THE MAGAZINE

The Bleeding Edge

The Bleeding Edge

In 1952, a group of surgeons performed the world’s first successful open-heart surgery at the University of Minnesota. They knew they had just a few minutes — 10 at the very most — after cutting off their patient’s circulation to slice into her heart and sew up a hole inside, before risking damage to her brain. If left untreated, the hole could have killed her within a few years. It took them five and a half minutes to do the procedure — and the patient lived.

Within six years, Walt Lillehei, a member of the surgical team, would go on to perform more than 400 open-heart surgeries. Most succeeded in keeping patients’ once-failing hearts pumping for decades. But sometimes, stitches put in during surgery would damage a heart and send it off its rhythm. A pacemaker had been developed to reset a patient’s heartbeat, but it was the size of a small microwave oven and had to be plugged into the wall. Still, this counted as an improvement: Just a few years earlier, the only way to fix an erratically beating heart was to regularly shock the patient’s chest with as many as 75 volts of electricity, leaving blisters behind.

In 1957, Lillehei asked Earl Bakken, an electrical engineer employed by the university’s hospital, whether he could make pacemakers portable. About a month later, Bakken showed up at work with what he would later call the Medtronic 5800. (Medtronic was the name of Bakken’s repair company, which he had co-founded in a Minneapolis garage.) The device, the first of its kind, was small enough to fit into an adult’s hand and ran on a 9-volt battery. Connected to the heart by just a thin wire and attached to the outside of the body, it could travel wherever a patient did. Bakken had based the design on a circuit for a metronome he had found in Popular Electronics. It tested well in dogs, and as soon as he had a chance, Lillehei connected it to a human heart.

It worked.

What happened next was monumental — and not just for patients with arrhythmias. At the time of the pacemaker’s development, Minnesota’s largest industry by far was agriculture. But Bakken’s revolutionary device set the Midwestern state on a new course: Long known for milling wheat and processing meat, Minnesota would rapidly become a global hub of medical technology development.

Over the next few decades, Medtronic grew to become one of America’s largest corporations — and the largest to focus exclusively on developing and marketing medical devices. (In 2013, Medtronic raked in $16.6 billion in revenues.) And like a massive glacier calving icebergs, Medtronic spun off other Minneapolis-based medtech companies. These businesses, along with others eager to join the state’s thriving medtech scene, created heart valves, ventilators, heart-rate monitors, defibrillators, lasers, and an abundance of other devices.

By 1985, the state’s health-care industry, including medtech companies and major providers like the Mayo Clinic, accounted for 200,000 jobs and more than $6 billion in annual sales. Before too long, Minnesota’s government was pitching the state as “the heart of the nation’s health care.” But the medtech industry had already expanded well beyond U.S. borders. In 1967, Medtronic opened its first international service center in Amsterdam, and in the mid-1970s, one-third of its executives were working to sell products in international markets. By the end of the 20th century, American companies like Medtronic were exporting some $15 billion worth of medical technology each year; last year, exports were valued at more than $43 billion.

Still, the United States has remained these companies’ biggest market because Americans wanted — and would pay for — the most advanced medical devices out there. Today, the U.S. medtech market is worth around $127 billion, nearly 40 percent of the world’s total.

Recently, however, the industry centered in the Land of 10,000 Lakes has hit something of a crisis point, both at home and abroad. Minnesota’s biggest medtech companies have long preferred to just make updated versions of the products they already know can sell. That is, in order to avoid the most challenging demands of a complex, sluggish federal bureaucracy that regulates new devices, they have left the real innovation to enterprising smaller companies. For a while, that setup worked just fine. But new government pressures, including provisions of the Affordable Care Act, have made the path to profitability less clear, and investors that support innovative companies are more risk-averse than ever: Early-stage funding for new technologies has been on the decline.

Meanwhile, traditional foreign markets for Minnesota’s companies are toying with new, tighter regulations, prompting businesses to consider putting resources into other, rapidly developing countries. Even Medtronic recently announced that it plans to move more of its corporate operations overseas in order to save money and capitalize on new opportunities. But many emerging markets are trying to boost their own medtech industries so that perhaps, one day, they can seize Minnesota’s mantle. “Every country who doesn’t have a medtech business wants one,” says Shaye Mandle, president of the Minneapolis-based trade group LifeScience Alley.

The more that foreign doctors, engineers, managers, and investors can learn about the medtech industry, the more competition American companies will face. And Minnesota, with America’s highest concentration of medtech jobs, has the most at stake in making sure the industry Medtronic spawned stays on top — no easy task.

