC investment across the board in organizations, in med device, small startup med device and diagnostic companies.

So I think that, along with sort of ever-evolving customer base, really puts an opportunity for Novasyte in play. So we’ve always advocated that the sales force is never removed from the opportunity to own the relationship. Our goal is never to replace the sales force or the full-time clinical force. A number of customers use a blended model, which is they may have a sales rep or a sales manager in there, they may have a dedicated full-time clinician, and then augmenting that, sort of the offensive line, if you will, is the Novasyte team.

So it really depends on the technology, the complexity and where the product is going in, but I think if you look at it, the goal is always to have you’re highly-paid sales guys and girls out in front selling. And yes there’s opportunity to sell in an account when you’re in servicing, educating, but there’s also opportunity to be down the road of the next deal. So our goal as we came out of Covidien was not to necessarily remove the sales force but to provide a strategic partner who can support multiple conversions at once, who can support clinical credibility, who is a clinician to a clinician, a pharmacist to a pharmacist or a physician to a physician. So you get this inherent uptick in adoption, in credibility and utilization from our perspective when you’re leveraging a company like Novasyte to support your sales force, but again, your sales force or your full-time clinical team, they are the quarterbacks.

Scott Nelson:    Mm-hmm.

Tim Gleeson:    So they are still very much in control. This is not a, “Hey, we’ve got the PO. Give it to Novasyte. Go implement it.” That’s not the process and it never has to be.

Scott Nelson:    Gotcha. I like your analogy of using the traditional model of a sales rep in the field being the quarterback and a company like Novasyte, for example, or even if you insource it, your insource clinical team as the kind of offensive line. That’s a great analogy. Joe, anything to add to those comments?

Joe Andrew:     Well, I think if you talk about what Tim mentioned earlier in regard to decisions being top-down [00:17:14], we have a large system IDN [00:17:18] converted, let’s say 42 hospitals, what’s the tactical plan to do this? Do you fly in your sales reps to bring in marketing, as Tim said, you insource it?

Scott Nelson:    Uh-huh.

Joe Andrew:     Or do you look for a partner that has done this before, and we can go over a laundry list of conversions that we have performed system-wide, 42 hospitals converted within two-and-a-half months, and that’s [00:17:37] before in-service and product now on the floors being utilized. So we make the decisions, as Tim said, from the top down and these larger opportunities pop up. We are able to parachute our team in [00:17:50] and assist, and we’ve done that time over time. And in regard to some of the price pressures, as Tim often stated, within the medical device industry, someone from the AdvaMed conference last week, a CEO, mentioned that we can’t keep reducing our price 2% a year, 3% a year. It’s death by a thousand cuts. We have to come up with a way to innovate our product and make our product valuable versus just dropping our price.

Scott Nelson:    Mm-hmm.

Joe Andrew:     And that’s kind of the task ahead of these medical device manufacturers, how do you make your product sticky [00:18:22] without lowering your price [00:18:24]?

Scott Nelson:    Mm-hmm. And that’s a difficult challenge, and you have to think one of those would be the support and service that you offer on the back end, certainly.

Joe Andrew:     Exactly.

Scott Nelson:    We talked a lot about like a typical conversion process, so either a stand-alone hospital or in most cases probably a hospital system would decide to convert to a product and everything that goes on behind the scenes throughout that conversion process, the education, the questions post-conversion, etc., but what about even, in looking outside of a conversion process in a day-to-day sort of environment where a physician is using a device, not overly experienced with it but has some questions during the case or right before the case, do you see that as a big challenge? And the reason I ask is I’m looking at the phone-in video support that Novasyte offers. Is that where you see that coming into play?

Tim Gleeson:    Yeah. No, I think there’s definitely, again I had to use the blended term, but there’s sort of a multi-pronged approach here.

Scott Nelson:    Mm-hmm.

Tim Gleeson:    And one that we’ve developed in conjunction with customers, and nowadays the discussion around, okay, of the time spent in front of the customer, how many times could that particular customer have been supported remotely whether it be by phone support or video chat support? And that was really how we’ve come up with sort of an augmented approach, three-pronged approach if you will. So I think when you look at the on-demand discussion, being able to support end users in a just-in-time basis is important and becoming more prevalent. If you look at the product set getting smaller and smaller and going home with patients, that presents a whole host of different challenges around, how do you support that?

