Implantable Pacemaker

8/11/2019 Implantable Pacemaker

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High Technology Entrepreneurship and Strategy

Prof. Ron Adner

Group Project

IMPLANTABLE PACEMAKER

Balazs Asztalos

Olivier Genelot

Tiago Guerra

Antti Jaaskelainen

Kai Zolleis

Manfred Zurkirch

Fontainebleau, February 2002


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1. INTRODUCTION........................................................................................... 2

2. PACEMAKER TECHNICAL DESCRIPTION.............................................. 3

2.1. What is the problem with the heart?..................................................................................3

2.2. How a pacemaker works.....................................................................................................4

2.3. Key features and technical challenges .............................................................................5

2.4. Potential developments ......................................................................................................6

3. HISTORY OF THE PACEMAKER INNOVATION .........................................8

3.1. Overview ...............................................................................................................................8

3.2. The early years.....................................................................................................................8

3.4. Development of the pacemaker and the emergence of competition............................11

4. RELEVANT MARKETS AND VALUE CHAIN DYNAMICS ........................ 14

4.1 Market Size ..........................................................................................................................14

4.2 Current competitive landscape .........................................................................................14

4.3 Market Structure .................................................................................................................15

4.4 Market Drivers and Innovation Diffusion .........................................................................18

4.5 Substitutes ..........................................................................................................................19

5. INNOVATION AND TECHNOLOGY MANAGEMENT ................................ 20

5.1. What makes innovation such a challenge in the pacemaker industry? ......................20

5.2. Are disruptive or incremental innovations driving the pacemaker industry? ............21

5.3. How important are complementary assets? ...................................................................22

5.5 How important is the first-mover advantage? .................................................................23

5.6. What uncertainties is the pacemaker industry facing? .................................................24

6. MEDTRONIC AND CPI: DIFFERENT INNOVATION STRATEGIES.......... 26

6.1. Development of new technologies...................................................................................27

6.2. Market approaches............................................................................................................28

6.3. Defending the market position.........................................................................................29

7. CONCLUSIONS..........................................................................................30

References.................................................................................................................................32


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1. Introduction

The pacemaker and especially the implantable pacemaker have saved and

lengthened the lives of millions of people. The implantable pacemaker,

invented by Wilson Greatbatch in 1958 has generated a thriving multibillion-

dollar industry that has been characterised by continuous innovation through

the decades since the original invention. A testimonial to the innovativeness in

this industry is that in 1984 the National Society of Professional Engineers

(USA) cited the implantable heart pacemaker as one of the ten outstanding

engineering achievements of the last fifty years, putting it in the same league

with the electronic computer and the Apollo 11 moon landing.

This dynamic industry is characterized by active innovation and intense

competition. How have some companies been able to make a sustainable

difference by successfully bringing the innovation to the market?

After a technical presentation of the pacemaker, we will describe the history of

the pacemaker industry focusing on the events, persons and companies that

shaped the innovation and the formation of the industry. Then we will analysethe market structure, the value chain in the industry, the market drivers and the

speed of diffusion of the innovation.

We will then move to analyse the challenges that innovation has represented to

the industry, and we will highlight the key role played by technological and

market related complementary assets. We will focus on two milestones in the

history of the pacing industry and how two companies have managed theinnovation. One of the companies is Medtronic, which was the first mover and

market leader in the early seventies. The second company we analyse is CPI,

which was formed in 1974 as a start-up, established by formed Medtronic

employees to capitalise on the Lithium battery innovation, which at the time

was rejected by Medtronic.


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2. Pacemaker technical description

2.1. What is the problem with the heart?1

The hearts ability to pump blood through the body and the lungs depends onthe precise functioning of its electric system. It is the responsibility of this

electric system to co-ordinate the contraction of the chambers of the heart. This

usually happens in a way that a special type of electrical impulse travels

through the heart and sets off contractions in the chambers as it passes

through them.

Normally an area of specialised heart tissuecalled the SA (sinoatrial) node

(located in the right atrium) generates the electrical impulse. This is the

natural pacemaker of the heart. Each time this tissue fires, the impulse

travels through the chambers in the following sequence: SA node -> left & right

atria -> AV node ->left & right ventricle. The AV (atrioventricular) node locates

between the atriums and ventricles and it conducts the impulse to the

ventricles, which are otherwise completely isolated electrically from the atriums.

It also slows down the impulse, leaving time for the blood to flow from the

atriums to the ventricles2(see figure 1)

Figure 1

Just like any other electrical system, the hearts electrical system can

also malfunction. There are many ways that it can deviate from normal


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functionality; two common problems that result in the need for pacemaker

implantation are as follows:

Malfunctioning SA node. Normally the SA node generates 60-80 impulses

every minute. In some persons, however, this can slow down to 30-40

(bradycardia). At such slow rates, the heart is unable to pump adequateamount of blood through the body. A related problem especially at older

age, is when the heart starts missing beats.

