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May 26, 2008

The End Of Innovation | Boston Scientific's struggle to maintain the entrepreneurial spirit

By Matthew L. Brown

Boston Scientific Corp. may spend hundreds of thousands on corporate “sponsorships” inside Fenway Park, but the Natick medical device giant's business strategy may have more in common with the New York Yankees and the team's bureaucratic free-spending approach.

During the annual Bioengineering and Biotechnology Corporate Forum at Worcester Polytechnic Institute in March, Ray Knox, a BSX project manager, expressed the quandary facing the company, and other large technology companies like it.

“We have lost the entrepreneurial spirit,” he said. “We are big and bureaucratic, but that's a spirit we need to bring back to Boston Scientific.”
Other biotech executives at the forum thought, “God, I hope that's not us,” said one.

Taking Chances

“It's really sad. I know (Boston Scientific CEO) Jim Tobin really well,” said Elliott Hillback, senior vice president at Genzyme in Cambridge. Hillback and Tobin are both alumni of health care company Baxter International. “I don't know when they lost it.”

Hillback said companies fall out of the innovation mode all too easily.

“It's easy to let it slip and it's hard to keep it. You have to work at it, and it comes from the top,” he said. “The only way we can succeed is to innovate, not just in science, but in business practice and the only way to do that is to take chances, calculated, well thought-out chances.”

Like the Yankees, Boston Scientific has little use for a farm team, or in-house innovation. And for more than the past decade, the company has been more interested in growing by acquisition than by innovating internally, according to W. Grant McGimpsey, director of the WPI Bioengineering Institute.

 

 

“The Boston Scientific model, the Pfizer model - they don't do anything anymore, they just acquire,” McGimpsey said. “It probably makes short-term business sense, but it shifts the cost of developing those products to other entities that are less able to shoulder those costs.”

As a result, fewer new ideas are developed, and McGimpsey said universities like WPI notice “a hole in our revenue,” as companies sponsor less university research.

Boston Scientific is so large that when it does sponsor university research, it wants the university to act almost as if it were the company's development division, providing BSX not only with studies, findings and results, but product plans, regulatory strategies and detailed reports on the company's projected return on investment.

The company insists on common sense things like peer-reviewed research and validation of the findings produced by that research, but it also wants the university to answer some very business-like questions.

And Knox said Boston Scientific has a hard time making universities understand those questions.

“There's a lack of understanding of scalability and repeatability. Has the work been done to make sure something is actually scalable?” Knox asked. “There's increasingly more push-back from the FDA,” and the company requires “greater detail and quality of work” than ever before from universities with which it works.

“We want to make sure we're getting value for that expenditure,” Knox said. The company also wants to make sure that when all is said and done, it owns the intellectual property that a university, start-up or venture capital-backed company has developed on its behalf. “Business is fickle,” Knox said. “It's not the ‘90s anymore.”

But it's not clear that that strategy has paid off, according to McGimpsey.

“If they (Boston Scientific) had more of a farm system rather than free agents, if you're home-growing the ideas, you might have an advantage over those who are trying to acquire.”

Kevin O'Sullivan, president and CEO of the Mass. Biomedical Initiatives, agreed with McGimpsey.

“Look at what Biogen Idec (the Cambridge-base biomedical company) is doing,” he said. “They're setting up their own little incubators. They understand. Those that don't aren't going to survive.”

 

 

Buy To Survive

But Boston Scientific's acquisition strategy did work for a while. The company began its “strategic acquisition program” in 1995 in order to “assemble the lines of business necessary to achieve the critical mass that allows it to continue to be a leader in the medical industry,” according to U.S. Securities and Exchange Commission filings.

By 2000, the company's net sales were on a brisk upward march: $2.7 billion in 2001, $2.9 billion in 2002, $3.5 billion in 2003, $5.6 billion in 2004, $6.3 billion in 2005 and $7.8 billion in 2006. And aside from posting a $54 million net loss in 2001, the company's profits were on a similar positive track.

When the Yankees pay top dollar to acquire the best talent in baseball, they know they can count on sell-out ticket sales to support such acquisitions and make money.

In 2006, Boston Scientific spent $27 billion to buy suffering medical device maker Guidant Corp., an acquisition Fortune magazine called “the second worst deal ever” (second only to the AOL Time Warner debacle) and the Wall Street Journal termed “a deal from hell.” The deal came just as serious questions about the safety and effectiveness of the company's bread-and-butter products, coronary stents, were being raised.

Stent sales and the company's stock price fell through the floor. That year, Boston Scientific reported a $3.6 billion net loss and a $495 million net loss for 2007. Last year, it began the layoff of as much as a fifth of its employees and sold off several recently-acquired business units in an attempt to become profitable once again.

O'Sullivan said large companies in areas as dependent upon innovation as health care and biotechnology can't simply buy their innovation anymore.

“If Boston Scientific is going to survive, they need to say, ‘who do we partner with?' not necessarily buy up,” he said. As companies get bigger, slower to react, more bureaucratic and less innovative, they invite competition from smaller, younger companies.

“They can continue to operate these big behemoths, but these small boutique operations are going to clean their clocks,” O'Sullivan said. “The small boutiques' quality is better, they bring the product on time. I think pharma is starting to realize that.”

Whether medical device manufacturers like Boston Scientific will ever realize that remains to be seen, O'Sullivan said, but “those that don't aren't going to survive. It's going to take real innovative leadership at the top, too,” he said. “The same-old, same-old isn't going to cut it.” Big companies have a way of become “fat, dumb and lazy,” he said. At Boston Scientific, “senior leadership is really on the ropes right now. Obviously, they have to be much more nimble.”

Hillback of Genzyme said healthcare-related companies must diversify. They can't expect their in-house science and engineering to produce enough new products to sustain 20 percent annual growth.

“We have done a lot of acquisitions, and some of them have been very complex,” he said. “But if you went three, four, five years when you're not living the (innovation) culture, people get in a rut and it's hard to get them out of that.”

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