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PERSPECTIVE

DISRUPTION in Medtech:Is The Model Changing?

David Cassak, 6

NEW BUSINESS MODELS

CARDINAL HEALTH:Disrupting Medtech’s Business Model

David Cassak, 10

MEDTECHSTRATEGIST.COM

See page 28

OCTOBER 3, 2016Vol. 3, No. 14

MARKET TRACK

Published by Innovation In Medtech, llc

START-UPS TO WATCH

ABOGEN: Betting that Spit Matters

Wendy Diller, 42

206 ORTHO: Changing Clinical and

Business Outcomes in Fracture Fixation

Mary Stuart, 44

ORPYX MEDICAL: A Wearable Device Helps

Prevent Diabetic Foot Ulcers Mary Stuart, 48

START-UPS TO WATCH CRE8MDI LLC:

A New Measurement for Arterial Stiffness Aids in

Cardiac Risk Stratification Mary Stuart, 00

CAROTID STENTING Silk Road Medical:

Pioneering a New Standard for CAROTID ARTERY Intervention

Mary Thompson, 20

CREST at 10 Years: Durability Data Reassures, but Periprocedural Stroke Worries Continue, 29

OBESITY UPDATE

The FDA, Investors SupportOBESITY DEVICES for the

Bulk of Patients Mary Stuart, 36

DIAGNOSTICS

POINT-OF-CARE TESTINGCONSOLIDATION Continues

as Danaher Buys Cepheid Wendy Diller, 30

An Inside View of the Danaher-Cepheid Deal: MTS Speaks with Diagnostics Expert Bob Easton, 33

US TCAR Market Conversion Potential

http://www.medtechStrategist.com

THE MEDTECH STRATEGIST © 2016 Innovation In Medtech, LLC. All rights reserved.

10 NEW BUSINESS MODELS

As we note elsewhere in this issue (see “Disruption in Medtech: Is the Model Changing?”), the notion of disruption in medical devices has long been thought of in terms of technol-ogy disruption, with a decid-edly positive spin to the idea. “Disruptive” technologies open new markets and establish new standards of care and, in the process, reward not just clini-cians and patients but product companies and their investors in some cases—think of coro-nary stents or transcatheter valves—with market oppor-tunities worth billions.

But as cost pressures continue to re-shape healthcare delivery, the medtech industry is being forced to redefine dis-ruption—more in terms of business models than technology. In most cases, these new business models seek to look past technology offerings alone, or at least place them in a broader context—a context that addresses the larger cost concerns their customers face. No longer is it enough to sell customers a product;

companies have to help those customers reduce the cost of the episode of care in which those products are used.

Some medical device compa-nies are turning to service of-ferings in an effort to address that larger context of cost and care. But for companies that have historically focused exclu-sively on products, a move into services can be difficult, if not disorienting. Far easier is add-ing products to the offerings of companies that are experts in providing a broad range of services.

That, at least, is the view of Cardinal Health as it rolls out its new, more ambi-tious program in medical devices. A $100 billion-plus distributor of a wide range of products and supplies, Cardinal is ex-pert at helping hospitals move products efficiently through their system, saving them significant amounts of money in the process. A couple of years ago, Car-dinal raised eyebrows in the medtech space with two acquisitions in close succession: Access Closure, developers

Mike Buck

With its base of sophisticated logistical services and close relationships with hospitals, Cardinal Health is building its medical device business on a radically new and disruptive business model. To what extent will the rest of medtech have to follow suit?

Disrupting Medtech’s Business Model

Cardinal Health:

by DAVID CASSAK

NEW BUSINESS MODELS

OCTOBER 3, 2016 | Vol. 3, No. 14

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of the Mynx femoral artery closure device, and, more significantly, the Cordis cardiovascular device busi-ness purchased from J&J.(See “J&J’s Cordis Divestiture Hints at Changes to Come in Medtech,” The MedTech Strategist, March 30, 2015.)

Both moves—along with an eye on orthopedics next on Cardinal’s agenda—signal an important move by Cardinal Health. The answer to the question “What can Cardinal do with Cordis that J&J couldn’t or didn’t want to?” lies at the heart of Cardinal’s new, more aggressive stance.

Last year, Cardinal Health brought in industry veteran Mike Buck, most recently a key player in Abbott Vas-cular’s expansion of its cardiovas-cular business, to execute its new strategy. Under Buck, President of Medical Products at Cardinal Health, the company is building out its own proprietary medical device business. But it won’t be a medical device busi-ness conventionally conceived. With the resources and expertise of one of the country’s most sophisticated dis-tributors behind it, Cardinal’s medical products business is built around a compelling service offering and closer relationships with thousands of hos-

pitals. In the process, it introduces a new, disruptive business model to medtech.