Malfunctioning AV node. Just like the SA node, the AV node can also miss

conducting some of the impulses coming from the SA node, causing a drop

in the amount of the blood that the ventricles can deliver. Its most severe

form is fibrillation, which is the uncontrolled beating of the different parts of

the heart.

2.2. How a pacemaker works3

The above mentioned malfunctioningof the hearts electrical system can be

corrected by delivering timed electrical impulses to the heart. A

pacemaker device is used for this purpose.

A pacemaker consists of a small housing device containing a battery and the

electronic circuit running the pacemaker and one or two long electrical wires

that travel from the pacemaker housing to the heart. The most common way

these wires are implanted is that one is connected to the right atrium and the

other, if used, to the left ventricle. They serve as sensors to detect the electrical

impulses generated by the SA node and also to check whether the AV node

also conducted the impulses to the ventricles.

When it is sensed that the SA or AV node missed to generate an impulse,

these wires are used to send an electric impulse to the heart themselves,

taking over the function of SA and AV nodes. In this manner the pacemaker

can supervise the heart and ensure that it continues to contract at a heart rate

adequate to pump sufficient blood through the body.


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adjusted. This way no operation needs to be done. Since the devices can

communicate with the outside world, they can provide information also on the

functionality of the heart, making follow-up easier for the physicians.

Intelligent devices. Pacemakers having a small microcomputer inside are ableto change the therapy of the patient also. They are able to recognise an

abnormally fast heart rate and react automatically. Including a small crystal

sensor inside the pacemaker, it can detect body movement, and can adjust the

pacemaker rate up or down according to the wearers activity. This can come

as close as to mimic the natural functionality of the heart.

Reliability. Like any medical device, pacemakers have to be highly reliable,thoroughly tested and approved before being introduced to healthcare.

Significant portion of the patients are pacemaker dependent, meaning that

without the pacemaker their heart would stop functioning. This creates the need

for high quality in the device and also for reliable signalling methods in case the

device faults, possibly warning well before it actually happens.

2.4. Potential developments4

Miniaturisation. Pacemakers have got progressively smaller since their first

appearance. The smallest pacemaker just weights 12.8 grams and it is

expected that development eventually will lead to a point where the leads could

be eliminated and the pacemaker itself could be directly implanted into the

heart.

Multiple leads (dual chamber pacing).Inserting more than two wires into the

heart creates the possibility to alter not only the frequency of the electrical

impulses but to alter the electrical activation pattern of the hearts muscle also.

Uses of this include hypertrophic obstructive cardiomyopathy, where overgrown

heart muscles blocks the egress of blood out of the heart or congestive heart

failure, where cardiac muscle deteriorates. With direct activation of different

muscles in the heart it is possible to alleviate these problems.


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Beat to beat response. One of the most important advances in the

augmentation of pacemaker efficacy has been the development of complex

rate response algorithms. This assures that pacemakers gauge the bodys

physical need for increased cardiac output and that the pacemaker has a way

to interpret those signals and adjust its pulse generation accordingly. In thefuture this can possibly include oxygen consumption based rate

responsiveness, patient-triggered rate increase and eventually pacemakers

hardwired into the parasympathetic and sympathetic nervous systems.

Programmers, remote monitoring. The increasing demand for patient

management and follow-up leads to more efficient and informative interface

between patient and physician. These devices are called programmers, andthey more and more encapsulate diagnostic software, trans-telephonic patient

monitoring capabilities (through telephone line, mobile phone)5.

Defibrillation.Cardiac diseases are interrelated and often having one cardiac

disease predisposes a patient to having another. Patients with pacemakers

often develop symptoms of ventricular fibrillation or tachycardia (which both

require a device called AICD Automatic Implantable Cardioverter Defibrillator)

and vice versa. In these cases the patients would benefit from a single,

integrated device capable of both functionalities. In the future it is expected that

these devices will eventually be the norm.

Brain pacemaker. As a treatment for depression there is possible treatment

with a pacemaker for the brain system called NeuroCybernetic Prosthesis

System6. The system sends 30-second electrical signals every 5 minutes to the

left vagus nerve. Currently approved only for epilepsy, this system could be

used for the treatment of depression, Parkinson disease and possibly other

brain diseases also7.

Pacemaker for the stomach.Gastroparesis8 is a weakness of the stomach,

causing the patients digestion not to work properly, resulting in nausea,

vomiting and weight loss. It is caused by the lack of coordination between the

stomach muscles, nerves and hormones. A possible treatment is the

implantation of a pacemaker in the abdominal wall with electrodes sutured to


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the stomach. The Cleveland Clinic already offers this treatment but it is still to

be generally accepted.

