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Before we begin, we have a couple of questions. What do you love about Cold Call? What do you want less of? What would make Cold Call even better? Tell us. Head over to hbr.org slash podcast survey to share your thoughts. We want to make the show even better, but we need your help to do that. So head to hbr.org slash podcast survey. Thank you. It's hard to create a successful startup. Each year, about 600,000 startups are launched in the U.S.,
10% fail within the first year. 90% will fail within the first decade. And in the medical technology field, survival is even harder. Because in addition to all the usual challenges of launching a firm, they also have to grapple with regulatory hurdles, clinical trials, capital intensity, and reimbursement issues.
Facing all of that, it's no wonder that few medtech ventures make it to late-stage development. In this episode of Cold Call, we'll talk about an innovation that's helping to level the playing field for medtech startups and could hold promise for startups of all kinds. Today on Cold Call, we welcome Professor Regina Hertzlinger and guest Duke Roline to discuss the case Ajax Health, a new model for medical technology and innovation. I'm your host, Brian Kenney, and you're listening to Cold Call on the HBR Podcast Network.
Professor Reggie Hertzlinger has been called the godmother of consumer-driven healthcare by Money Magazine, and she wrote the book Innovating in Healthcare, Creating Breakthrough Services, Products, and Business Models. Welcome back, Reggie. It's great to have you on the show. Always a treat to be here, especially with
Yeah. And Duke Roline is the founder, CEO, and chairman of Ajax Health. He's the protagonist in today's case. He's a graduate of Harvard Business School as well, going back a few years. We won't date you there. Duke, great to have you on the show. It's terrific to be here. Thank you. And I know that you're here today on campus because the case is being discussed and you're going to be – did you already do it? Yeah. Okay. All right. We're late because students just mobbed us.
Yes, right? That's right. As I said, I had to take him over my shoulder. Drag him out of the classroom. You know, for our listeners who aren't familiar with this, one of the great things about Harvard Business School and being a student here is that many of the protagonists who we write cases about visit the classroom on the day the case is discussed, and they get to sit there, and it might be kind of uncomfortable, Duke, you tell me, and listen to the students talk about how they would make decisions that you had to make in real life. What's that like?
I love it. They're very smart. They're very engaged. They get most of it right. Sometimes they're off, but there's logic behind their being off. And I'm always amazed at that.
how much better they are at thinking through things real time over a night of reading versus me having to live it real time and figure it out and go through all the mistakes as I make it happen. I think another great thing is seeing Duke. So, you know, you read about this and who could Duke be?
And this Duke shows up and he's full of energy and passion about the field. He's enormously successful, but he tells you, I've almost failed in everything I've done. So he gives him not only a great model, but a lot of courage. Mm-hmm.
Yeah, it humanizes the case. And that's part of the reason we do Cold Call is because we want people to hear what the protagonist experienced. We want to hear the faculty member talk about why they decided to write a particular case and why it makes for a lasting set of insights for managers. So, Reggie, I'm going to start with you. I want to know what initially caught your attention about Ajax Health and why you decided to write a case about it. Why was it important to you to document this? So, health care is very oligopolized. It's more and more
consisting of very large firms, and it's hard to break into those firms. It's also very hard to innovate in those firms. So I was on the board of a huge pharmaceutical company that was the first to commercialize interferon. CEO of the company was a lawyer who knew very little science.
But he thought if he commercialized a new product within his existing firm, the existing firm would kill it. And what he did is he started a whole separate firm, secret firm, that reported only to him about interferon. I have two more cases with exactly the same thing.
CEO of a very large company to get an innovation that's not going to be killed by the not-invented-here kind of mentality as to break off and start a new firm to do it. Ajax, Duke's model, is a brilliant way of dealing with the lack of innovation in big companies, especially big healthcare companies. Mm-hmm, mm-hmm.
Duke, let me turn to you for a minute. You were new to health care. In fact, when you came to HBS, you said that you hadn't been in the field at all. Can you talk a little bit about what those early days were like at HBS for you and why you decided that this was something you wanted to pursue? Yeah, so I graduated from Stanford and couldn't get a job and decided to start a restaurant business with a friend of mine who was graduating from Stanford Business School. And the restaurant was successful. We opened it in Palo Alto. We ended up opening up nine more restaurants.
And after about two years, I realized that, gosh, I like running businesses and I like the entrepreneurial spirit and all of the intensity that comes with that. But I definitely didn't want to make a career in business.