As Buck explains in the following interview, adapted from the dinner program at the Wilson, Sonsini, Go-odrich & Rosati Medical Device Con-ference, held this past June, Cardinal Health isn’t bringing disruption to the medtech industry, it’s adapting to the broader disruption already tak-ing place. In the interview, Buck talks about Cardinal’s strategy going for-ward and about how the company’s novel business model fits today’s changing medical device marketplace.

The MedTech Strategist: Before we get into Cardinal Health’s strategy and some of its recent moves, can you give us a description of the company, its businesses, and how it’s organized?

Mike Buck: Cardinal Health is a global health ser-vices and solutions company with more than 37,000 employees, doing business in more than 60 countries, with revenue in excess of $120 billion. We’re backed by nearly 100 years of experience and rank among the top 25 on the Fortune 500 and are among the Fortune Global 100. Broadly speaking, we’re committed to improving the cost effectiveness of healthcare through solutions that address the efficiency of the supply chain; optimize the process and performance of healthcare; provide clinically proven, daily use medical products and pharmaceuticals; and connect patients, providers, payors, pharmacists, and manufacturers for seamless care coordination and better patient management. We are organized into two large divisions, known as our Pharmaceutical and Medical segments, through which we focus on four key solutions: Products, Logistics, Business, and Patient.

MTS: Products and Logistics are self-explanatory. What do you mean by Business and Patient Solutions?

Mike Buck: Our Business Solutions range from inventory and warehouse management to regulatory compliance support, commercialization services, and performance improvement consulting aimed at stream-lining workflows and helping to reduce costs. As for

Patient Solutions, we connect clinicians and patients for seamless care coordination and better patient well-ness. Our Patient Solutions include medical therapy management, inpatient and outpatient pharmacy solu-tions, patient outreach and care transition, and bedside medication delivery. We’re able to produce the data and insights needed to help achieve fewer readmissions, bet-ter adherence, and better outcomes.

MTS: On the medical products side, how much of the business comes from Cardinal Health brand products and how much comes from the distribution of products on behalf of other branded manufacturers?

Mike Buck: For decades, but more aggressively in the last three or four years, we’ve moved toward Cardinal Health brand products. Today, we have a comprehensive offering of self-manufactured, toll-manufactured, and sourced-manufactured products, ranging from medical consumables to durable medical equipment to physician preference items.

MTS: Are those former American Hospital Supply products, which came through companies like V. Mueller and Pharmaseal, still branded that way? Or do they now carry the Cardinal Health brand?

Mike Buck: The vast majority of those products are still in our overall portfolio, but the brand names have, for the most part, migrated to the Cardinal Health brand.



This is in line with our broader strategy to grow and expand our Cardinal Health offering. That said, we have retained some of the more well-known trademarks, such as Protexis within our surgical gloves line and Medi-Vac, a trademark within fluid management. But we do not have Pharmaseal or V. Mueller anymore, as these were specialty solutions spun off to CareFusion [now part of Becton Dickinson]. It’s important to note that we are in the middle of a visual rebranding of all our Cardinal Health brand products. So, if you’re in a hospital, you’ll still see Protexis because of the trademark. But going forward, you’re going to see a much bigger Cardinal Health brand product presence.

MTS: I think a lot of people in the industry viewed your arrival at Cardinal Health as marking a significant change in the focus, if not strategy and direction, of the medical products business. What did [Medical Segment CEO] Don Casey tell you he wanted you to do when you came on board?

Mike Buck: From a products perspective, Cardinal Health has been more widely known as a distributor of leading brand medical products. In reality, we have been manufacturing and providing Cardinal Health branded products for decades. Over the last number of years, the company began to accelerate Cardinal Health brand prod-ucts and services. With Don, it was very clear it was really all about taking our product businesses to the next level. That means looking not just at our financial performance and our investment in those products, but also at the way we go about our business—our infrastructure, policies, quality programs, and our sales and marketing efforts. Car-dinal Health has been working for a number of years on ramping up its medical products business. Don also talked to me about growing our international footprint. Today, the vast majority of Cardinal Health business is centered in the United States. The global experience in my background was very important to him and the company. You will see us continue to expand our product lines in ways that enable

us to serve the entire continuum of care—from hospital to home—and bring innovation to some of the mature prod-ucts that are used every day. You also will see us expand globally. We’re committed to delivering high-quality prod-ucts and driving efficiencies for customers and patients.