3. History of the Pacemaker innovation*

3.1. Overview

The timeline below describes key events that shaped the development of the

pacemaker and the evolution of the pacing industry.

1949

Medtronic

founded

1957

Lillehei &Medtronicdevelopexternal

PMs

1958

Greatbachinvents

implantablePM

1960

Medtronicbuys exclusive

rights toGreatbachs

invention

Implantable

PM publishedin scientific

paper

Greatbachleaves

Taber Inc.

1960 - 1973

Rapiddevelopment of

PM;complementary& incremental

innovations

1974

Lithium

batterypowered PMinvented

Medtronicrejects Li-battery

SeveralMedtronic

employeesleave to formCPI on the

basis of Li-powered

pacemaker

1975-1982

CPI success, Medtroniclooses mkt share

In 1978 EliLilly buys

CPI

Competitors emerge: Cordis,Intermedics, General Electric, CPI

1983 =>

Medtronicregains

mkt share

Eli Lillyspins off

medicalequipmentas Guidant

in 1994

Rapid incrementaland complementary

innovationcontinues

GE exits in1976 due to

qualityproblems

Medtronic providesequipment repairand maintenance

services to hospitalsand has closerelations with

doctors

Medtronicclear

leaderwith>70% mkt

share

Figure 2 - Technological innovation and companies evolution

3.2. The early years

Physicians had known since 1803 that electricity was effective in stimulating

heart activity. But progress in the development of pacemakers had been slow.

*This whole chapter relies on information mainly from the following sources: Branbury & Mitchell(1995), Gobeli & Rudelius (1985), Medtronic corporate website, Short biography of W. Greatbach

website, HBR Medtronic case


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Pacemakers of the 1950s were bulky, relied on external electrodes, and

had to be plugged into a wall outlet. External electric shocks were frequently

too traumatic for young heart block patients, and the AC-operated pacemaker

could fail during a power blackout.

In most cases, the external pacemaker was used for patients recovering from

open-heart surgery. This market for external pacemakers was relatively small.

However, several physicians were beginning to recognise the value of the

device in treating patients suffering from chronic heart block. Yet, long-term

application presented several problems: an external pacemaker worn 24 hours

a day was inconvenient for the patient, the wires could become dislodged from

the heart, and most important, the passage of wires through the skin to theheart introduced the possibility of infection.

In the 1950s one of the leading pacemaker researchers was Dr. Lillehei

from the University of Minnesota Medical School. He worked closely with a

small medical service company called Medtronic, which had been founded

in 1949 by Earl Bakken and Palmer Hermundslie9. Together they improved the

external pacemaker by decreasing the size of the pacemaker systems and

improving the reliability of the power source.

The implantable pacemaker breakthrough: Wilson Greatbatch, an electrical

engineer from Buffalo, New York, invented the worlds first implantable

cardiac pacemaker in 195810.He worked closely with William Chardack, chief

of surgery at Buffalos Veterans Administration Hospital, who implanted the first

pacemaker to a dog. The device succesfully took control of the dogs heartbeat

but unfortunately the device failed after four hours when the body fluids found

their way to short out the circuit. Nevertheless, the device proved to have

potential for success and Greatbatch, Chardack and another doctor from

Veterans Administration Hospital, Andrew Gage, continued the development of

the pacemaker. Together, they carried out more than two years of experimental

work and testing on dogs before they published a paper in 1960 entitled: A

transistorised, self-contained, implantable pacemaker for the long-term

correction of complete heart block.


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As the three men advanced in the development of the implantable pacemaker,

they soon reached a stage where an experiment with a human patient was

needed. Greatbatch's then employer, Taber Instrument Corp.11, was

unwilling to risk a million-dollar company on a perilous item like the pacemaker

and rejected the idea. We assume that as a materials testing device andinstrumentation company, and having Wilson Greatbatch in their ranks, Taber

Industries would have had the technical capability to continue developing the

pacemaker. However, it was the total lack of knowledge and marketing

capabilities towards the medical device industry that caused Taber to reject this

promising innovation.

Greatbatch left the company and continued the pacemaker development on hisown, relying on his savings. Greatbatch had a clear deadline for himself to get

results: he had calculated that his savings of a little over $2000 would feed his

wife and four children for approximately two years (apparently his wife was very

resourceful and raised a big garden).