And that reached a pivot point when I was offered the job as the CEO of Sizzler. And I turned that down and instead opted to go back to Harvard Business School. But I went back to Harvard Business School with a mandate to transition to another industry. And my thought was that...
I'd become pretty good at managing chefs who typically think they're the smartest people in the room. It's not unlike doctors who are the smartest people in the room. So I thought if I could manage chefs effectively, I could potentially manage doctors. And then I was lucky enough to get into Reggie's class. And in Reggie's class, I was exposed to not only doctors, but actually how businesses in healthcare are run. What I did actually, my second year of business school,
was to take a job in California working for a startup. And so I'd fly back to California each week and then fly back on the red ice Sunday night and
It was a crazy, crazy year, but it really kick-started my exposure and my ability to get into the healthcare space, and then it sort of all went from there. I've been in the healthcare business running medtech companies ever since. Yeah, yeah. And you've had a lot of different success with different kinds of startups in the medtech space. At some point, you came into this notion of growth drivers and the chassis model. Can you describe that for us? Because that's the central theme of the case. That's what we're going to be spending most of our time talking about. Yeah. So...
The five companies I'd run previous to doing the Cordis deal, which really is at the cornerstone, it's the core of what the middle path is about, were beset with risk. And I was telling Reggie's class earlier today that each company I ran, there was a point when it could have failed or succeeded. And the real challenge with that was not knowing that we could
have a buyer, not knowing that we could actually commercialize this technology. And the medical device space is really challenged by huge capital requirements, long development timelines. You have to get regulatory approval before you can start selling and commercializing. And the venture model is typically operating on a four to five year cycle and the lifeline for these med tech companies is like nine years. So it doesn't really fit into a category.
So what I came up with is this idea that instead of trying to opportunistically build a technology that you would hope someone would want to acquire, we would buy the company that needed technologies. And in this case that we profile in the HB article, it's Cordis.
And then we would really do an assessment of what the technology deficiencies in the portfolio were. And then we would underwrite to develop those technologies for Cordis. And through that orchestration of having what I call the chassis, which is the commercial engine that can commercialize the assets, and the growth driver engine, which is what's creating the products –
You create this combustion where you can get a lot of people developing technologies for an engine that really needs growth, put them in, and completely transform a company. By the way, I love the car metaphor. It's very American. It's very American. It's very relatable. Yeah. Reggie, let me turn to you for a second. You've been looking and studying innovation in the healthcare space for many years. Why is it so hard to innovate in this space? Well, it's hard because...
Medicine's hard. So if you're going to innovate in healthcare, it's not like some other industries have to know an enormous amount about medicine. Not just what your body looks like, but just...
You have to know what the different functions of different organs, what the problems are, what kinds of solutions people are looking at. It's enormously difficult. Then you have to know who practices medicine, what are these physicians, nurses, the therapists.
What do they like? It's a very, very unusual group of people, tremendously intelligent. And how do you motivate them to change? Health care is very heavily regulated. Yeah.
regulated by the Food and Drug Administration. Very good thing. I love the Food and Drug Administration. But it takes millions, tens of millions, hundreds of millions of dollars to get through their requirements. And health care is not a consumer industry. It's paid by what are called third parties.
Somebody else is paying for our health care. In this case, in your case, and my case, the Harvard Business School. In your case, Duke. I'm not sure. It's Ajax. So you don't have the normal consumer interaction of saying, I like this or I don't like that.
You have the third party making the decision. And the innovator has to convince this third party of three things. One is that they want to pay for whatever the innovation is. So these drugs, these miraculous drugs that are dealing with
people who are morbidly obese. Many insurance companies are not sure that it is insurable, that it is a medical problem that deserves insurance. Convincing this third party that urination should be insurable and not these drugs cost hundreds of thousands of dollars a year have to be insured.
Then the physician or whoever is prescribing the drug needs a code, and to get the code,
The innovator has to wander through the key opinion leaders, make sure that they get the right code so that whoever is prescribing or using the thing can code it correctly and get paid for it. How much do you get paid? There is another question. How much does the insurer want to pay you?
In the UK, they have a technique. It's called the quality-adjusted life year, and they judge how many quality-adjusted life years are added by the innovation and is the price that the innovator wants worth the addition in quality-adjusted lifetime.
How we reach payment decisions in the U.S., I don't know. But it's a tough industry, and it's tough.
