Engineering a Healthcare Technology Gold Rush

Northern California could play an important role in inventing the future of medical technology, if the high cost of doing business there doesn't hold it back.

There's a sense in Silicon Valley that almost anything is possible and it's easy to see why: The region is on an upswing, and the Bay Area is awash in innovative tech startups, social media, smartphones, wearable devices, and risk-taking and wildly-optimistic entrepreneurs.

Novel technologies with wide-ranging possibilities routinely make their debut in the area like the iPhone or, more recently, Google's driverless cars.

And now the tantalizing possibility is presenting itself that the same communications device wizardry is bursting its way into the medical device industry, allowing for everything from on-the-go body monitoring to improved disease diagnostics.

If the medical device industry is due for a disruption, Northern California and its innovation culture are well positioned to take advantage of it--but only if it can afford to, and if FDA isn't overly risk-aversive in its regulation of innovative healthcare technology. 

"A ton of things are going to come together, and it's not clear what's going to work. ... I think the Northern California innovation culture is better suited to that kind of approach," says Bill Evans, president of San Francisco-based Bridge Design, which helped create Fridley, MN-based Medtronic's next-generation Enlite glucose sensor and Newark-based Oraya Therapeutics' radiotherapy device for treating age-related macular degeneration. 

But Evans also added: "If the regulators step in too much, too heavy-handed, then it's going to make that whole process much more expensive to do, and hence less able to be experimental."

There is also the issue of funding. The Bay Area attracts the largest share of venture capital investment in the country. In just the second quarter of 2013, Bay Area life sciences companies received $504 million in venture capital, with $159 million going to medical devices--an imposing figure but not as great as the pre-Great Recession years, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. Last year, life science venture investing amounted to $1.75 billion.

"Northern California continues to lead the nation for medical device innovations and startups. ... There's a lot of innovative stuff going on. But [the innovative companies are] all early and they're all hurting for money," says Mir Imran, chairman and CEO of San Jose-based InCube Labs.

Digital health offers broader reaching preventative services and remote monitoring which is great.

However, there are certain conditions where a physician needs to see the patient in person. Some digital health advances could hurt healthcare because they are reducing patients' direct interactions with doctors and creating "bad medicine," according to Kathryn Stecco, MD, co-founder and chief medical officer of Altai Medical Technologies in San Jose.

Stecco meanwhile does not see much life-saving technology getting funded: "There's not a lot of venture capital money being funelled into early-stage device deals."

Still, the tech boom has helped push the region's employment to return to pre-recession levels, and other related industries like manufacturing are seeing an uptick.

While it is too early to tell if the tech industry is in a bubble as it proved to be in the Dot-Com era, the healthily growing economy in the region is attracting some of the brightest minds in the world.

The region is already unparalleled for using information technology for healthcare related applications. Based in the area is, for instance, Redwood City-based Proteus Digital Health, which embeds sensing technology into pharmaceutical tablets. The technology won FDA approval last year. HeartFlow, also based in Redwood City, uses software to diagnose cardiovascular problems and optimize treatment. Using, standard coronary CT data, its cloud-based software is able to provide non-invasive evaluation of coronary blood flow in patients with heart disease.

The Bay Area has also seen great strides in the area of genomics. Mountain View-based Genia Corp., for example, has technology that measures changes in electrical currents to engage in genetic sequencing, versus the expensive optical sensors presently used. While the current cost of sequencing a genome typically ranges from $1,000 to $4,000, Genia's goal is a $100 genome.

The region is also home to the digital health incubator Rock Health; the Center for Digital Health Innovation at the University of California, San Francisco; and consumer facing health-tracking firms like Jawbone, Misfit Wearables, Fitbit, and Scanadu.

In addition, to these applications, the region has a track record of launching forward-thinking traditional medical device firms such as Acclarent (acquired by New Brunswick, NJ-based Johnson & Johnson), and Nanostim (recently acquired by Little Canada, MN-based St. Jude Medical).

There are big firms such as Medtronic Vascular (Santa Rosa), Abbott Vascular (Santa Clara), Siemens Medical Solutions' Acuson division (Mountain View), Stryker Endoscopy (San Jose), as well as Accuray and Intuitive Surgical (both in Sunnyvale).

The Employment and Research Climate

While the Southern California area beats out the San Francisco Bay Area for core medical device jobs, the north is on par the south for overall jobs in the life sciences. The region is home to one of the densest biotech clusters in the country, which includes the likes of industry heavyweights like Genentech and genetic analysis pioneer Life Technologies Corp.

Roughly 850 biomedical companies are based in the Bay Area, making it the largest biomedical cluster in the United State. In all, 31% of the state's total biomedical workforce is based in the region.

San Francisco itself has 9,372 medical device workers, making it sixth in the United States, while Los Angeles area comes in first with 29,104, according to Econometric Modeling Systems Inc. data from 2012 cited by Minneapolis economic development group Greater MSP. The Bay Area, however, has 47,109 "biomedical jobs," slightly less than the 55,105 in Los Angeles, Orange, Ventura, and Santa Barbara counties, according to PwC's California Biomedical Industry 2013 Report. San Diego County has 25,883.

Silicon Valley and San Francisco may be known for their high cost of living--which has become even more exorbitant in the recent tech boom, but those in the life science industry earn significant salaries. Research, testing, and medical labs, for instance, pay an average of $130,867 per year.