“If medtech disappeared from the face of the Earth, the biggest hole economically would be right here,” Mandle says of Minnesota. If the state’s industry and the infrastructure that supports it can’t adapt to changing circumstances — and fast — a hole could also rip open as medtech’s epicenter moves to the other side of the world.

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In the back room of the Bakken Museum, housed in a mansion on one of Minneapolis’s famous lakes, David Rhees, the museum’s executive director, pulls down what looks like a large, opaque gummy candy with electronics embedded inside. It is a Chardack-Greatbatch pacemaker (named for its creators), the first device of its kind to be implanted in a person’s body. Licensed to Medtronic in 1961, just a few years after Bakken’s initial technological breakthrough, it is roughly the size of a hockey puck and weighs about the same too. The electronics inside include the five little disks that powered it.

Nearby, the museum’s main hall displays a wide selection of pacemakers, each one smaller than the next, developed over many years. Each also has features different from those of its predecessors. One is even nuclear-powered. Basically, Rhees explains, Bakken’s first, simple design “opened up a cycle of innovation [for pacing] that really hasn’t stopped.”

Manny Villafaña, Medtronic’s first international sales manager, was a part of this cycle. The way he tells the story, he was swimming at a Minneapolis hotel in 1971 when he ran into Wilson Greatbatch. Villafaña had been working in South America, and he had noticed that pacemakers usually failed after a year or so. It turned out that Greatbatch, one of the creators of the first implantable pacemakers, had started a new company, in Clarence, New York, to create batteries for medical devices. And he had already licensed one that could last six years, maybe more.

But the battery contained lithium — the same element that, more recently, has caused electric vehicles’ batteries to burst into flames — and not everyone trusted the safety, power, or longevity of Greatbatch’s invention. Nevertheless, Villafaña, standing by the pool in a paper bathing suit bought from a vending machine, was eager to hear more. The two met later that day to discuss Greatbatch’s work, and within months, Villafaña was raising money to start a new company. A year later, he officially opened Cardiac Pacemakers Inc. to develop devices with Greatbatch’s batteries inside.

Many medtech companies have started like this, with a business-minded person who understands patients’ needs and an engineer or a doctor who knows how to satisfy them. The company that resulted from that particular hotel meeting sold in 1978 to Indianapolis-based Eli Lilly and later, in 2006, became part of Boston Scientific, one of the world’s largest medtech companies. (Despite its name, the company has more employees in Minnesota than in Massachusetts.) Villafaña’s next endeavor, St. Jude Medical, created the first clinically (and commercially) successful mechanical heart valve with two flaps, which could open like French doors to let blood through — an innovation that reduced the risk of clotting. Today, St. Jude, with $5.5 billion in net sales in 2013, is just a few slots behind Boston Scientific on the list of the world’s largest medical-device companies.

Health care is still Minnesota’s biggest industry, and medtech specifically attracted nearly 60 percent of venture capital investments in the state in 2013, according to Minnesota’s economic development department. As medtech companies have grown and multiplied, local manufacturers, intellectual property lawyers, regulatory experts, communications consultants, and engineers have specialized in the field too. More than anywhere else in the United States, Minnesota has come to depend on the medtech industry for jobs — and enormous profits. “In the last one and a half to two decades, their margins were astronomical,” Ed Yu, a principal at PricewaterhouseCoopers (PwC) who focuses on health innovation, says of major American medtech companies. “I’ve heard of 70 percent, to even 90 percent, gross margins.”

Minnesota-based companies still sell pacemakers — plenty of them — and simple devices, such as surgical scissors and medical tubing. More-advanced devices, however, treat everything from sinusitis to high blood pressure to symptoms of multiple sclerosis. They can stimulate spinal nerves to reduce chronic pain or send pulses of electricity to the brain to treat Parkinson’s disease. Implants adjust the breathing patterns of people with sleep apnea. Surgeons can use a laser to ablate cancerous cells in the brain of a patient lying in another room in an MRI machine. A few years back, a team of researchers at the University of Minnesota managed to grow bioartificial rat hearts and get them beating, and the university’s cardiology labs are now working on stem-cell technology that could treat heart disease.

But innovation actually hasn’t happened at the superfast pace one might expect — certainly not with the major players, such as Medtronic, St. Jude, and the like. These companies, Yu says, “figured out that the way to maximize their profit is selling more of what they had.” For instance, they make the same device, smaller or cheaper, rather than developing something entirely novel.