The paper published by Greatbatch, Chardack and Gage had not gone

unnoticed by Medtronic. This company, which had a very humble beginning in

a garage in Minneapolis,was established as a service company, providing

medical equipment maintenance and repair services for the hospitals in

the region. On a rainy October evening in 1960, Palmer Hermundslie flew a

private plane to Buffalo, met Dr. Chardack and Greatbatch in the airport, and

signed a contract giving Medtronic exclusive rights to produce and market

the Chardack-Greatbatch implantable pulse generator. Production of the

implantables began in November, and by the end of December 1960,

Medtronic had received orders for 50 of the $375 units. The start was again

modest; Wilson Greatbatch made these 50 first pacemakers himself in his

backyard workshop. But this innovation would launch Medtronic into a growth

path that would bring the company to dominate the pacemaker and medical

electronics industry in the following decades.

While providing their services to the hospitals, the founders became well

acquainted with doctors and nurses throughout the Midwest - among them the

staff members of medical research laboratories


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Frequently, the medical teams asked Medtronic engineers to modify equipment

or design and produce new devices needed for special tests. The company

responded by building single-use, custom-made products, and thereby entered

the manufacturing business. Due to these close relationships with doctorsand the customer demand, what had started as a service company was in

the late fifties transforming into a product development intensive

innovator.

In fact, the very close relationships of Medtronic with the medical

community not only changed to companys focus from being a service

company into product development but it also laid out the groundwork for thecompanys future success. It was the special relationships and active

collaboration with leading cardiologists that gave credibility to the companys

products in the early years. In the later years the close relationships with

doctors, hospitals and patients enabled Medtronic to identify unmet needs and

create incremental innovations that expanded the pacing market significantly.

3.4. Development of the pacemaker and the emergence of competition

After the initial development of the implantable pacemaker, significant

advancements in all areas of pacing occurred rapidly. Medtronic was not left

alone into the industry, several other companies soon entered: Cordis and

General Electric were among the first to enter and later entrants included

Intermedics and CPI. Still, as a first entrant in cardiac pacing, Medtronic had a

strong technological lead and the company enjoyed over 70% market

share through the 1960s.

After 1960, due to the visibility of these first attempts, many academic and

commercial laboratories entered in the research race. In an effort to enter the

industry, the rights and results of these researches were bought by existing

firms in the medical and electronic areas or by new firms usually headed by

researchers themselves.


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However, all this activity didnt change much the dominant design that

Medtronic had already brought to the market. The dominant design was

characterized by the following:

Synchronous (fixed rate) or asynchronous (variable rate) options

Single chamber of the heart (atrium or ventricle) pacing

Mercury-Zinc batteries

Epoxy-Silicon casing

Between 1960 and 1990, 32 firms sold external pacemakers and 86 firms sold

implantable pacemakers, of which 44 shutdown and 23 sold out (Branbury and

Mitchell 1995).12The number of new entrants could be explained simply by the

attractiveness of the high margins in the pacing industry probably allmedical equipment companies at least considered entering the market.

However, the number of exits (including the much publicised GE sell out) and

consolidation suggest that pacing industry has not been an easy industry for

the new entrants. We assume that in most cases the exits have resultedfrom

companies either not being able to keep up with the fast incremental

innovationsor from problems related to product quality. An example of thefirst exit reason, inability to innovate, could be Intermedics (bought by Guidant

in 1999), which in the 1990 for example failed to develop an implantable

defibrillator. The extreme importance of product quality aspects can be

exemplified by two cases: most notably, the 1976 exit of GE (sold out to

Teletronics) after product quality problems and the later exit of Teletronics

(bought by St. Jude) after the companys product failures caused two deaths

and a recall of 36,500 devices. We will analyse the success factors of the

industry more in chapter 5.

Even though the fast pace of innovation probably was very challenging for

many entrants, on the other hand fast development also provided

opportunities to successfully enter the industry. A case in point is CPI,

which was established by people who left Medtronicto capitalise on a new

related innovation, the Lithium battery.


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Li-batterywas developed outside the pacemaker-industry and was available to

all firms. The battery was specifically adapted to pacemakers by Wilson

Greatbatch. However, Medtronic initially rejected it, although Li-battery

provided significant opportunities to improve pacemakers with longer battery

life and with better certainty of avoiding leakages. We can only speculate thereasons behind this initial rejection but probably Medtronics dominant design

and safety record was an inhibitor to take this kind of bigger step and integrate

this radical change. In addition, the fact that a longer device lifetime would

shrink the replacement market was most likely part of the decision. With about

60% market share and a heavy influence on the market, Medtronic had few

incentives to rock the boat and cut its revenues.

CPI became very successful and gained significant market share in the

seventies, mainly at the expense of Medtronic.CPI was later bought by Eli

Lilly (1978), which later in 1994 spun the unit off under the name Guidant.


