Executive Editor

Don Gerhardt is president/CEO of LifeScience Alley, a regional industry association based in the Minneapolis area. He has held a variety of healthcare industry posts, including CEO of MedCenters Health Plan, administrator of Michigan State University's medical facilities, with Kaiser Permanente, as a consultant for healthcare start-up companies and business coalitions, as an officer for a high-tech healthcare data company, and with several international healthcare businesses. He sits on the boards of two med-tech companies.

Don is a frequent speaker and contributor to healthcare-related articles and books. He is a faculty member at the University of St. Thomas and serves on the advisory boards of the University of Minnesota's Biomedical Engineering Institute, College of Pharmacy, Institute of Technology and School of Nursing.

BB&T: You have viewed the life sciences industry, especially the healthcare services and med-tech sectors, from a variety of viewpoints over a number of years. How did you get started in the business, and how has the point from which you have viewed them changed over the years?

Gerhardt: I've been at it for more than 30 years now, starting on the clinic and hospital management side, mainly in the outpatient side, so this long career in the healthcare and caregiving world has taken me in a lot of directions. There's only a few of "me" running around, in that I've been able to be on the caregiver side, on the financing side. I've run HMOs and been closely related to the health insurance world for a long time. I've been on the academic side ran the healthcare facilities at Michigan State University and on the technology side. I was an officer of a company making healthcare information systems, and I've sat on the boards of medical device companies. So I've been able to see it from a broad spectrum and lots of different angles, and I still love it. I this it's an absolutely fabulous field to be in.

BB&T: The offshoot of that would be, what are some of the most significant changes that you have seen in the life sciences sector overall in that period of time?

Gerhardt: I'll call it the changes, or new factors. To me the first one really is the financial situation and the difficult problems we have in dealing with it. And then, as you well know, the big-cost things that are coming at our healthcare system, and what we need to do with it. The ones that I see that are going to be the most difficult in the future for this sector that you and I enjoy so much. The building and financing of technology is going to become very difficult in the next few years.

Then there's the issue of paying for the services and the care. And there's the accessing of coverage the everyday person on the street accessing not just emergency room coverage, but accessing the whole world of "What can I get to help this thing that makes me ill, or inhibits my ability to act in a healthy way on a day-to-day basis?"

There are three others that I see. For a number of reasons, caregivers, insurers/payers and the technology side have moved apart. I don't think we can solve the major problems that are coming at us with them moving apart. I think they have to move closer together or they have to cooperate in different ways. It has become kind of a zone where they are afraid to step across the aisle to cooperate with each other to attempt to do something new or different, and I think we need to encourage new ways of approaching the challenges. The second one is clearly the increase in technology.

The best example is my wife. She was a long-time nurse. She left the nursing profession about eight years ago. She was a high-tech nurse she was an intensive care and recovery room kind of nurse. She says she couldn't go back today. She looks at what goes on where she worked just a short time ago and says, "I couldn't do it ... I'm too far behind in technology."

The third major change is the new waves of epidemic-proportion health problems that are different from the black plague, or the polio epidemics that used to wreak havoc among us. The HIV/hepatitis, obesity/diabetes, the age wave, the change in movement and exercise. I'm involved in a small company with some people right now that is getting into what those changes in movement and exercise are doing to our health. Finally there is the convergence with biotech. Those major waves have strong implications for the med-tech world.

BB&T: The greater emphasis on dealing with chronic disease is certainly going to be one of the pillars of the industry moving forward, and really, it involves everybody certainly from the payer perspective backward.

Gerhardt: I absolutely agree with you. It causes a kind of a whiplash effect. As new technology or new applications get developed, the questions will be "How much does it cost?" and "How much does it save?" Those are hard things to define and prove. At the same time, they're not illegitimate questions.

BB&T: You're right, and I think those two questions might even be reversed from the way you just posed them. That is, before you even consider the cost of a potential new technology, you have to answer the question, "How much can you save?"

Gerhardt: At times, I think our industry doesn't understand what's happening with the providers and payers. Providers and insurers are developing these very aggressive, dollar-saving formulae out of their tech evaluation committees or processes and parts of our industry think they're still going to be able to sell the same way in the future as they're doing now.

BB&T: We spend a lot of time and focus on looking at what's coming down the road, both from the regulatory and payer sides. And it's really obvious that companies still have a little blind spot to a certain extent, saying, "Well, maybe we can get one more iteration out there that is simply a bells-and-whistles thing. But if that hasn't already dried up, it's just about to. The puddle has just about evaporated. There are a lot of habits built into business models that are changing quite slowly.

Gerhardt: And while someone can say, very legitimately, that's the way we improve these devices, these new technologies, the person that's paying for it is saying, "We agree improve it on your own dollar and bring it back to us when it works."

BB&T: One of the things that I love about the device industry is that there is so much emphasis on development-stage companies. My question is, do you see med-tech business as differing from other sectors with which you have at least a passing familiarity in the way it treats such companies? In a lot of retail industries, for instance, start-ups aren't necessarily encouraged. Ideas are encouraged, and companies like to buy them, but at a whole different stage than in med-tech.

Gerhardt: I think that while IPOs are disappearing relatively quickly, at the same time M&A activity kind of mirrors what you're talking about. But clearly they are expecting down-line M&A activity rather than early-on idea stage, as in retail. Med-tech is treated very differently, and obviously biotech has the same thing. I'm kind of speaking for biotech as well with these responses, because med-tech and biotech are converging so fast.