MTS: I was talking to a very smart executive in this industry, someone with long experience. I don’t recall how Cardinal Health came up in the conversation, but he said to me, ‘The company to watch is Cardinal Health. What they’re doing is very disruptive.’ Assuming he’s right, how would you describe the disruption that Cardinal Health is bringing, and how disruptive do you really see it? Both Guidant and Abbott were companies that built major device franchises quickly. Were you brought on to build the next Guidant or Abbott? Or are you doing something very different?

Mike Buck: We’re not creating or bringing the disrup-tion. The disruption is already occurring in our healthcare system. Our fee-for-service payment model is clearly mov-ing to fee-for-value. We don’t believe that products alone are going to be enough for successful medical device firms of the future. It’s very difficult even today to fulfill the needs of customers in the healthcare system with just a portfolio of products, and it’s only going to get harder over the next five or ten years. Cardinal Health actually started without products, initially focused on providing infrastruc-ture and logistical solutions. Through a combination of our scale, breadth, and experience, we are uniquely and well positioned to deliver comprehensive solutions that help customers thrive in this changing world.

Look at the introduction of CCJR (comprehensive care for joint replacement) in orthopedics, where hospitals now have to consider the entire episode of care including the 90 days after surgery. [See “First Take: The Orthopedics Industry Faces CMS’ New Bundled Payment Program,” The MedTech Strategist, December 18, 2015 and “US Hospitals Shift Cost-Control Priorities as Bundled-Payment Programs Ramp Up,” The MedTech Strategist, June 30, 2016. Also see “CMS Issues New Plan for Cardiovascular Procedure Bun-dling,” The MedTech Strategist, July 29, 2016.]

The same is happening in cardiology for treatment of acute MI patients. Similar to CCJR, no longer will a drug-eluting stent (DES) for this treatment be paid for under a pure DRG payment. It will be part of a broader episode-of-care evalu-ation that extends long after the patient goes home. That puts a company as diversified as we are, with services and logistical support and a home business, in a very unique position. When we sit down with hospital CEOs, they are

"From a products perspective, Cardinal Health has been more widely known as a distributor of leading brand medical products. In reality, we have been manufacturing and providing Cardinal Health branded products for decades."

OCTOBER 3, 2016



very interested in talking about these new areas of change and what we have to offer. For example, in our NaviHealth business, we help manage the post-acute care initiatives for thousands of patients. That leads to a very different conver-sation about how products fit in a larger set of components of care. That’s not to say that the industry isn’t going to inno-vate the way product companies always have; in fact, that kind of innovation around breakthrough technologies still needs to take place. But in the most common procedures, we believe the best offering is more than a product.

MTS: You’re saying customers aren’t looking for a product; they’re looking for a solution and that there has to be a service or analytic implicit in or associated with the product?

Mike Buck: We firmly recognize that patients, clini-cians, and payors are still looking for products that solve unmet clinical needs. There’s no doubt our industry needs to continue to develop those breakthroughs. But granted that, when you talk with large healthcare institutions, their big problems sit more in their high-volume, routine proce-dures. That’s where things are changing. Products in those procedures are important, but what’s key today is looking at all aspects of the treatment episode.

MTS: From my days covering hospital supply distributors, I know they’re really a different segment of the market than manufacturers. And one thing that differentiates them is the relationship each has with their core hospital customers. How would you describe Cardinal Health’s customers, and how do you think about your relationship with them? Is it more of a service-oriented distribution relationship? Or is it more product oriented, which is really about clinical outcomes and things like that?

Mike Buck: It’s both. As healthcare has become more complex, there are many more people involved in the deliv-ery of care. They are focused on the entire continuum, not just certain points, but from start to finish. They are working hard to reduce the total cost of healthcare while improving the lives of patients. Because of our scale and breadth, we have a wide range of customers in six primary segments: Acute, Physician Office, Retail Pharmacy, Supplier/Manufac-turer, Patient, and Payor. On any given day, our “customer” can be a surgical nurse, physician, CEO, CFO, materials man-ager, GPO, patient, payor, and more. From a relationship perspective, it is about delivering solutions to these cus-tomers that make their jobs easier and help them navigate

the challenges they face daily. The relationship is about our helping them be in a better position to focus on what mat-ters most. The healthcare market is very dynamic and so our customers, and the relationships we have with them, are grounded in providing comprehensive and integrated solutions to drive greater efficiencies, outcomes, and value.

MTS: A lot of the large, multinational medical device giants today are talking about the growing influence of the economic buyer. Is there any real role for physician preference in the products purchased under that arrangement?

Mike Buck: I have spent most of my career in a product-focused type of environment. And even then, we began talking about solutions years ago. But without core competencies in services and analytics, it becomes very, very difficult to provide real solutions. Historically, Cardinal Health has been primarily known as a solutions company. Now, we’re building upon the service offering by bringing products to market in a more substantial way. It seems a much easier route to be a service company adding products than it is for a pure product company to add services.