Still, Silicon Valley is one of the most expensive places in the nation to conduct business. In 2011, The Boyd Co. Inc. (Plainsboro, NJ) looked at 55 locations throughout North America and estimated the cost of running a hypothetical manufacturing plant with 325 workers. The San Jose/Palo Alto area won the dubious honor of being the costliest place to make medical devices on the continent, costing $30.71 million annually. By contrast, the cost of operating the same type of facility in San Jose, Costa Rica was $17.82 million. The cost of labor, energy, shipping, and taxes all contribute to Silicon Valley's reputation as being an expensive locale.

"It doesn't help them," says Dale Wahlstrom, CEO of Minnesota trade association LifeScience Alley and former vice president of venture programs at Medtronic. "But they have a really strong knowledge community, which helps them offset that."

It perhaps comes as no surprise that Silicon Valley is home to one of the densest concentrations of engineers on the planet. And San Jose and San Francisco come in at number one and number two respectively when it comes to U.S. cities with the highest numbers of patents filed.

California, along with Massachusetts, have some of the most prominent research entities in the world including in the life sciences. The National Institutes of Health gives California more grant money than any other state, amounting to roughly 15% of the total NIH funding in the country. The Bay Area itself is home to Stanford University; University of California, Berkeley; and University of California, San Francisco.

This year, the Academic Ranking of World Universities by China's Shanghai Jiao Tong University cited Stanford University as the second best university in the world. UC Berkeley was pegged in the third slot. Also based in the area is Singularity University (Moffett Field), a forward-looking think tank whose corporate founders include Genentech, Autodesk, Google, and Cisco.

UC San Francisco actually receives the most NIH funding among California universities, receiving about $500 million in the first nine months of 2012 alone, according to the California Biomedical Industry 2013 Report. Stanford brought in more than $334 million, and UC Berkeley had nearly $119 million.

Manufacturing Know-How

The Bay Area's medical device industry also benefits from a wide variety of suppliers, manufacturers and experts in a wide variety of fields--a situation not seen in many other parts of the country or even the world, says Bob Lathrop, president of San Jose-based Lathrop Engineering, which assists on instrument and product development in the medical device industry.

"It's a can-do area with huge resources. If you want to do anything with lasers, you have huge resources locally. If you want to do anything with surface treatment of plastics for these biochips, huge resources locally," Lathrop says. Sure, such expertise can be found in Europe, too, but Lathrop says, "There's a lot less innovation than right here in Northern California. I'll put it that way"

The Bay Area's economy over the decades has morphed from defense contracting, to silicon and semiconductors, to personal computers, to websites, IT and smartphones, recalls Dave Busch, vice president of medical at San Jose-based OnCore Manufacturing Services, which provides electronics manufacturing and design services. The company assists in the manufacture of the Oraya Therapeutics platform mentioned earlier.

"Now we're becoming a medical device and biotech valley. ... There are not that many places that can reinvent themselves as significantly and quickly as Silicon Valley," Busch says.

The penchant for reinvention and the constant hunt for the next big thing has a downside, though, especially when it comes to the turnover from people constantly leaving one medical technology venture for the next exciting thing, says Wahlstrom, recalling his pre-2006 experiences at Medtronic.

"They're very good at starting companies, not as good at growing them," Wahlstrom says.

A Medical Device Valley?

Silicon Valley has a reputation for attracting people with a desire to "change the world" with technology, and in the case of breakthroughs in computing, networking technology, and mobile device technology, it has helped do that.

All of those technologies have served to make countless business processes smarter and more efficient. New computing technology itself is famed for offering substantially better performance than older-generation equipment at a lower or equivalent cost. Moore's Law has proved effective at predicting the volume of transistors on integrated circuits--which doubles roughly every two years.

According to Roger McNamee, managing director of Elevation Partners at ITLG Innovation Summit (Santa Clara), Moore's Law is not really a law at all--but a challenge for engineers to outdo themselves. And in the healthcare space, a central challenge for medtech firms is to develop medical technology that reduces cost from the healthcare system at large.

Every 13 years, U.S. healthcare spending doubles, according to  Antonio Regalado, senior business editor at MIT's Technology Review.

Despite constant breakthroughs, patients in the United States are paying more and more money for mediocre outcomes. While the trade association AdvaMed has repeatedly claimed that spending on medical device technology does not play a role in this, some healthcare economists, like Harvard's Katherine Baicker and Amitabh Chandra, disagree. There are countless of examples of expensive technologies with limited benefit that help propel healthcare costs upward, they argue. They point to technology like Intuitive Surgical's da Vinci robot, which costs upwards of $2 million, and has questionable benefits over conventional laparoscopic surgery.

Still, technology has tremendous potential to improve the efficacy of healthcare as we know it, argues Sun Microsystems co-founder Vinod Khosla, who expects artificial intelligence to ultimately be able to do 80% of tasks doctors currently perform. Khosla argues that future of healthcare will be driven by innovative technologists and entrepreneurs--not necessarily clinicians.  

Less controversial is the conclusion that the healthcare system must move from cost-increasing to cost-cutting healthcare technology. And even if technology doesn't end up replacing doctors, it could certainly help address the United States's shortage of physicians.

"We know more about the health of our cars than the health of our patients. ... These technologies should enhance the doctor-patient relationship," says Daniel Kraft, MD, executive director of FutureMed and medicine and neuroscience chair at Singularity University.

Health care in many ways is broken," says Kraft, who welcomes the changes.

A lesson might be learned in how Silicon Valley outfits see opportunity in rescuing Healthcare.gov. There is also a larger opportunity for the Bay Area to reinvent healthcare itself.

Kraft thinks the area's brightest minds are up to the challenge: "Would you rather build healthville or Farmville when it comes to doing something meaningful with your life?"