So I think when you look at the 800 phone support and the video chat, well the 800 phone support is not necessarily revolutionary. It’s part of our integrated approach and then again becomes sort of I consult on the phone and with our help, whether it be an end user, consultant, clinician, physician or patient, manage that product. And then also with our video chat leverage, this is one of those sort of in-between stages of technology where you don’t necessarily need to do a full-court press within a facility because the product is not that different or the product is not that changed, and really what you end up doing is you provide a menu of services to them, and you might give them 30 hours of face-to-face field-based support and then maybe two weeks of video chat support. So it becomes this opportunity for the customer to figure out, how do they want to consume this information? How do they want to get educated? What kind of accountability do they want to take on board? So there’s a shed risk, shed reward discussion that goes along with this.

One thing I might add just real quickly is, when you talk about the price points being critically addressed within a health system, and the biggest spend always comes in first and they ask, “Okay, we need to lower your price by 3%. We’ve got a 50-million-dollar gap in our budget,” that’s happening with every product in every company and we’re seeing that. What we’ve been able to do and what we’ve noticed more and more is, how do you differentiate your product or service when all of a sudden you’ve got this negative innovation, this innovation where the product is not necessarily the most revolutionary but it fits 80% of the need and it’s at a great value? So I guess my point there is that service, a lot of organizations have come to us and said, “Our product is good but we need to differentiate on a different platform,” and that’s where they’ve come and said, “We need service to be a differentiator.”

Scott Nelson:    Mm-hmm.

Tim Gleeson:    So I think that’s really an interesting discussion when we talk about all of these pricing pressures, how do you make your product or your service or the combination of the two differentiated? And I think that’s where Novasyte can play a really healthy role.

Scott Nelson:    Right. Joe, unless you want to step in there, and I guess let me throw this scenario at you. If I’m a hospital, we’re in the process of negotiating a new contract, as a medical device manufacturer though I can come in and say, “Look, we’re going to be competitive on price.” Say I’m the incumbent in this case. I’m going to say, “Do you recall the video support that we offered over the past year-and-a-half? Anytime your nurses or your techs, etc. had a question, we were there, available, just like an online chat through a banking service, for example.” An intangible like 24/7 phone and video support or something along those lines, I have to think that in most cases would outweigh maybe a little bit of a higher price. Do you agree?

Tim Gleeson:    Yeah. Look, I think it does, but again I think it goes back to the healthcare sector being a little slower to adopt technology and a little slower to adopt new ways of doing certain services. Obviously, there are cutting-edge surgeries and cutting-edge devices that are coming out, but as it relates to the healthcare arena, generally a little slower to adopt technology. So I think the opportunity is there and I think that the next generation of clinicians and physicians are really going to expect it. I think that we do have an interesting sort of parallel going on in the healthcare setting with healthcare workers, and I’m not sure that they necessarily see how valuable that can be yet. But what I will say is, from a menu offering, I think you’re talking about being able to differentiate your offering and offering three components – field-based, video chat and phone. We do see that becomes, whether it’s at the high-end level of an IDN discussion or sitting down with a GPO, being able to put that into an offering and say, “Here’s 10 reasons why you should buy from us, and three of them is the service component.” We see that more and more becoming a valuable distinction between competition. So I think you’re right. We’re just not sure how far it can go yet.

Scott Nelson:    Sure. Yeah, that makes a ton of sense. And even going back to, and I can speak to this personally, in that a lot of the times when I’m going to cover a case, cover a procedure, most of my experience has been on the implant side or like a one-time-use sort of product, if I’m going to support a case or even go to in-service a bunch of new techs or nurses that have questions about how a particular device is used, there are so many times when I personally left that hospital and said, “Geez, I drove two-and-a-half hours to this hospital and that totally could have been accomplished through video, [laughs] through a Skype chat,” or something along those lines.

Tim Gleeson:    Yeah.

Scott Nelson:    And I guarantee that every sales guy that’s going to be listening to this interview is like, “Amen. I thought the exact same thing.” But with that said, this is not a new thought. This has been a thought I’ve had probably for the past five years, but yet I find it hard to believe that a large strategic device company, whether it’s Covidien, Boston Scientific, Stryker, Zimmer, I’d be hard-pressed to see them implement something like that. Would you agree?