MTS: That tees up the Cordis discussion nicely. It was no real surprise when J&J sold its Cordis cardiovascular device business; what likely surprised many was that the acquirer turned out to be Cardinal Health. When J&J exited the coronary stent business a couple of years earlier, the message, implicit at least, seemed to be that interventional cardiology had gotten to be very difficult and J&J no longer felt it could get the returns there that it wanted. If J&J couldn’t get value, how can Cardinal Health? What can you do with that business that J&J couldn’t?

Mike Buck: The key here is timing. Over the years, J&J had appropriately invested in Cordis to make it a leader in interventional medicine and drug-eluting stents. It was an incredibly successful business but heavily R&D focused. Years back, the stent business centered on companies racing to come out with second- and third- and fourth-generation products. New product introductions backed by heavy R&D became the norm and significant technological improvements were made. But today that landscape is dif-ferent. I think most clinicians would tell you that metallic drug-eluting stent technology has remained fairly constant over the past few years—to the point where the DES mar-ket is no longer ideal for many of the market leaders. But it’s the right place for us. As interventional products moved



from highly innovation-centric to more daily-use products delivering strong clinical outcomes, it starts to play to our strengths. As that transition happened, it became the right time for a company like ours to come into the market. It’s now part of a broader episode of care. And with new bun-dled payments on the horizon in cardiology, we think we’re uniquely positioned to assist and ultimately benefit.

MTS: But just to be clear, is this about dropping the price out of the market? Because Cardinal Health can get a lot of value out of products at much lower margins than J&J can—or Abbott or Boston Scientific for that matter.

Mike Buck: We’re all about leveraging the scale of Car-dinal Health to bring solutions that span the entire episode of care across multiple channels. And that takes more than a product sold at a lower cost to win. Simply competing on price is an unsuccessful strategy; we have no interest in doing that.

MTS: You said success for Cardinal Health with Cordis will be measured differently than it was for J&J. As Cardinal Health, do you think about success in terms of market share, being number-one or number-two? Is it having a certain market share? Or is it simply having a product available for a hospital that is going to be buying a lot of other things from Cardinal Health as well?

Mike Buck: That’s a good question. I think ultimately success will lie in our ability to bring our scaled solutions, our broad footprint, to the cath lab, helping it be financially stronger by driving inefficiencies out and quality of care up. Hospitals today face so many challenges: higher efficacy of care requirements, lower reimbursements, higher patient satisfaction goals, etc. They have a ton to manage and we can help. So yes, we’ll measure success in terms of sales growth and increased market share, but it’s actually much bigger than that.

MTS: You personally have a long history in this industry and, as we mentioned, one of the things that people in this industry find intriguing about Cardinal Health is its ability to disrupt the model. If you think back to your earlier career, what do you think the reaction likely was in the more established interventional cardiology community when they heard that Cardinal Health was the acquirer of Cordis?

Mike Buck: I would guess they probably thought that Cardinal Health would focus on the commoditized aspect of

this business and on price. They probably looked at Cardinal Health and reasoned that we know how to move products through the system so we can afford to sell them inexpen-sively and, therefore, we would drive down the price point. But the truth is, we’ve had the Cordis business for about a year—it’s led by David Wilson, who serves as president—and we’ve raised service levels through investment into the seg-ment. We’re investing in our CIMS RFID-enabled solutions, which is our Cardinal Health Inventory Management System, and we bought a company to manage all of the inventory associated with the cath lab. We’re also working to adapt our naviHealth post-acute care business to cardiology patients, so when patients leave the hospital, they go to the right place of care and get the right kind of care. We can plug those into an existing cardiovascular product-based business.

MTS: In other words, hospitals’ problem today isn’t that they’re paying too much for their stents, but that the overall episode of care costs too much. Does it then follow that if you can address that overall cost by bringing that service offering that more traditional manufacturers don’t have, pricing pressures go away? You can address the cost issue without focusing on prices?

Mike Buck: Yes. Materials management leaders are still going to hold us accountable for passing along savings when able, looking at consolidation and standardization and pricing. But a sole focus on the cost of products is not the solution. Executives in the C-suite at hospitals are thinking about the entire episode of care. For example, in orthope-dic total joint replacement, the variability of total cost of the episode can be substantial from patient to patient. We are very interested in helping our customers find a more cost-efficient way to treat their patients over the entire episode of care—which means the right patient, the right scheduled time, the right product, and the right discharge, post-op care, and follow-up. That’s what the majority of advanced health systems are thinking about right now, and it’s what a pure product company struggles with. Simply reducing a product price doesn’t solve the task at hand.

