Does M&A Beat Organic Innovation?

A panel of experts at MD&M West weighed in on acquisition-based innovation vs. organic innovation for growing a successful company.

Amanda Pedersen

Is it smarter to scale innovation organically or through M&A? Bryce Rutter challenged experts with that question last week during a panel he moderated at MD&M West on the subject of "Keeping Innovation at the Heart of Product Development."

The question was particularly timely as mass consolidation continues to be a prevalent trend in the medical device industry, most recently with Abbott Laboratories's $25 billion purchase of St. Jude Medical.

"I've been working with the biggest medical device companies for many decades, and what I've observed over the years is that every one of them has some kind of skunkworks, some sort of an innovation lab that produces almost nothing, except lots of jobs," said Stephen Wilcox, founder of Philadelphia-based Design Science. "All of the real breakthrough ideas have come through acquisitions."

The problem is, Wilcox said, little companies are good at coming up with brilliant ideas, but they can't develop those ideas into a multibillion-dollar business. "That's the strength of the big companies," he said. "They're able to take these little flowers and turn them into whole ecosystems."

"If I were one of the big companies, I'd punt on that one and just concentrate on acquisitions, because you know, the fact is, a taxi company could have never developed Uber," Wilcox said.

Philips certainly seems to have embraced the acquisition-based innovation strategy in recent years. The company closed its $1.2 billion acquisition of Volcano Corp. in early 2015, and bought Wellcentive, a population health management firm, in 2016.

Rutter pointed out that part of what made the Philips-Volcano deal interesting is that it involved a capital company buying a disposables company, which was not unlike Medtronic's $42.9 billion merger with Covidien, which closed around the same time. And as it just so happened, one panelist, Andrew Tochterman had first-hand experience with the Philips-Volcano deal.

So, Rutter asked Tochterman, "how'd the marriage go? Or are you still dating?"

"I honestly do believe it's been a great acquisition," said Tochterman, coronary segment leader at San Diego-based Philips Volcano. He agreed that it's a unique partnership with Philips being a capital provider, and one with multiple touch points from healthy living through home healthcare. "I'd be understating it to say that it has not been a change, but overall I think it's going very positively," he said.

As for Rutter's broader question about organic innovation versus acquisition-based innovation, Tochterman pointed out that there is another trend driving up M&A activity in the industry, and that is the rise of the administrative voice in medical device purchasing decisions. During his days at Guidant, which Boston Scientific acquired in 2006 after a bidding war with Johnson and Johnson, doctors had a lot more say in those transactions. That power has shifted in recent years to the hospital administrators who are taking a harder look at the bottom line, making it tougher for the little guys to compete.

"It doesn't matter how attractive your widget is unless you're saving money, reducing costs, and improving patient outcomes," Tochterman said. "So I think you have to have both [organic innovation and M&A]."

It's important not to starve an existing product line that is producing profitability, Tochterman said, but he said the current healthcare environment makes it necessary to look elsewhere for long-term success.

Ron Pierce, vice president and director of design strategy and research for Karten Design, of Marina Del Rey, CA, agreed. Most organizations start with something that is unique to them, Pierce said, but "the dynamics of the market place today is just too crazy, competitors are too aggressive, and you can't maintain a competitive lead without looking outside your initial core."

During the panel discussion Pierce talked about a client his firm is currently working with in the respiratory health space (without mentioning the company by name, of course). While Karten Design is engaged in front-end research to help the client find opportunities for organic growth based on market needs, Pierce said the firm is also chartered to scout out potential M&A opportunities in that space.

"They need to be operating with one eye in both areas," Pierce said. "But hopefully you don't give up the ability to grow organically from an innovation standpoint."

Amanda Pedersen is Qmed's news editor. Contact her at [email protected].

[Image credit: Pixabay]