Joe Andrew:     Yeah. First of all, Novasyte, Tim and I, when we first started this organization five years ago, our first obstacle was, how do we meet every nurse that we submit to our customers? And that was done through video chat, through a software we had purchased. This was five years ago when not everyone had video cameras, so we knew this technology was going to be the way information was going to be consumed, that people were going to interact. Obviously, you see it now with Skype, and there are 45 million users on Skype, and there are co-browsing websites now where they’re sharing a screen and video pops up. So the technology is there. The adoption, as Tim said earlier, is falling behind the flow of the communities today.

So getting a doctor or a nurse to [00:27:12] with your computer screen and look at the computer screen and get an education on a device, yeah, it makes sense, because you can hold that device. Some of the devices that are out there now may be more intricate. So the pushback would be, “This device has more bells and whistles than I’m really comfortable with. I need somebody here to hold my hand.” That’s where the pushback or the disconnect could be with the technology. We see this as the medium to low-end products that they can be shown and visualized on camera. With some of the more intricate surgeries and implants, it may not catch on as quick.

Tim Gleeson:    Yeah, and I think that when you’re talking about the large multinationals like the Covidiens, the Boston Scientifics, the Medtronics, look, it’s coming. It’s happening. There’s no question it’s going to happen, and I think that’s a really important distinction. We were just with AdvaMed last week, we had a great discussion with the CEO of J&J’s ortho clinical business, they’ve gone and they’ve done this. They are doing this internally, this video chat discussion. So it’s not a question of if but when. The one variable is it could be another five to eight years before it’s really adopted.

Scott Nelson:    Mm-hmm.

Tim Gleeson:    But we’re here, and we’re not looking to be a singular offering. So as we go through and we constantly evolve our business, we’re certainly looking at doing more, and one of those prongs is the video chat discussion, Novasyte 360.

Scott Nelson:    Right, right. Yeah, and to your point, Tim, I mean it seems like every day there’s a new blog post or a new article that’s written about another potential negative impact for a medical device manufacturer. We talked about the device tax. We talked about the changing dynamics and how customers buy, and moving from a physician-driven sale to more of a hospital-executive-level/procurement-level-driven sale. There are added compliances, added costs of complying with the Sunshine Act, regulatory costs, etc., etc.

Tim Gleeson:    Yeah.

Scott Nelson:    I mean, the model has to change, right? I mean, there’s no doubt about it. And back to your early analogy of the quarterback, do you guys personally see more and more companies, especially those I’m not going to say startups but maybe more mature startups, moving to more of a model where there’s kind of a regional direct sales guy, but in order to implement either utilization or to manage a post-conversion process implementing more of like your team at Novasyte…

Tim Gleeson:    Yeah.

Scott Nelson:    …[00:29:58] sort of task, I mean, that’s got to happen.

Tim Gleeson:    Yeah.

Scott Nelson:    And I pinpoint the mature startups just because they can’t get financing anymore. I mean, it’s a dried-up market. The chance for an IPO is pretty much nonexistent. An acquisition is probably going to be their best chance at an exit, and they’ve got to show sales, so they’re going to have to iterate on their model.

Tim Gleeson:    Yeah.

Scott Nelson:    And I have to think the same thing, maybe in a little bit of a different way, it’s got to apply to even the big companies, like the large multinationals like we just talked about.

Tim Gleeson:    Yeah, so I think you’re right on there. I got a bit of an echo, but we love sales guys and girls as much as anybody. We are sales guys. Our organization is built on the backs of sales guys and girls who are trying to figure it out. The day of the super-sales rep, the guy or girl who is able to convince physician X to leverage their joint or their pacemaker or their stent or whatever it might be, things that were traditionally all physician preference, that day is rapidly coming to an end. And while I don’t want that to be the case because, like I said, 90% of our networks are these guys and girls doing this, but the deals are being done at the corporate level, the major accounts, the IDN, the health systems.

And really, what’s happening is from the period of time that a health systems group says yes at that executive level, and there are a number of reasons why, right? And that’s made up of it could be value, it could be innovation, it could be both, but ultimately the decision is made in a somewhat different environment than it has been in the past. Now it’s up to the organization that gets the nod to effectively go in and help with change management. That’s effective. That’s what it is. The executive [00:31:55] team has said yes not only because you’ve got a great product and a great price, but because you’ve committed to me that you can actually do this conversion and get people on board.