MTS: The other big cardiovascular deal Cardinal Health did was the acquisition of AccessClosure [manufacturer of the MYNX femoral artery closure device]. That deal was done before the Cordis deal. How did AccessClosure fit in your strategy? Is it part of the same strategy or something different?

Mike Buck: AccessClosure served as our entrée into the cardiovascular space and allowed us to bolt on things

OCTOBER 3, 2016



of much greater critical mass. It strengthened Cardinal Health’s portfolio of physician preference items, which include offerings in the cardiovascular, wound manage-ment, and orthopedics areas. Our goal is to help customers standardize around medical devices, while offering inno-vative solutions in supply chain management, inventory optimization, and work flow tools and data to support the most effective management of the patient. Collectively, and with Cordis, we can offer high-quality, daily-use products; reliable, trackable inventory and logistics; and deep ana-lytic capabilities that will result in a comprehensive offering for the entire episode of care. This multidimensional set of solutions is becoming increasingly important with emerging value-based payment models.

MTS: So how acquisitive will Cardinal Health be going forward? Is Cordis enough of a platform? Do you want to do more acquisitions? And given the size and scale of Cardinal Health, Cordis seems a logical fit. Can you really look at small companies with niche technologies to make a contribution to what you want to do?

Mike Buck: Cordis gave us a broad footprint of 700 commercial professionals utilizing a distribution network doing business in nearly 60 countries. That’s something we lacked. We are very disciplined about the moves that we make, the way we deploy capital, and the acquisitions we consider. All of those are really with the thought about where care is going and ensuring we’re on the right side of care.

MTS: Before we get into some other areas outside cardiovascular that you’re interested in, let’s spend a minute on wound care. That’s another clinical space where you actually have proprietary products. What does your offering there consist of and what’s your broader strategy?

Mike Buck: We’ve built a portfolio of advanced wound care, traditional wound care, skin and baby care and incontinence products. These products are found in the acute and physician space, long-term care, and some now are in the home and retail space. We’ve also expanded into the physician-preference space within wound care through our expansion into the negative pres-sure wound therapy business.

MTS: OK, let’s talk about orthopedics. It’s a very diverse space. When Cardinal Health thinks about orthopedics, are you focusing on total joint replacement and/or spine,

which typically don’t go through distributors like Cardinal Health? Or sports medicine and orthopedic soft goods, which typically do?

Mike Buck: We’re already in orthopedics, with branded products primarily in trauma and accessories, such as bone cement. But that’s just the beginning. We’re actively work-ing to expand our orthopedics business, and while it’s too early for us to publicly comment on our strategy, we do believe there are opportunities for Cardinal Health in large joint replacement. But, again, our differentiator would not be the implant; it would likely be everything around the

implant. The biggest change in orthopedics is how hospitals will manage total joint replacement episodes. CCJR is now active in more than 700 hospitals in the US and that num-ber is growing. With CCJR, hospitals are on the hook for the entire episode of care; that allows us to play a much big-ger role with our customers. A large part of all costs can be assessed and optimized through our NaviHealth analytics. If we’re successful in total hip replacement, it’s not going to be because we’ve got the latest hip implant. When we think of orthopedics, we’re thinking beyond just implant; we’re thinking about everything, from pre-op to rehab to logistics and distribution optimization. There are a lot of compo-nents, assets, and technologies that are part of that. Some of them we own now; some of them we’re putting together. But as in cardiology, a lot of our strategy depends on timing.

MTS: Will you need to do a large, critical mass deal in orthopedics? Or, because of your reach into the hospital, can you do a bunch of niche acquisitions that suddenly, at some point down the line, become a substantial Cardinal Health-branded line of orthopedic products?

Mike Buck: Again, timing is everything and we’re not sharing our detailed market entry plans yet. Right now, there is still a large fee-for-service component, still heavily reliant on sales reps managing expensive trays and complex

"We are very disciplined about the moves that we make, the way we deploy capital, and the acquisitions we consider.

All of those are really with the thought about where care is going and ensuring

we’re on the right side of care."



product availability matrices. In time, what we want to do is to wrap the programs and services that differentiate us from the market leaders around a clinically acceptable implant. It will be a business built more around services than a tradi-tional sales-driven business built around the implant. Our biggest challenge is understanding how our business fits in the context of the current market. We are always think-ing about where care is going and focused on making sure we’re on the right side of care.

MTS: In the pharma industry, generics are an important part of the industry product mix, and it’s something Cardinal Health talks about in its pharma business. You said before that price cutting is not part of your strategy going forward. But do you see a role for generic products in non-physician preference items in Cardinal Health’s medical device strategy?