In part, this is due to simple economics. If a company can make a ton of money without having to invest heavily in research and development, it will jump at the chance. But the anchors of Minnesota’s industry have also moderated their speed of innovation because of the U.S. Food and Drug Administration (FDA).

Coming up with ideas for new devices is the easy part, medtech entrepreneurs say. The harder — and much longer — part is moving the idea to commercialization. High-risk innovations often have to be tested on animals before the FDA will approve them for a small, exploratory trial with humans. If that goes well, a more expansive (and expensive) trial follows. Only then, if the FDA deems a device both safe and effective, can the company move toward commercializing it.

An industry-supported PwC survey in 2010 found that, for innovative, higher-risk devices, it took companies an average of 54 months to move from preliminary communications with the FDA to formal submission to the final green light. The same survey reported that, apart from marketing and related costs, companies working on the same class of devices spent an average of $94 million on the road to commercial clearance. (The FDA is working to shorten the average time it takes to make decisions; a plan to implement new recommendations is due in December.)

Once upon a time, this process was faster and cheaper. Take Greatbatch and Villafaña’s lithium-powered pacemaker. The two men didn’t have to worry about convincing government officials that their device was safe, because the FDA only began comprehensively regulating medical devices in 1976.

Increasingly, industry executives and experts say, Minnesota’s behemoths have been acquiring smaller companies, but waiting until after the newbies have tangled with the FDA. In the meantime, funding for these new companies often comes from private investors or venture capitalists who have already made fortunes in medtech, know the industry, and want to back the next big thing. And to raise the chance of getting FDA approval (and making money in the interim), companies with this funding often try out their products first across the Atlantic.

But, medtech executives say, that system is now breaking down.

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Investors have always been nervous about medtech companies’ viability. While the FDA takes years to approve a device, the waiting company burns through the capital it has raised. In the recent past, this has often meant that Minnesota’s most innovative products aren’t immediately available to American patients. Rather, consumers in Europe get to try them first, thanks to the continent’s looser regulatory environment. “[The] FDA is rigorous, but not always transparent or predictable,” explains Robert Kieval, whose company, CVRx, grew out of a Minneapolis-based incubator. “So you ask, ‘What else besides the U.S. market is important?'”

CVRx’s main product stimulates a spot on the carotid artery that signals the heart, kidneys, and arteries to lower blood pressure. The company makes the device in a small Minnesota facility — a modern-day equivalent of Bakken’s garage with a clean room where production happens and another where CVRx bench-tests qualities like strength and heat-tolerance. But in 2003, when CVRx tested the device on a human, for just a few minutes, it was in Bern, Switzerland. The first operation to implant the device more permanently happened in Bern, too, with Kieval standing in the operating room next to the doctor.

In CVRx’s office, one wall is covered with silver plaques — patents and trademarks from places where the company would like to sell its products, including the United States. Right now, though, CVRx is focused on selling its device in European countries, from Spain to Norway to Hungary.

The European process goes faster in part because regulators want to know only that a new device won’t harm a patient. Unlike the FDA, the more decentralized European system leaves the question of how well a device works in improving or managing a health condition to doctors, patients, and the people who pay the bills. That makes it an enticing proving ground for U.S. medtech companies hoping to convince the FDA of new products’ safety and worth so that they can eventually be marketed back home.

But this could soon change. In 2011, a French company’s defective breast implants pushed European lawmakers to re-examine the continent’s oversight system. In October 2013, the European Parliament voted to increase scrutiny of device-makers. As of June 2014, those new rules still hadn’t been finalized, but some lawmakers are still pushing for a stricter, more centralized system, closer to the U.S. model.

Europe’s shifting environment, however, is only one relatively small piece of the puzzle jeopardizing the medtech industry’s typical research-and-development process. More so than ever, particularly in the United States (though Europe is not immune), it’s unclear that a device that meets regulators’ standards will be able to make money. And that really spooks investors.

Medtech companies make money when their products are purchased by hospitals (or purchasing coalitions), which in turn ask payors — insurance companies and the government — for reimbursements.

Insurers have long found ways to nip and tuck these payments; for instance, they might limit which patients qualify for certain procedures, including ones in which medical devices are required. As a general rule, when hospitals cannot bill insurers for a chunk of a device’s cost, they are less likely to buy it.