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4. Relevant markets and value chain dynamics

4.1 Market Size

In 1999, the bradycardia pacing market represented 2.5 bn$ sales worldwide

with a growth rate around 10%. Around 540 000 pacemakers are implanted

each year, mainly in the US and in Europe (see repartition chart)13.

1999 Bradycardia pacemaker market repartition

(% total units)

US

38%

Europe

40%

Japan

6% Other

16%

4.2 Current competitive landscape

Consecutive to a long history of entries, exits and consolidations, the market is

now in the hand of three global players, all US corporations: Medtronic, St Jude

and Guidant CPI. Other manufacturers are local manufacturers (Biotronik in

Germany, ELA in France, Sorin in Italy).

Global Market Share 1999

(% $ sales)

Medtronic

51%

Guidant

22%

St Jude

21%

Others

6%


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4.3 Market Structure

The market is composed of several actors: suppliers, manufacturers, regulatory

bodies like FDA in the US, doctors, hospitals and insurance companies. The

relationships are complex, as they do not take place along a linear process thatwould end in the end customer, the patient.

Suppliers: they provide critical elements (battery, sensors), both in terms of

reliability and increased performances (battery lifetime, functionalities). In

particular, batteries are quite specific to the application and 90% (60% directly

and 30% through licensing)14of the battery pacemaker market is held by one

company, founded by Greatbatch himself. This position probably enables

Wilson Greatbatch Technologies Inc. to capture a part of the pacemaker

industry profit (in 2000, Greatbatch EBITDA totaled 26% of sales!15). Since

almost all sales of these specific batteries depend on pacemaker market,

they can be viewed as a co-specialized asset to the pacemaker.

Cardiac surgeons, general cardiologists:pacemaker represents the breadand butter operations for cardiac surgeons and cardiologist16. After having had

ManufacturersSuppliers

FDA

or equivalent

Patients

EP,

Cardiologists

Hospitals

Health

Insurance

ManufacturersSuppliers

FDA

or equivalent

Patients

EP,

Cardiologists

Hospitals

Health

Insurance


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at least six years residency training, pacemaker implantation represents a low

complexity operation and correspond to high volume - low risk part of their

business. The primary functions the doctors will look for are an adequate

treatment of the medical problem and a high level of reliability of the

device. Their reputation is somehow attached to the device, as they are theones who select the brand and model. Furthermore, doctors have no

incentive to spend part of their time to get an in-depth knowledge of the

technology that would enable them to assess a new manufacturer offer. Thus,

they have little incentive to switch from one manufacturer to another. In

contrast, a relation of trust is progressively established between the doctor

and the manufacturer through the sales representative.

The doctors value the ease of implantation, the ease of programming, the

existence of standard programming interfaces across models, the availability of

service, training and support, as well as automatic functions that can help

increase productivityin follow-up activities. Once the main market players are

at parity in terms of adequate treatment and reliability, these additional features

play a distinctive role and can further increase switching costs (eg. acquisition

of a programming device and training). As far as technical innovation is

concerned, manufacturers will generally target thought leaders among doctors

to promote a new product introduction.

Cardiac surgeons and cardiologists enable the diffusion of the product and can

be considered as being an extension of the distribution network. In this respect,

the relationship and trust that is built with them is a critical

complementary asset. To the extent that these physicians derive a large

part of their revenue from implants, we could even consider them as co-

specialized.

FDA approval process17: medical devices are assigned to one of three

regulatory classes based on the level of control necessary to assure the safety

and effectiveness of the device. Classification is risk based, that is, the risk the

device poses to the patient and/or the user is a major factor in the class it is

assigned. Class I includes devices with the lowest risk and Class III includes

those with the greatest risk. Pacemakers belong to class III, which requires


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Growing pool of trained doctors: with a large awareness, good reliability

track record and an increased ease of implantation, in addition to

cardiologists, an increasing number of sub-specialists like electro-

physiologists perform pacemaker implants. Currently, about 35% of the

implants are performed by electro-physiologists, and this proportion is

increasing. Thus the distribution channel that doctors represent grows and

increases the market penetration.

4.5 Substitutes

Although there is no general substitute for a pacemaker there are certain

diseases where substitutes exist.

Treatment of atrial fibrillation by ablation. Atrial fibrillation is a

dysfunctionality in the heart that is accompanied by abnormal electrical

New Indication Scope Extension

Bradycardia

Congestive Heart Failure

Parkinson Disease

Antitachycardia

From severe to comfort application

1958 2001

2001

Vasovagal Syncope

MarketG

rowth

New Indication Scope Extension

Bradycardia

Congestive Heart Failure

Parkinson Disease

Antitachycardia

From severe to comfort application

1958 2001

2001

Vasovagal Syncope

MarketG

rowth


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impulses. The physician can identify the precise area in the heart that starts the

abnormal signal, and then this tissue can be eliminated by ablation.

