30 Mar Will the Covid Crisis Change Innovation?
Before the Covid Crisis, the Innovation zeitgeist advocated being the low price alternative to offerings from incumbents. But this crisis is revealing the invisible consequences.
The NYTimes reports that the reason we will lose lives unnecessarily and pay a premium to fill a shortage of ventilators during this crisis is because “you get what you pay for.”
“‘We definitely saw the problem,’ said Dr. Thomas R. Frieden, who ran the Centers for Disease Control and Prevention from 2009 to 2017. ‘We innovated to try and get a solution.’”
Bidders were told “the government would buy as many as 40,000 new ventilators . . . The ventilators were to cost less than $3,000 each. The lower the price, the more machines the government would be able to buy. . . Ventilators at the time typically went for about $10,000 each, and getting the price down to $3,000 would be tough . . . The research agency opted not to go with a large, established device maker. Instead it chose Newport Medical Instruments, a small outfit in Costa Mesa, Calif. . . Newport’s executives bet they would be able to make up for any losses by selling the ventilators around the world.”
The total contract would be around $100 million and Newport was given $6.1 million upfront in 2010. Two years later, after an official testified to Congress that the product was meeting specifications, “In May 2012, Covidien, a large medical device manufacturer, agreed to buy Newport for just over $100 million.” The purchase price was no more than the value of the contract (and for all we know was contingent upon the contract being fulfilled, so not the big payday, implied by the NYT).
Covidien (whose name is ironically tied to the COVID virus) was an incumbent in the market, making the $10,000 ventilator. Two years after the acquisition was announced (and probably not long after the acquisition was completed) Covidien asked to get out of the contract. “In 2014, with no ventilators having been delivered to the government, Covidien executives told officials at the biomedical research agency that they wanted to get out of the contract . . .The executives complained that it was not sufficiently profitable for the company.”
Instead of recognizing that pricing was unrealistic, “The research agency started over, awarding a new contract for $13.8 million to the giant Dutch company Philips.” That’s more than twice the initial $6.1 million deal with Newport.
“It wasn’t until last July that the F.D.A. signed off on the new Philips ventilator, the Trilogy Evo. The government ordered 10,000 units in December, setting a delivery date in mid-2020.” If the cost per unit was based on the original budget of around $100 million, then they were $10,000 per unit.
We are likely paying much more for the units being made at the 11th hour by GM and others. Who knows what the cost in lives will be because ventilators aren’t available to hospitals for this crisis.
So aiming for cheap has wasted lives and money.
More importantly, it has wasted time and attention on better solutions than ventilators.
Have you or a loved one ever been treated with this equipment? My fathers words – a nightmare. And when I hear “induced coma” and “ventilator” in the description of treatment of those with the virus, I wonder if the “induced coma” isn’t to overcome the reaction of the patient to the ventilator.
This crisis is making visible that our innovation ecosystem is limited by aiming for low price. There is so much more room for improvement.