Today, as pressure grows in the United States to keep rising health-care costs in check, insurers are not as generous with reimbursements. On top of that, the Affordable Care Act has moved Medicare, the national health program that serves primarily the elderly, toward new “value-based” systems, which reward (or punish) providers for the overall outcomes of treatment, rather than paying for each service performed. For instance, a hospital’s ability to recoup costs will not depend directly on how many pacemakers doctors have installed; it will depend, more than ever, on how many hospital visits those pacemakers can preempt. Private insurers, which take cues from Medicare, are moving toward similar payment models.

Medtech companies, then, must prove that their products will keep people healthier in the long term, but they are still figuring out what sort of evidence they need to collect in order to do so. If they are lucky, they have anticipated these data demands in clinical trials and have guessed correctly at what will sell insurers on their products. Often, however, companies aren’t even sure what payors will require and end up scrambling for data once a device is already on the market. “The kind of evidence that FDA needs to make the regulatory decision doesn’t match the evidence payors are requiring to make reimbursement decisions,” says Greg Daniel, a fellow at the Brookings Institution who studies biomedical innovation.

In this tumult, venture capitalists are reining in their medtech investments in up-and-coming companies, focusing on development teams with excellent track records or new outfits with unusually clear paths to market. From 2007 to 2012, the value of venture investments in U.S. medtech companies dropped by about a third. In 2013, it decreased by another 17 percent, down to $2.1 billion. According to the industry, this drought is hurting innovation. Without robust investment, says LifeScience Alley’s Mandle, advances in medical technology will quickly slow.

But not everywhere. Other countries are eager to pick up the slack. In 2011, PwC ranked the United States behind China, India, and Brazil in an assessment of early-stage entrepreneurial activity in medical technology because the three developing countries had more innovation efforts just getting under way and more easily available funding.

Still, arguably no place can compete with the deep bench of medtech infrastructure and talent that Minnesota has. One quick solution is to import the state’s expertise and use it to supplement and invigorate growth abroad. That’s why some of the most eager supporters of American medtech companies right now are foreign investors who aren’t just looking to make a profit: They want companies in their own countries, for good.

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When Jim Buck started raising money for his company, Minneapolis-based Mardil Medical, he didn’t think he would find many interested parties in the United States. The company’s technology, which puts a saline-filled “bladder” around the heart to improve the function of a particular valve, faced a difficult regulatory pathway, one made even more challenging because an earlier version of the technology (owned by a different and now-defunct company) was repeatedly rejected by the FDA.

So Buck flew around the world to find investors in places such as China, Singapore, Thailand, Canada, and Romania. In 2013, he raised more than $6 million, most of it from Agensi Inovasi Malaysia (AIM), a government agency focused on innovation. AIM, Buck says, offered Mardil “very attractive investment terms.” Mardil wasn’t required to operate in Malaysia as part of the deal, but Buck says it made good business sense. His company now has a Malaysian subsidiary and a staff there to develop part of its product portfolio. And in February, in the earliest clinical trial for the company’s lead product, Mardil implanted its device in two patients at the National Heart Institute in Kuala Lumpur.

All this involves sharing some of the knowledge built up in Minnesota about how to develop a successful medtech business — a transfer that, Buck says, was part of what enticed his investors in the first place. “Malaysia is not investing in Mardil Medical because they’re a venture investor,” he says. “They’re trying to pivot from a low-margin [manufacturing] industry to a high-margin knowledge-based economy.”

Malaysia’s medtech industry is small right now, around one-fifteenth the size of Minnesota’s. The country’s extensive rubber industry means that its primary medical product is latex surgical gloves. But the government has targeted medical devices as a potential area for growth. It has been working for almost a decade to improve its regulatory system for devices; in 2012, it passed a series of laws that required device manufacturers to register with the government, imposed new rules on device quality, and authorized a Medical Device Authority to oversee these new regulations. “The value we add is innovation and expertise,” says Buck, speaking of companies like his.

But, he admits, it’s reasonable to think that the knowledge Mardil is sharing will one day enable businesspeople in Malaysia to start companies — and win scarce investment dollars — without tapping into American knowledge.

Malaysia is far from the only place that is investing heavily in its medtech infrastructure. “A lot of countries are getting more aggressive about putting in protocols to set up quality clinical trials for cheaper,” LifeScience Alley’s Mandle says. Dick Bianco of the University of Minnesota’s Experimental Surgical Services, which runs the institution’s animal-testing labs, has gone to Brazil and India to help set up labs like his. “We’re exporting safety techniques,” he says. Foreign governments, he adds, ask directly for his help.