So we’ve had so many discussions over the last 30, 45 days around the period of time between the corporate boardroom is saying yes and the individual facility getting the nod and saying, “By the way, your product is converting.” There is a period of time, the gray area, where there really needs to be a clinical sales advisory team, and this is where we see the augmentation in the sales force, going from a traditional sales rep to sort of hand-to-hand combat to, “Hey, we’ve got the license, we’ve got the deal at the top, now we need to make sure that we convince key decision-makers in each facility on a local level that this is the right call and give them one of three value propositions and hope that they hang onto it.”

So we don’t necessarily have the answer today, but we do know that the days of [00:32:55] convince an individual in a facility to stand up and pound their chest in the value analysis committee and say, “We need this product because…” those days are really coming to an end. And I’m sure there’ll be people out there, detractors who dispute this, but it’s certainly becoming less and less prevalent.

So the clinical sales advisory discussion is really that what we’re looking at is, “Okay, how do we as a partner to our med device customers play a bigger role in the change management?” And we’ve got some great ideas on it, we certainly don’t have all the answers. So I think there’s going to be a period of time where we’re really going to be figuring it out, but again, for our business we feel very optimistic that the future looks way better than the past, for us. And so that model has to change in order to support what’s going on in the buying decisions.

Scott Nelson:    Right. I’m not sure if you noticed it but I had to step away and cough. I couldn’t reach my Mute button quick enough. But great points, and I’m sure you guys would probably agree with this, but if you’re a salesperson listening to this interview, don’t cry and complain about the changing dynamics within the industry. I mean, I guess the way I would approach it, the way I’d personally approach it is change with it, figure out where you’re strong, make your case be known and change with the industry, but the worst thing you can do is complain or be stubborn about what’s happening within our industry.

So I want to kind of reach towards a little bit of a conclusion and ask you a little bit more specific questions about your offerings, the Novasyte offerings. Your three main categories are kind of more flexible in-service teams, phone-in video support, and then full-time clinical recruitment, and if you can touch briefly on three of those and then maybe, if possible, give a few examples of what those would look like, and we kind of touched on this a little bit already so if the examples are overkill—but maybe briefly describe each of those three offerings.

Tim Gleeson:    Yeah. Yeah, absolutely. I think the really important one to focus on is the first piece, and that’s sort of the field-based change, right? And everybody’s business is somewhat pivot a little bit based on opportunity, and so is ours. So if you look at our field-based discussion, I think the really important thing to note is we’re not just used for, “Hey, the customer said yes. Bring in the Novasyte nurses or pharmacists.” That’s not in anymore. We’ve really gotten further down the discussion in the commercial plan.

Okay, “Hey guys, Novasyte, come in. We want to bring into corporate. Let’s do a one-day workshop. We want to talk about our new,” I don’t know, “Foley catheter that we’re launching, and we want you guys to come in and sort of talk to us about what you’ve seen in this space and how we go about building into the commercial plan, clinical support.” Okay, that’s a much more dynamic discussion than, Hey, by the way, we closed Keiser Hospital. We need you guys to help us.” So we’re getting way more down the line in the discussion around, “Okay, how are we taking this product to market and what have you seen and what kind of spend should we be looking at as we budget this out?”

I think as you move down the [00:36:23] pipe, now we’re talking about everything in between. Okay, now the product’s in there, how do drive utilization? What can we do to make sure that physicians are understanding on when to prescribe a certain diagnostic test? And now we’re talking about sort of persuading end users about the features and benefits, and typical sales discussion, but really what we’re [00:36:45] calling it is a clinical sales advisor. And then all the way down from the cradle to the grave, we’ve worked with a number of organizations when there has been regulatory action such as a recall. And so building out the plan, supporting them in not only getting out in front and educating the customer on why this happened, but making sure the product is removed, tagged, documented, and then replacing it with the new product.

So I think all of the other pieces about business really sort of fluctuate around that. Phone and video support fits right on the front end, the launch, and on the back end the recalls. And then the full-time direct placement stuff, that really comes from organizations saying, “Hey, we’d love to use 30 of your consultants across the country, but we need 15 full-time direct-level people, the full-time regional people, to help manage this? Can you help us build that team?” And so over the years we’ve kind of been asked to do that and thankfully, because it’s given us an opportunity to help [00:37:50] craft the plan. Joe, anything to add to that?