Because there's so much particular knowledge that people have to have in order to be effective in the industry. Yeah. You mentioned earlier during the introduction that what they're doing at Ajax is brilliant. What makes it brilliant? What are they doing to deal with some of the things that you just talked about? The brilliance of Ajax is that it enables these extraordinary people
The scientists, the engineers with their imagination about how healthcare can be made better and cheaper and gets rid of
of all these operational details, which are very, very important. Second, the innovation that I thought was so smart, really because of Duke's personality and his experience, he did something amazing, and that is he enabled private equity, not a VC equity.
But big money put in $1.3 billion right off the bat so that he and the engineers and his whole team didn't have to repeatedly go back and ask for $10 million, $20 million, $50 million, $100 million. They could concentrate on what they did well.
I think it's a model that should be used in other industries. I'm so glad he used it in health care. And I want to come back to that in a little bit. But let me turn to you, Duke. What Reggie's describing sounds so daunting. I can't believe that anybody innovates in health care at all. And we've heard about some of these issues. How did you sort of see beyond that and create the model that you're using with Cordis? And maybe just for our listeners, describe Cordis. Describe that acquisition and why it made sense. Sure.
At the highest level, what I have tried to do is, with each successive company, institutionalize lessons learned and core ideas and core capabilities that I did well. So that each company, I've been successfully a little bit better. Through the course of five companies starting, growing, and then selling them, there were a couple common denominators that I knew I had to avoid. One is
Like Reggie said, it's really, really tough to go with a venture model every two years with your handout. It's distracting for the organization because you're worried more about trying to get the capital than you are about executing on the program. It's really tough for the original investors because the next set of investors are always trying to push down the value. It's just a broken system in healthcare where the lifeline of a company requires
It requires hundreds of millions of dollars potentially, and the timelines are long. So what we did with Cordis is we bought a company that was really broken. We carved it out of cardinal health, and what we liked about it was that it had no growth. It had no EBITDA. It had no—
really sort of messed up distribution system. It was ugly. And that was compelling to me because my feeling and my vision is that the value of the technologies, which I call growth drivers that I've created, have transformed the profile of the companies that have acquired my technology. We put a growth driver into a company that's not growing and all of a sudden that company blossoms.
So the vision for Cordis is we could do that at scale. We could take a company that had 700 million or so of sales, wasn't growing, and we could transform that company by bringing innovation. So we created a separate innovation engine that we call Cordis X with $300 million to really, in a bespoke way, figure out which technologies the portfolio needed and then build them, leveraging an ecosystem like Reggie referred to,
That's not unlike app developers in the App Store. App developers are developing apps and they know the commercial engine is going to be the – is the Apple App Store. That's the same as our model. We have engineers that are out there developing technologies and our App Store is Cordis. It has completely transformed the company and transformed in many ways the way that growth –
and innovation can come into stagnant companies that need it. And quite frankly, growth is what drives value in these companies more than in technology, more than in biotech. It is literally top-line growth. Can you give us a specific example of a growth driver? What's a growth driver that you would plug into a company, and how does it manifest in the chassis? How does it get moved through that chassis?
The growth drivers are not always transformative technologies, right? In the middle path to innovation, we talk about on the one hand, you have iterative technologies, which are changing a color, making it a little bit bigger. On the other end of the spectrum, you have transformative. What we did at Cordis X is we
Yeah.
And when you're a $700 million company that's looking to grow 10%, you don't need a ton of revenue in order to change the profile dramatically. We'll get it with the transformative. We'll get some of the modest growth with the iterative. And then there's a whole basket in between. So that's how we look at it. We look at it from a portfolio perspective. Yeah, yeah.
Reggie, Duke is making this sound simple. We do this and we plug that in and it flourishes. I'm sure it's not that simple. How challenging is it to take an innovation like this and plug it into an existing infrastructure, you know, where there are silos and they're used to doing things in a particular way and they're part of their own barrier to innovation? Yeah.
I think it's incredibly difficult, especially in a company that was the star of its particular industry, Cordis. It was owned by a distributor, Cardinal, which was started by an HBS grad. Cardinal grew under his leadership from $100 million to $200 million.
to $225 billion. You're doing something right. Yeah. But once you're at $225 billion, how much faster can you grow it?
So they went into the medical technology business. And brilliant as they were, medical technology, it's a very hard business. So when Duke bought Cordis, fixing up Cordis was a huge undertaking. Mm-hmm.