Industry stalwarts are also trying to carve out a place for themselves in emerging markets — hoping to take advantage of them, rather than having them strictly as competitors. Medtronic, for instance, has begun acquiring Chinese medtech companies; it opened an “innovation center” in Shanghai in 2012 (its first research-and-development outpost outside the United States and Europe); and it has said it will hire 1,000 Chinese workers by 2017. “It’s an element of requirement to be able to get into those markets effectively,” says Mandle. “That’s not great for jobs here in the United States. Some of our big companies aren’t necessarily shrinking here, but all of their growth is occurring someplace else.”

Some smaller companies are leaving the United States altogether. In an interview, one medtech executive said that he was recently on a panel populated with American CEOs who had moved their businesses to China because their biggest investors were there. And heavy hitters may be following suit before too long: In June, Medtronic announced an agreement to acquire Covidien, a competitor incorporated in Ireland, for $42.9 billion. If the deal goes through, Medtronic will become an Irish company, with access to more-favorable tax rates than it has in the United States. Medtronic says it wants to acquire Covidien, in part, because of the company’s “extensive capabilities in emerging market R&D and manufacturing.”

But even in this earthquake of a development, there could be good news for Minneapolis: Medtronic says it will maintain a strong presence in Minnesota and that the deal will allow it to invest $10 billion in the U.S. medtech industry — including in early-stage companies that need venture capital.

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Challenges to Minnesota’s medtech dominance are constantly mounting. But at 8 a.m. on a Tuesday in May, at least, things look like they always have at the Good Day Cafe.

MedCity News, which covers health-care innovation, has called the cafe one of the more popular spots in the United States for medtech CEOs and venture capitalists to meet. The low-slung establishment is tucked right up next to Interstate 394, which heads straight from central Minneapolis out to the western suburbs, where many of Minnesota’s 400-odd medtech entities are now based. With its cheerful neon signs advertising blue-plate specials, the cafe seems out of place among the tall office-park buildings. Inside, however, dozens of suited executives who work in those buildings are chatting over omelets covered in mushroom gravy.

One of these execs is Dennis Wahr, who spent the first half of his career in Ann Arbor, Michigan, as an interventional cardiologist. (His field relies on technologies like specialized catheters to treat heart disease.) Having served for years on the advisory boards of medical-device companies, “I always figured I’d start my own thing,” Wahr says. He was so close to going to San Francisco to start a company that he put a down payment on a house there. But then he bumped into one of Minneapolis’s most successful medtech leaders, Dale Spencer, who had grown a company called SciMed Life Systems into a legendary Minneapolis success story. (Boston Scientific acquired it in 1995, in a deal worth about $869 million.) Just a few days later, “at what must have been 7 a.m.,” Wahr says, Spencer called to sell him on Minnesota’s advantages and promised to serve on his board. Wahr changed his plans.

For some medtech entrepreneurs, and Wahr is one of them, plenty of money is still here. It helps that Wahr’s last two companies sold quickly — within just four years — and that one went to St. Jude. As for generating data to meet the new demands of regulators, Wahr’s company is conducting an additional, intermediate round of testing on a product in Europe. This extra trial will add $30 million to the cost of developing the device, but Wahr thinks it will make the product’s ultimate success in the United States much more likely.

“People like to say that the government has slowed us down,” he says. But developing a truly new idea — and making sure it works safely — should take time. Wahr points out that it took more than a decade to get penicillin from a petri dish to patients, and even longer to produce it on a mass scale.

The question is: How much time? The next couple of decades promise to offer seemingly limitless opportunities that medtech companies just about anywhere can seize on — if they’re fast and nimble enough. Genome research will lead to personalized health therapies; nanomaterials will patch nerves, bone, and flesh; and mobile devices will track real-time data from the human body. “What will happen in the next 20 years,” Wahr says of innovation, “will dwarf what happened in the last 20.”

Emerging medtech industries in other countries that want a piece of this pie might very well serve local needs in a way that companies rooted in America never can. Still, Minnesota’s companies — and U.S. medtech infrastructure generally — don’t have to forfeit their global lead in the coming burst of medtech innovation.

Staying ahead, however, requires big changes. The industry will need to stop relying so heavily on short-term profits, and, along with the government, it must stop letting exciting ideas languish. Above all, both sides will need to figure out how to balance good regulations and a desire to cut health-care costs with genuine experimentation and risk-taking.
Otherwise, the United States could find itself playing catch-up to the world for the first time — while resources and jobs rush away from Minnesota. “Most medtech innovation has happened in the U.S.,” says Buck, of Mardil Medical. In the very near future, he warns, “that might not be true.”