Drugs.Certain types of tachycardia (fast pacing of the heart) or atrial fibrillation

can be treated by drugs slowing heart pacing. Drugs include beta-blockers,calcium-channel blockers and digoxin (slowing the AV node).

It seems that pacemaker is not being threatened by drug substitutes. On the

contrary, new pacemakers are actually replacing some inefficient drugs, which

have problematic side effects especially when the treatment has to be

permanent.

5. Innovation and technology management

5.1. What makes innovation such a challenge in the pacemaker industry?

The pacemaker industry is remarkable because its innovation process blends

contradictory forces:

Western Society requires the best pacemakers possible leading to a

demand for steady technological advancements.

There is a tension in the attitudes of cardiologist and EPs. On one hand

they dislike to introduce novel devices because of the potential risk for

their patients. On the other hand, they like to have the latest technology

to work with.

All the players along the value chain - suppliers, regulators, insurance

companies, doctors and patients - have to be involved in the introduction

of a new version. There are many interdependencies as already

highlighted in chapter 4.


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5.2. Are disruptive or incremental innovations driving the pacemaker

industry?

Among the several innovations that occurred in the pacing industry, some bear

incremental characteristics while two innovations bear characteristics ofdisruptive innovation. The table below provides a selection of the important

innovations in the pacemaker industry. From the 11 innovations displayed, we

consider two as disruptive: the invention of the implantable pacemaker in

1958 and the development of the Lithium batteryfor pacemakers in 1974. The

other nine innovations we deem incremental.

The two disrup t ive innov at ions gave the innovators a clear competitive

advantage. The production of implantable pacemakers in 1958 enabled

Medtronic to gain and keep market shares around 70 % over several years.

Though it could not initially match the external pacemaker performances on

several dimensions (except wearability!), technological trajectory rapidly

improved performances to a level that was meeting the patients needs.

The invention of the long-lasting Lithium battery has disruptive characteristics

as it initially introduced risks and established incumbents had no incentive to

pursue it. The inventor CPI (today Guidant) managed to capture a market share

of above 20%. Today both players are considered to be the most promising in

the industry.

Incremental innovations have a less drastic impact on the prosperity of the

different competitors but are nonetheless essential. There are two major factors

Selection of important pacemaker innovations

1958 First implantable pacemaker1965 Demand standby pacer1971 Programmable pacer1973 Pacer programmer1974 Lithium battery1976 Telemetry1979 Multiprogrammable pacer1979 Programmable dual-chamber pacer1983 Antitachycardia pacer1985 Rate-responsive pacer1985 Antitachycardia plus defibrillator pacer1986 Defibrillator pacer


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that distinguish them from the disruptive technologies in the pacemaker

industry. First, medical doctors are less reluctant to adopt devices with minor

changes because the potential risk of failure is relatively small. When an

incremental improvement is made, obtaining FDA approval is a much simpler

and faster process. Secondly, a company does not need to be always the firstto market such an incrementally improved product to remain competitive in the

industry.

5.3. How important are complementary assets?

In order to be successful in the pacemaker industry, it is critical to have accessto complementary assets and to exploit them optimally. Medtronic as well as

CPI have excelled in this exploitation. In the pacemaker industry we consider

the following complementary assets to be key:

Good relationships to cardiologists/EPs and hospitals, in other words to the

distribution channel

Effective access to the regulators that licence the use of a particular

pacemaker type

Close collaboration with suppliers of critical components

In our opinion, the most important complementary asset is the good

relationship with medical doctors and hospitals. They act not only as the

main distribution channelbut also provide valuable information about the

market requirements. The decision of which pacemaker to implant is usually

based on trust and experience from the past. Not surprisingly, the patient

leaves the decision up to the expert. As a pacemaker is a highly critical device

for the life of the patient, physicians are very reluctant to switch suppliers

(conservatism). For a new entrant, it is difficult to overcome this barrier due

to trust based tacit contracts between the incumbent and the medical

institution. Therefore, incumbents have a clear first-mover advantage reflected

in a high-switching cost for customers.


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It is also crucial to have effective access to the governmental regulators, who

are in charge of approving new types of pacemakers. However, this asset not

as critical as the first one because an entrant has to overcome the same

hurdles as the incumbent.

Last but not least, excellent relationships to suppliers of critical components are

a key complementary asset as well. This applies for example to sensors and

micro-devices but especially to the battery producer (virtual monopoly). If the

pacemaker producer is able to develop its product in cooperation with the

supplier, time-to-market and product quality improve. Additionally, this

collaboration leads to lower production costs and better supply-chain

performance. Again, all competitors should basically have equal access tothese suppliers. That is, criticality is much lower than for the distribution

channels.