He can speak to it better than I, but I'm sure there was a great turnover in personnel, not in a cruel way, and also a change in spirit in the idea that we're going to be successful. We're not just going to survive. We're going to be a success. Yeah. What is that cultural situation like, Duke?
So what's really interesting is everything that I do is founded and the foundation of what I do is based on mentality. And so-
My mentality and the people and the teams that I work with are super fast, super hungry, driven. Think of them as Navy SEALs. And then think of a big organization as like the U.S. Army. The challenge is how do you influence an organization from a mentality standpoint so they start thinking competitively as opposed to thinking about just maintaining the status quo? Yeah.
It was something that I did not expect. When we bought Cordis, we needed to turbocharge the chassis. We needed to overhaul the mentality. We needed to change a company that had not had growth to thinking about not only growing, but how could we actually own and win in the category of cardiovascular and peripheral vascular medicine.
So the way you do that is by leading, right? It's by not only being a leader yourself, but also by finding people that are like-minded, that have an ambition and a drive to radically change an organization and then empowering them. And it sounds so simple, but it's really hard. People have personalities, people have experiences, they're entrenched in their ideas and they're
You give them a chance, and if they're not willing to embrace the change, then you have to get rid of them. We overhauled, to Reggie's point, almost the entire leadership team at Cordis, not because they weren't talented, smart, capable people, but because what we were going to do and undertake to do with Cordis, which is transition it to a high-growth company in a short period of time, was going to take an enormous amount of energy and an enormous amount of commitment and
People in their lives are either ready for that or they're not. And if they're not, then they need to go to someplace else. And I think the hardest thing about Cordis was actually that. It was not creating the growth driver engine. It was actually changing the mentality of the chassis of Cordis and optimizing it to be able to be ready to take on the products that we were going to.
and have now successfully brought into the organization. Reggie, in your experience at looking at this kind of innovation in other places, how do you do what Duke is describing without demoralizing the people that have been there for a long time and sort of put their heart and soul into this place and they feel like, you know, their work has gone for naught? Well, there aren't many models like this to indicate the caliber of the people that Duke put in place.
His general counsel, his chief lawyer, was a clerk for the chief justice of the Supreme Court. So they're extraordinary people. How do you get rid of people who don't fit in with the new model? I wish I could tell you how you do that gracefully. I'm sure they were well-paid people.
Their past accomplishments were well recognized, but it still must be very painful. Mm-hmm. Mm-hmm. What do you do to relieve that pain? I wish I knew. Yeah.
But what this does do, I would imagine, is opens up the door for innovation in a new and exciting way. So people see and feel that change is coming. I'm wondering if, in your mind, is this the model of, you know, the portfolio model that Duke is describing where they're looking across a whole range of things from sort of modest innovation to extreme innovation? Does that create new opportunity, the apt
a metaphor that you used earlier, for app developers or product developers. For sure. Now they've got access to something they might never have had access to before. For sure. So I have another case study. It's about a company called SORD. And SORD is an AI-enabled company for physical therapy. The CEO is like Duke, kind of a techie.
and with a similar personality, very high energy, charismatic personality. And he got interested in pelvic issues that women have, inflammation, continual urinary tract infections. And he developed a terrific device called Bloom. He adopted Duke's model.
And he has formed something like COVID, a sales and operating company. And he has 10 divisions under it that deal with different aspects, different innovations that use AI sensors and different kinds of therapists to deal with the problem.
I'm sure that this model, whether it follows exactly the Duke model of buying a famous but tired company or taking an existing company and breaking it up so that you have these separate accelerators that are kind of guarded from things that
engineers or doctors don't like to do. I think it'll take over the industry. Yeah. Duke, let me ask you. So you've got, we'll go back to Cordis, that example. You've got a portfolio of devices that you're putting into the marketplace. You've got your chassis that's fired up and ready to bring these to market and deal with all the regulatory issues and other things.