Joe Andrew:     I think what’s important is that we’re highly customizable, sometimes to a fault. We go in and we really do work with our customers on what the need is. We’ve had customers where it takes an hour really, realistically, to learn this product. [00:38:06] It’s a supply sometimes considered commodity. They can learn it on a one-hour module. So we have people in local markets that can come in. You’re saving on cost, you’re saving on expenses, and they can help educate and bring this product in the facility.

We have customers that have us for more of a hybrid approach or a dedicated model where you have 25 to 55 clinicians that are scattered throughout the United States, but the product is pretty intricate where they need more than an hour or two to learn it, it takes weeks on end to learn this product. And so from that perspective, we manage them from our office. We manage all of their expenses and travel. We help them with American Express programs. We [00:38:46] get them to the facility and this is pretty much their full-time job. They move around the country.

And then we have the hybrid model where we have both kind of just-in-time local supplied with a more dedicated team, and surrounding all this is a great analytics tool where we can, for our customers, process data and show them where they’re spending their money, where the folks are working, what hospitals down to the region, where these individuals are working to better manage their program. So we’ve dedicated a lot of time, effort and money to develop these tools to add that value to our customer, and this is why we’ve had four or five customers now since we’ve started four-and-a-half, five years ago, have been on board because of the continual support that we provide throughout the process.

Scott Nelson:    Okay. And in regard to those data analytics sort of modules or packages that you just mentioned, is that something where if I’m a medical device manufacturer I can say, “Okay, over the past 12 months we’ve dedicated 60% of our clinical support staff to the Southeast, but based on the market opportunity that should only be about 30% of where our spend should be,” and then I can begin to adjust things from there? Is that kind of what that looks like?

Tim Gleeson:    That’s exactly it. Having trend lines around who’s spending what, what accounts are reaping, ROI around revenue to service, and really sort of getting some baseline metrics so you can understand, “Okay, on a thousand-bed  facility, what does it look like? [00:40:21] centralized lab? How do we get out-of-box failures down?” So there are a number of different baselines that we use, both as an industry and then specialty for the organization, to measure against and really measure both operating metrics and then performance outside, in the field.

Scott Nelson:    Gotcha. Okay. Okay, that makes sense. And then lastly, if I’m a medical device manufacturer, how can I rest assure that, one, your people will actually know my product can be competent, and then two, from the hospital’s perspective, are they going to understand that it’s not a situation where one month the contract with Novasyte clinical specialist is working for Covidien and then the next month they’re coming in and helping out with Johnson & Johnson? Does that make sense? If you can just touch briefly on that that’d be great.

Joe Andrew:     Yeah. Well, it goes back to really our selection process, and we have, when Tim and I [00:41:26] the company, we needed to make sure that our process was tight in regard to meeting our folks face to face, [00:41:31] we can see that they are the right personality, they’re our brand representatives. So the video chat is not just a chance to meet them one-on-one but [00:41:37] on that video chat we have some behavioral and situational questions as I would as a hiring manager at Covidien. And so we really get their understanding of what they would do in a certain scenario, from at two in the morning you get a nurse on the floor that’s in a code, what happens? Where do you go? What do you say? How do you handle that scenario?

And so by the time we get to the end product of a hirer with us, now that they’ve met with us one-on-one, we’ve been reference-checked, all the background, and things have gone through and even the [00:42:07] credentialing process has been done on our end, so we know we have the correct person that we feel can go and represent our company, our company’s company as well. So we really make sure that the right fit is put out front first and foremost.

In regard to the education piece, we have several individuals who have worked on several different customers’ product lines, noncompetitive of course, and so we know that they understand the Novasyte process, they learn real quickly and they also are that brand representative that we know we can trust. And so that’s one thing that we really home in on, is that selection process that has guaranteed our—I won’t say guaranteed but has made sure that we have the right folks in the right place at the right time.

Tim Gleeson:    And I think ultimately, Scott, you’re talking about a collaborative approach, right?

Scott Nelson:    Mm-hmm.