5.5 How important is the first-mover advantage?

Both for large incumbents, as Medtronic, and for new entrants like CPI, it is

crucial to understand when and why the first mover has an advantage. We

have to distinguish between first movers in the industry and first movers in the

new technical developments in pacing systems.

What comes to the first type, first mover in the industry, we claim that a

significant first mover advantage exists. This advantage is tightly linked to

the extreme importance of safety, product quality and trust. A first mover has

the advantage of leveraging the cumulative experience that doctors and

patients have from the first movers products. This related to both the safety

record and the switching barriers that result from the in-depth product

knowledge of doctors (invested learning).

The same reasons that create an advantage for industry first movers naturally

make the conditions difficult for new entrants, even though the entrants product

would be technically superior. Only in specific cases where the technological

improvement has been very significant and the incumbents have been very


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slow to react, a new entrant has been able to successfully gain market share

(CPI with the Li-battery powered pacemaker being an example)

5.6. What uncertainties is the pacemaker industry facing?

The pacemaker industry is in many aspects a predictable environment, mainly

due to the criticality of the product. However, disruptive technologies and big

market changes (e.g., regulatory issues) are a significant risk for the market

players.

Technological uncertainty. As outlined above, both disruptive and

incremental innovations can have a big impact on companies future

performances. Incremental uncertainties can be largely overcome if the market

player makes sure that it is on the technological forefront. In product

improvements, it is not necessary to be the first mover in this industry, as long

as a company is fairly quick to respond to competitor actions. At the current

stage of development for the standard bradycardia treatment, the marginal

value brought by technological improvements may be decreasing (in other

words, we may be reaching the end of the S curve). Hence, disruptive

innovations are more critical and can be a risk for the incumbents. Companies

are therefore well advised to devote enough attention to watch out for

potential technological changes.

Market uncertainty. All customers along the value chain - regulators, insurers,

hospitals, doctors, patients - are contributing to the market uncertainty. For

example, national regulations change, insurance companies have different cost

coverage policies or doctors might simply dislike a certain product. The market

players can reduce some of the risk by making sure that they have continuous

fast access to information about potential changes. This applies to the

interface to the most critical players of the value chain (see also

complementary assets). Nevertheless, current pressure to lower health care

bills could encourage less refined disruptive innovation. In such a context,

advanced secondary functions or comfort features may lose pre-eminence inthe face of a less expensive and more basic technology.


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Competitive uncertainty. While this industry is seemingly attractive for

incumbents and new entrants alike, it is full of traps as we have already

discussed above. There are complementary assets that cannot be accessed

easily, disruptive technologies that take the incumbents by surprise or failedinnovations that immediately backfire to the innovator. Another interesting

story tells that Eli Lilly has attempted to preclude Medtronic from entering the

defibrillator market segment, claiming that Medtronic violated a CPI patent. In

order to settle the case, the two companies cross-licensed technology, giving

CPI a rate responsive pacemaker in an OEM arrangement with Medtronic.

Without the responsive unit, CPI would have been at a serious competitive

disadvantage.

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This kind of moves further locks the market, raises entrybarriers and stabilizes the competitive picture.

Operational uncertainty. The degree of operational uncertainty is considered

to be low. Market players hold a stable market share with limited fluctuations.

Complementary innovations, unless disruptive, can be dealt with. Still, although

supply seems much less uncertain than in other high-tech industries there are

some potential uncertainties to be considered. It is interesting to note, for

instance, that some suppliers terminated sales of certain materials to

manufacturers of implantable devices to reduce potential product liability

exposure. Or take the supplier of Lithium batteries, Wilson Greatbatch Inc.,

which acts as the single supplier for the whole industry. Naturally, it may be

risky to rely on a single source of supply.

Organizational uncertainty. The organizational uncertainty is fairly low.

Investments are done on a mainly incremental basis and extreme resource

constraints are rare. Some organizational uncertainty can originate from the

fear of product cannibalisation. However, C. M. Branbury and W. Mitchell

(1995) demonstrated that the effect of cannibalisation is less dangerous than

the effect of delayed innovation.


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Medtronic had in the 1970s. Due to the companys leading position, and its

excellent contacts to the medical community Medtronic had a vast inflow of new

development ideas from their customer base. At the same time Medtronics

product development organisation appears to have been very functional and

specialised. As a combination of these issues, Medtronic had difficulties inboth deciding where to focus their development efforts and then

delivering fast enough. These problems were exemplified by the Li-battery

invention, which was first overlooked by Medtronic and later developed with

great time lags (4 years after CPI had entered the market with their Li-battery

powered pacemaker).