Mike Buck: Today, we do in fact have a broad offering of high-quality, high-value daily use products under our Car-dinal Health brand, and we will continue to offer savings on products through our scaled approach.

MTS: So let’s talk about those service-oriented offerings. Can you describe some of them?

Mike Buck: We’ve talked about naviHealth, which pro-vides evidence-based care pathway analytics to help our customers manage the post-discharge episode of care with things like risk-sharing programs. With naviHealth, we often contract with the payor, taking on risk and then sharing the benefits. Today, we cover more than two million patient lives. RightCare and Curaspan are two recent acquisitions—Curaspan plugs into naviHealth; it’s a patient transition management program that enables hospitals and payors to automate the patient transition process. RightCare opti-mizes the care based on specific patient characteristics. On the logistics side, we have our CIMS inventory management program. OptiFreight is a separate business, doing freight arbitrage in logistics in order to help hospitals manage freight costs. And Presource is a custom kitting business. Those are just some of the service offerings we have; there are many others.

MTS: And its Cardinal Health’s strategy and philosophy that those service offerings help you as you build out your product businesses?

Mike Buck: They can often be the differentiator with

our customers. When we talk to our customers, they think of us as problem solvers, not just as sellers or providers of products.

MTS: Do you envision any customers who would buy only products or only services? Or are the two, to your mind, linked?

Mike Buck: The last thing we want to do is to tell customers that they have to take all of our products and services or none at all. That’s not our goal. We want to have a menu of products and services that come on line at differ-ent points. When we present our offering in its totality, it’s quite compelling.

MTS: And as you said, it’s easier for a service-oriented company to move into products than a products-oriented company to move into services.

Mike Buck: Absolutely. When you start with our logis-tics and distribution capabilities and add all of the other things that traditional device companies haven’t built, bringing products into the mix is a lot easier than starting with products and figuring out how to offer services. We have many distribution centers in the United States; dupli-cating that is no easy task. But those are the kinds of things that we think about all the time. It’s part of our mission to take the infrastructure we’ve built over many years and incorporate all of these products.

MTS: That was the core strategy of American Hospital Supply 40 years ago; I don’t know how many people in the medical device industry today remember how dominant American was back then, when Medtronic was a relatively small company and J&J basically sold wound care and wound closure devices.

Mike Buck: And do you know why they were so dominant? Because they were perceived by customers as a trusted partner, bringing solutions to their problems. But when American went away, for the next 20 years, the medi-cal device industry poured money into R&D. All of a sudden, a lot of investment went into medical devices and drove innovation-driven medical products. We need to continue to have those innovation-driven products. But in today’s environment, the skill sets of companies like American and Cardinal Health become very, very valuable.

OCTOBER 3, 2016



MTS: That raises the issue, especially for companies that also have a distribution capability, of branding. I remember back in those days, a lot of hospital folks thought that Ethicon was actually an American Hospital Supply brand rather than a J&J company because they always saw Ethicon sutures arrive on American’s trucks. In buying Cordis and AccessClosure, you got two strong brands in interventional cardiology. How will you approach the value of those brands? How important is it to preserve those brands as opposed to identifying everything as Cardinal Health, especially given Cardinal Health’s much broader relationship with the hospital customer?

Mike Buck: This is an evolving strategy for us. The legacy of Cordis should not be defined by J&J’s decision to leave the DES market. Cordis is a brand with a long history and reputation for high-quality, highly innovative products. We’ll keep the Cordis brand, but Cordis goes to market as a Cardinal Health company. MYNX is a well-established prod-uct in the competitive market of closure. With our other products, we for the most part are branding them Cardinal Health. However, there are a handful of instances in which we are retaining trademarks because of their strength in the marketplace. An example would be our Jackson-Pratt wound drain along with our Protexis surgical gloves. In cases where we retain the trademarks, you’ll still see a strong Cardinal Health brand presence.

MTS: How important is the distribution business, separate from the brand, in the success of your overall strategy? In the 1970s and 1980s, a lot of branded manufacturers didn’t love the fact that American Hospital Supply sold its own, competing products and threatened not to distribute their products through American. But a lot of customers back then indicated that they’d rather change products than alter their distribution relationship with American because the efficiencies they drove through their distribution partner were so important.

Mike Buck: We distribute a lot of products made by other companies and this continues to be an important business for us. We continue to expand the Cardinal Health brand portfolio of clinically equivalent products.