Tim Gleeson:    I mean, people are an unpredictable commodity, so you can only control them so much in regard to who they are, what they’re going to do, what they’re going to say. So Joe and his team do a great job on the front end of controlling the uncontrollables as much as possible, but when it comes down to it it’s collaboration. We work hand in hand with our customer to make sure that everybody is trained, upskilled, consistently aware of the nuance, and has as much opportunity to represent them as one of their own full-time employees. So that’s really how we go about making sure that the quality stays in line, and that we’re constantly surveying the field to make sure that our people are hitting the goals that we want them to. And if they’re not, it’s an opportunity for coaching or we manage it in a different manner.

Scott Nelson:    Gotcha. Very good. As we conclude here, are there any major topics that we either haven’t covered or that you’d like to kind of speak to before we end this little conversation?

Tim Gleeson:    No, I think we’ve covered a lot. I think the only thing I’ll reiterate, and I think we’ve probably hammered it pretty hard, is that the dynamics in the industry are changing and we hope that we’re positioned to add value to our customers and the way that their customers are buying. It’s somewhat known but it’s certainly yet to be seen as to how much [00:44:17] we look forward to the next 12 to 18 months having maybe another conversation with you, Scott, and talking about what we’ve sort of articulated here, and hopefully, how we’ve been able to leverage that [00:44:30] and grown the business.

Scott Nelson:    Sure.

Joe Andrew:     Yeah, I think from my perspective, a value we bring to our customers, the medical device manufacturers, is one thing, and a by-product of what we’ve seen over the last five years is a value that we bring to the clinician and to the patient. These innovative products that are put in these hospitals are saving lives and making lives better, and if we can get that product into a hospital and educate the masses so it’s used properly and safely, I think that’s a great by-product that we’ve seen over the last five years and it’s a good feeling [00:45:01] company.

Scott Nelson:    Right, right. And to your point, Joe, I remember recently reading a piece—and I can’t remember exactly, it was a major publication, whether it was the New York Times or Forbes or something along those lines, I think the headline read “Do You Know That A 20-something Sales Rep May Have Been In On Your Procedure?” something like that—but to your point, when you think about it, the general public may object to that but in reality there are so many different medical devices, and to expect a physician to be competent on the nuances of every single one of them is a huge feat to ask someone to do, and so they’re better off having a clinical specialist in on that procedure or instructing the pertinent staff. So that’s actually a good thing to have a clinical specialist highly involved in the process. Anyway, good stuff, guys. Thanks a ton, and any lasting advice for those listening to the call? Looking at today’s med tech environment from kind of a 30,000-foot view, any lasting advice that you’d have to offer?

Tim Gleeson:    You know, I think when you think about entrepreneurship in this space it is very different than it was even a couple of years ago, especially if we’re talking development and regulatory approval. But lookit, we were in Boston last week at AdvaMed with a number of sort of very defined and early-stage device diagnostic companies and there really is no better space till today that I can see that adds tremendous amount of value to the end user and an opportunity to partake in that value. So, certainly, don’t be discouraged. I think we need more innovation out there. We need guys and girls to get after it, and we’ll hopefully be able to support you once you get your products [00:46:58] approved.

Scott Nelson:    Yeah. Excellent. Good stuff. And for anyone listening that’s just on iTunes, of course I’ll link up to this in the show notes online. But if you’re listening to this through iTunes or just have access to the audio portion of this interview, Novasyte is N-O-V as in victor-A-S-Y-T-E dot com, novasyte.com. And is that where you direct the audience to go to, is just your main website, guys?

Tim Gleeson:    Yeah, absolutely.

Scott Nelson:    To learn a little bit more, and there are some interesting case studies on there as well that speak to what we discussed in this interview. Anyway, we’ll leave it at that. Tim and Joe, I’ll ask you to hold on the line real quick, but for those listening, thanks so much for your attention, and of course, if you’re not listening to this interview on iTunes, all of the Medsider interviews are on iTunes. So just open up your iTunes account, do a search for Medsider or medical device and it’ll pop up, the podcast will pop up. You can subscribe for free, no cost. It’s the easy way to consume the content. We’re also on Stitcher Radio now as well, which is a nice little tool if you haven’t heard of that at all too. So, anyway, thanks for your listening attention. Until the next episode of Medsider, everyone. Take care.

[End of Recording]