As a consequence of the problems Medtronic faced in the seventies, thecompany later improved the efficiency of their product development process

significantly, for example by establishing cross-functional approaches to new

product development.

6.2. Market approaches

The approaches to marketing and customer relationships have actually been

surprisingly similar in both Medtronic during the 1950s and CPI in the

seventies. Both companies started with a brilliant breakthrough product and

were able to leverage existing relationships and knowledge of the medical

community, especially the key users. In the case of Medtronic, the deep

customer understanding was due to the approximately ten years of pre-

pacemaker service and maintenance business experience with hospitals in the

Midwest. On the other hand, CPI was able to leverage the experience and

contacts of former Medtronic employees who founded CPI. Both companies

had the remarkablebenefit of combining theadvantages of a start-up on

the technology side (flexibility, no legacy constraints) andthe advantages of

an established player with brilliant customer understanding. Similar

advantages to customer understanding were present also in the dealings with

the regulators.


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In contrast, in the beginning of the 1970s Medtronic was the clear market

leader and the company had established a first class distribution network and a

broad and deep customer base. Medtronic invested significantly in

customer educationsuch as providing seminars to doctors and sponsoring

medical conferences and publications in medical journals.

Even though Medtronic was the market leader, they were not always the

technological leader, especially in the crucial case of Li-battery pacemaker,

as already mentioned before. At the time, Medtronic was an increasingly

bureaucratic organisation, slowing down innovation and improvements. Also,

introducing a Li-battery powered pacemaker would have been a threat to

Medtronics replacement business in the short-run. Another issue was theconservative environment, which led to slow reaction: conservative

customerscontinued to use Medtronics conventional pacemakers for a long

time after the initial Li-battery pacemakers launch. Medtronics sales were

stable for years, but the companys market share eroded. These issues explain

why it took them so many years to react (CPI came to market in 1974,

Medtronic in 1978). In contrast, CPI had no legacy of replacement business

to protectand their means of reaching the wide market were initially limited.

CPI had to break through with a significantly improved product and rely

on the acceptance of lead users.

6.3. Defending the market position

As Medtronicsmarket share declined during the 1970s the company started

to react: they improved their internal processesand had a stronger focus on

technological innovationthan before. Also, they focused on cross licensing

and widening their product range. The latter meant that hospitals and

cardiologists were able to purchase the entire range of pacing and cardiology

products from Medtronic. This created a clear switching barrier, as the

relationship with cardiologists became so comprehensive. Medtronics sales

and market share started to increase again


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CPI on the other hand, developed very differently: they were bought by Eli

Lilly, which later spun this division off as Guidant. Being part of Eli Lilly

probably helped CPI to get access to a world-class distribution network, so

crucial in this industry. In the long run, sustained innovation helped Guidant

take the lead over the rest of competition and resulted in the acquisition ofIntermedics.

We speculate that CPI might have had a very different fate if they had

managed to acquire William Greatbatch Inc in the mid-seventies (which is still

the quasi-monopoly producer of pacemaker Li-batteries today). This vertical

integration of a critical complementary asset would have left Medtronic in a

competitively very bad position, and CPI might have become market leader.

7. Conclusions

Through the study of the demanding pacing industry, we have been able to

assess how some of the companies were able to successfully bring innovation

to the market. This gives good insights on the relative importance of access to

technology and access to market as well as on the impact of disruptive

innovation.

In the first instance, when the implantable pacemaker was invented, Taber Inc.

had a clear technological advantage. However, this company either did not

recognize the market potential or acknowledged that they were not in a position

to market the product. Medtronic, on the other hand, had no particular

technological advantage but had excellent market understanding and was quick

to realize the opportunity.

This goes against the popular view that technological leadership is the main

driver of success in innovation management. Clearly, thorough market

knowledge and an efficient access to the distribution channel are key success

factors to recognize the potential value and commercialise a technological

innovation.


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The second milestone in the pacemaker development is a good example of

how a small player can take advantage of a disruptive technology. At the time

of Lithium battery introduction, Medtronic was a successful incumbent holding a

very large share of a profitable market that they could influence. Medtronic had

no particular pull from its customer base and saw no incentive to introduce thenew technology and bear the risks of it. In addition, the new innovation might

have decreased their profitable replacement business.

In this industry, successful innovation requires both technical innovation and

market intimacy. Patients and physicians expect continuous product

improvement, but the market is highly unforgiving, and a product failure can

cost dearly in terms of market share or even company survival. That tensionmakes innovation particularly risky. This risk, coupled with high entry barriers

mainly in the form of a tacit trust contract with physicians, may be part of the

explanation why only few companies prosper in this industry.


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Implantable Pacemaker

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