MTS: One of the values that a distribution company brings to hospitals is moving enormous quantities of product through as efficiently as possible. Is it neutral to either Cardinal Health or any potential partner whether you get products to the hospital by acquiring that company or by simply providing

distribution services for that company? Obviously, as you talk to small companies, they’d all like to exit and will do so most likely through acquisition. At the same time, if you can ramp up their sales and the adoption of their product as a distributor, it might be preferable in the short run if it leads to a higher exit valuation down the road.

Mike Buck: We don’t have to own a company to con-sider it a partner. We just signed a distribution agreement with Biosensors to sell drug-eluting stents in select coun-

tries in Europe, the Middle East, Africa, Australia, and New Zealand because Cordis lacked a drug-eluting stent. We’re always interested in forging distribution relationships with companies. A lot of small companies are going to fund them-selves today to a point just before they start to build-out a large commercial organization. As you said, for those com-panies, a sale is always an option and sometimes a desired one. But for those companies that would rather see value creation over the long-haul, putting their products into our organization could be a good thing. We don’t feel we have to invent or make everything we sell. We think we make a pretty good partner. Regarding acquisitions, over the past five years, we’ve made significant acquisitions, and I don’t see us slowing down. In cardiovascular, now that we have critical mass, companies will be of interest as long as they fit our model. If they’re working on the next big clinical prob-lem, they’re probably not for us. But if it’s an efficiency play, that’s a natural for us.

MTS: As you think about partnering, one of the benefits that Cardinal Health brings to its hospital customer is the ability to move products efficiently through a system—the right product at the right time at the right price. You now own Cordis. What happens if a hospital wants a competitive product from Medtronic or Boston Scientific? Are you fine with that if that’s what the customer wants? Or will you be trying to convert that customer to a Cordis product in the future?

Mike Buck: Let me broaden the discussion. We cur-rently distribute products to thousands of other companies.

"When we talk to our customers, they think of us as problem solvers, not just

as sellers or providers of products."



In fact, some of our distribution competitors sell our prod-ucts through their channels as well. The goal is to serve our customers’ needs. It’s not purely about features and benefits. That’s a products-only mentality. We think we can deliver great value with our products.

MTS: You once described to me a four-tiered taxonomy of the device industry that had breakthrough products like TAVR at the very top of the pyramid; these are products requiring a large R&D investment and huge selling efforts that change clinical practice. Next came established products like stents, total joint replacement where there’s innovation, but mostly incremental, and modest clinical differentiation. Next were mature products like sutures and negative pressure wound devices that have little real clinical differentiation and for which the R&D investment is low. Finally, there are all of the other products, really hospital supplies like gowns and masks—very little differentiation, almost no R&D, and very much price-driven. Obviously, through your distribution business, you want to have as broad a portfolio as possible. But as you think about building out Cardinal Health’s portfolio of self-manufactured, proprietary products, where in that taxonomy will you focus your efforts?

Mike Buck: However you look at this hierarchy in terms of business opportunities, the one thing that is clear to me is that gravity is in play. If your product is in the second tier today, odds are that in four to five years, it’s going to be in the third tier; if it’s in the third tier, odds are that it will be in the fourth tier.

MTS: So in terms of differentiation, R&D investment, and clinical value, everything drifts lower?

Mike Buck: Exactly. In general, I would say that many of the innovative products that have come out over the past 30 years are becoming more commoditized. For a lot of manu-facturers, this is a challenge. At Cardinal Health, we’re coming at this opportunity from below. As products and technologies start to drift toward minimal differentiation, they fall into our sweet spot. When products are no longer well-differentiated, the buying decisions about those products no longer focus only on the products themselves. Our customers will be thinking more about our ability to service the entire episode of care.

Now, there are still a lot of people working on innovation and technology breakthroughs. And as I said before, there’s still a need and a value for that.

MTS: And Cardinal Health’s strategy will be to identify those product opportunities that are ripe for drifting down and try to compete with the current market leaders with a Cardinal Health- or some other branded-product?

Mike Buck: Exactly. And it’s obvious when that happens. A company invests a lot of resources and energy to come out with an improvement, but the improvement is miniscule and the market responds by saying, ‘Thank you, that’s great, but we’re not going to pay more for that.’ That’s when you know the product is dropping into the tier below. We’re looking into segments where product innovation by itself isn’t enough and where our capabilities can really enhance a product that is no longer able to take share on its own by wrapping other ser-vices around it and focusing on the broader episode of care.

MTS: It seems to me that one thing that separates Cordis from AccessClosure for you is that there are a lot more of those products in Cordis’ portfolio that are drifting from the third tier down to the fourth, where they no longer justify a huge R&D investment and aren’t as high margin as before. For J&J, that was a problem; for Cardinal Health, it’s an opportunity.