You've got that payment from Medicare, which is different from other industries. You've got that long investment period. When I first came into the tech side about 10 years ago, it was a substantially shorter turn on investment than it is now. It was in the range of five to seven years to come to liquidity or whatever kind of event, and now it's very typically seven to 10 years. That changes lots of ratios, as you can well imagine much higher investment amounts are now needed to get the product to market, and then there's that IPO challenge. There is a lot more "angel" money around now, but not all of them are sophisticated investors or sophisticated evaluators of technology.

BB&T: Few sectors can legitimately lay claim to having a "higher purpose." Does the medical technology sector or let's say life sciences in general have the rights to such claims?

Gerhardt: Absolutely. We do have a right to that claim for a higher purpose, but we need to understand that we're not the sole claimant, that we're in a boat with others, some of whom are non-profit or government claimants. So it's a tough position to be in during a cost inflation or cost increase time as we're experiencing right now. The "not-for-profits" or the government can quite easily point back at the technology side and say, "Hey, you guys are the cause of all this."

Another piece of information: If you look through mission statements of those governmental or those not-for-profits and in the med-tech arena, all of them typically have "patient" in their statements. And it's true they're focusing on the patient. So we can't be the only claimant to that.

BB&T: Let's talk a bit about LifeScience Alley. How did it get its start, and how has it changed as it has evolved and grown over the years?

Gerhardt: It got started in 1984, really as an assistance to spotlight the state's emerging and growing , but still quite young medical technology industry. It was focused on the medical device industry and then getting the caregivers and academia and government and then the infrastructure together. From Day One, it was literally in initiating the verbiage of putting it together that they wanted to get all of those sides involved.

Three key people involved in that early on were Earl Bakken from Medtronic, our then-Gov. Rudy Perpich and a guy named Lee Berlin, who was another entrepreneur from here in town. They spent a lot of their own time, the two entrepreneurs did, and some of their own money, on getting it going.

Early on, it was more of a med-tech focus, with those caregivers, insurance companies, etc. involved. There were about 50 member organizations, and we're sitting at just under 600 now. We merged with MNBIO, the biotech association, about three years ago.

We're now really focused on that full ecosystem we call it an ecosystem that is focused on the health and well-being of humans, animals, plants and the environment. Now, some people might say that is taking on too much, but we're having a hard time proving that it is not appropriate to look at that broader spectrum as we're thinking about the healthcare of the people that we deal with every day. It is an ecosystem.

We do about 110 educational and information programs a year. We have two annual conferences the Med-Tech Investing Conference we do with IBF [International Business Forum] and our own annual conference. We do a lot of lobbying, and we have national and regional connects that we provide service to and participate in, including AdvaMed and the Biotechnology Industry Organization.

BB&T: How does the LifeScience Alley model compare to other regional associations with which you are familiar?

Gerhardt: We can't find many that are much like ours. We have found one that parallels us that's Biocom in San Diego. They're both med-tech and bio, as we are, and they're about the same size and do about the same thing. Others might parallel us a little bit, but they're not a combined med-tech and biotech organization.

BB&T: Matters pertaining to corporate governance and ethics are increasingly in the news. What are your members saying on the subject?

Gerhardt: Two points. I was in a conversation just last week at a board meeting of a not-for-profit. There was an employee from one of our large member companies and I've had the same comment from large-to-small companies that their organizations are strongly emphasizing and then spending lots of time and effort toward instilling that high ethical standard that's appropriate for this industry.

The other thing we see is that we've been doing more and more seminars on ethics and governance and that kind of thing among those 110 programs that we put on, the topics of which are driven by our members' requests. So we're seeing positive interest and follow-through on it.

BB&T: If you were President, or maybe Speaker of the House, what actions would you take to better enable the delivery of promising new healthcare technologies to those who would benefit from them? And if cost were not the primary consideration, how would you change the system of healthcare in the U.S.?

Gerhardt: First of all, I'd upgrade the pay scale for the Speaker of the House and the President (laughter). There are four major things that I'd get after. First, I'd identify a number of "quick to market" situations, seeing a major clinical need and then a major dollar-saving potential or need, and how much. I would encourage tech providers and payers to get together to work on it, because out of that I think might evolve a new style of reimbursement if all of them were working on it together because they're fighting each other way too much now. Getting them to work together, coming up with new style of reimbursement and then quick to market. That would be the government's participation. Government can help find the quick-to-market approach and help apply a formula or plan for it. That would be No. 1.

Second would be tort and patent reform. We're strangling ourselves without such reform.

Third would be funding of the National Institutes of Health, and then funding of early-entrepreneurship schools. As you look at how the NIH operates, we fund all this scientific/clinical stuff, but then we don't train anybody to bring it to market. That doesn't make sense to me. I think we could, relatively inexpensively, put together entrepreneurship training in junior high schools, high schools and some colleges to help get that really cool technology to market in the right way.

Then the last one, I'd build a system somewhere between the U.S, and Canada and between the U.S. and Europe's healthcare systems. I've lived in them all, and I know them pretty well. I truly believe that healthy lifestyles should be rewarded if you're going to live a healthy lifestyle, you should be rewarded in some way for it.

BB&T: Is there any question I haven't asked that you wish I had?

Gerhardt: What are we at LifeScience Alley doing to help make all this work? Last year at our annual conference, we saw things happen that wouldn't have happened if we hadn't done what we did. We get people from about 25 states and 12 countries for just a single day about 1,500 of them this year. What we get to see for that intense time is people exchanging information and network.

For example, some really terrific new things have happened between the University of Minnesota and Stanford. We've seen new fellowships, new investment, new products, etc. That's what we're here for and that's our best example to you of what we do well.

We call it "structured serendipity." It's trying to create multiple situations where serendipity can happen between the right people.

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