Mike Buck: It is an opportunity for us, and that’s why timing is so important. Our healthcare system is moving to a fee-for-value environment, but it’s not like we’re going to flip a switch and make that transition overnight. We will get there, but we have to be patient. Our expectations are that there will be products coming into the market where, over time, innovation won’t be the kind of differentiator it once was. This is our sweet spot.

MTS: So what are your criteria for those opportunities? What are you looking for?

Mike Buck: We’re looking at areas where a standard of care has been set and most physicians are performing proce-dures in a similar fashion. If you go to the East Coast or the West Coast, North or South and visit with 100 physicians, the procedures are all largely done in the same manner. We’re paying attention to where the go-to-market model is ripe for adjustment, by which I mean customers are moving away from seeing competition in terms of one product versus another and seeing it in terms of the entire episode of care, areas where the market is receptive to the things, other than products, that we provide. To be clear, we still believe that innovation and clinical impact are very important factors. The fact of the matter is that clinical impact has always driven product innovation. The issue is that by now, in our areas of focus, we all understand how

OCTOBER 3, 2016



the technology works and the products have all begun to look alike. Look at airplanes. Aerodynamic principals haven’t and won’t likely change; all planes have basically the same characteristics. It’s hard to tell a Boeing plane from an Airbus unless you’re a student of aviation. For a lot of technologies, the different products are very similar. It’s not that there aren’t differences, but it’s hard to make the case that those differences are meaningful.

MTS: It seems to me that one of the things that Cardinal Health will now try to incorporate into its strategy is a kind of vision—the marriage of visions about how innovation happens and is valued on the one hand, and, on the other, about how hospitals operate and think about things like product procurement and adoption. Cardinal Health has done the latter largely as a distributor. But distribution is a notoriously low-margin business. As you make that marriage work, how do you make sure that you’re not just taking a high-margin product innovation business and dragging it down to distributor-like margins?

Mike Buck: We drive value for our company and our customers by wrapping services and analytics around those products. We still have to be competitive on those high daily use products. As I said before, our strategy is not to make reducing price our differentiator. Distribution capabilities are the DNA of our company—logistics, ana-lytics, and a focus on solutions. Our customers bring us in when they have a problem they want to solve. Bringing in Cardinal Health brand products at a time when product differentiation is getting harder allows us to bring greater value to us and our customers. We have demonstrated that we can capitalize on our scale, which provides a cost benefit that we can pass along to our customers. More importantly, we can wrap around those products all of the other things I’ve mentioned.

MTS: Going back to the comment I referred to at the very beginning about how disruptive Cardinal Health can or will be, it’s pretty clear that your vision of the marketplace is very different and thus potentially disruptive for the industry. But how much of an impact can you make on Cardinal Health itself, given how much larger the pharma business is at Cardinal Health? Are there synergies between what you’re doing and the pharma business, and can you have an impact on Cardinal Health’s overall performance?

Mike Buck: Absolutely. The profit that the Medical

segment drives right now is about 16% of the overall profit. If we can take products that ultimately have higher mar-gins and can drive scale, that’s very impactful. We do more than $12 billion today in our Medical segment. That is big enough to raise the overall performance. There’s no doubt that the growth of our business has and will continue to have an impact on overall Cardinal Health.

MTS: Let me ask one final question. You came to Cardinal Health from some very traditional, innovation-driven, R&D-oriented medical device companies and you’re now working at a company with a model that is highly disruptive to those kinds of companies. How do you approach your new responsibilities? Do you have to jettison much of what you’ve learned? Or do you adapt Cardinal Health’s model to a more traditional approach?

Mike Buck: I used to have a business mentor who said to me, ‘Make sure you make yourself uncomfortable on a regular basis.’ That’s been my business philosophy, and I can tell you, after my first month at Cardinal Health, I was indeed uncomfortable. The language of distribution is very different from the language of manufacturers; so is the thinking. We are a very operations-focused business run by very tenacious and smart people. What I am comfort-able with is the desire of this company to move in the right direction, and I believe my experiences can help do that. As I said before, I think product companies and service companies are moving toward the same space, but from different directions. Product-only companies are headed toward services; services-oriented companies are headed toward products. For me, the challenge of accelerating a products-orientation within Cardinal Health is a fantastic opportunity. It’s not that we want to turn away from our heritage as a distributor; but rather that we know there is a significant growth opportunity for daily use products when combined with best-in-class services and analytics. It feels good doing something different at a company that has a lot of skills that will be valuable to healthcare systems, payors, and patients for decades to come.

"We drive value for our company and our customers by wrapping services and

analytics around those products."

david cassak, 6 david cassak, 10 - cardinal health · market track published by innovation in...

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