Do the folks who are in the chassis side of the business, do they have to know about all those things or do you have specialists where one group is representing one piece of the portfolio and another is doing another piece? I believe in transparent and open communication. So it aligns to a vision that we're all trying to affect towards and
So everybody knows what we're doing. Not everybody's responsible for everything, but we, you know, in a company that's got $700, $800, $900 million in sales, which is represented in over 50 countries and with 5,000 products, not everybody can be involved in everything. But there are four or five drivers, which we call the key drivers of the organization, that everybody's oriented to. And what everybody in the organization knows is how they –
on a daily basis, tie into one of those drivers. And one of those four or five drivers, there's actually five, is innovation and growth. And so they know what's being developed. They know when it's going to be developed. And the engine of Cordis X is inspirational. And the mentality of the organization is completely transformed based on this vision that we can actually
have new products, have new growth, not be reliant on either M&A, which is the way transformative technologies are usually brought into organizations, or through internal R&D, which is usually a 4% or 5% of revenue. We're spending $300 million on a company that's doing...
you know, 900 million in sales. The amount of innovation that we're able to bring into that company is transformational and everybody gets that. And so I want everybody to know that. Yeah. Reggie, you talked about Duke's charisma. It's pretty evident to me. How important is his leadership to the success of this model? And can you replicate a model like this without a leader like Duke? So, no, the charisma is important. I think the competence is important.
as important, and the energy. I really want to do this. This isn't easy. This is very, very difficult to do. And the mission-driven, it's healthcare. It's about people's lives, making their lives better, making it more accessible. So there are other qualities that are very important that differ from those that Duke has.
Yeah, it's an easy mission to get behind. Duke, let me ask you, is it easier to manage the chassis or the growth engine? So I don't manage the chassis anymore. I have an amazing CEO who I've worked with in the past, and he manages the chassis. I manage the growth drivers, and then collectively we sit over both companies.
My personality is driven by pace, right? Like I like to move very quickly. I like people that move very quickly. We try and get done in five days what larger companies do in two months.
And it works for me. So I really love the fast-paced organization of the Cordis X. I will say, though, that the transformation that's occurred not only with the incumbent people that have stayed at Cordis but also with the new people that have come in, Cordis is now a rocket ship. If I were to step back and say what the biggest learnings are, I would say one is that fixing a chassis that has not been optimized is really tough. Two –
And blending cultures between a fast-paced culture, which we had at Cordis X, and a slower-paced culture at Cordis is really tough. But then third, the biggest learning that I have is how...
a smaller group of people, the leadership team at Cordis and the leadership team and the implementers at Cordis X can actually wag the tail of a huge dog. And it's maybe the thing I'm the most proud of is how we have changed the mentality and the expectations of success for a company that didn't really have them when we bought that company four years ago. It's really remarkable and it's profoundly influenced what I want to do for the next sort of 20 years of my life, which is help people
learn how to transform organizations and innovate in healthcare. Reggie, you mentioned earlier that you think this could have application beyond the healthcare industry. We actually did a podcast about innovation within the armed forces a while back within the Department of Defense. And they did what you sort of described earlier, which is they created a separate organization and it was like a Skunk Works thing. And they were trying to infiltrate, you know, penetrate the amazing bureaucracy of the Department
of Defense. Not easy. I'm wondering if you think a model like this could work, either in a setting like that or in some other industry where innovation is just really hard to achieve because of regulation or whatever the other kinds of hurdles are. For sure. And in our article, we cite defense as
as an area that could benefit from this model. We didn't even set that up. I'm so happy to hear that something like that is happening, especially in this terrifying period of time that we're in. But we also think that an industry like the entertainment industry
which increasingly consists of reruns of shows that I saw and that the reruns are of things I didn't much enjoy to begin with. But the imagination is so impoverished that interesting entertainment rarely comes along. I think horror...
is among the most successful. Maybe it's a reflection of the times we live in or for some other reasons. But the studio Universal struck a deal with a very small firm that makes horror films. And it's analogous to what Duke did with Cordis and with these accelerators. Interesting.
The maker of the horror films is tremendously successful. And one reason for it is he's very creative about making these films. But he's freed from financing them, from distributing them, from doing the onerous work.
The things that are not necessarily onerous, but that are onerous to a creative personality like that. So we think two very important industries, which are kind of laggards, the defense industry and the entertainment industry, could easily benefit from the same model. Yeah.
This has been a great conversation, as I knew it would be. I've got one question left for each of you before we go, and I'll start with you, Duke. I give Reggie the last word because she wrote the case. Always. Always. He's a gentleman. Always. I give Reggie the last word and the first word. So happy to be first and her be second. You gave us a little glimpse of this. You talked about what you're hoping to do now that you've got this model codified in a way that you think could be replicable. What does success look like financially?
five years down the road for Cordis and for your ability to be able to take this now and maybe apply it in some other places like Reggie just described? So I think the model will evolve. The cornerstone of my career has been evolution, right? Thinking about what has worked and what hasn't worked could be optimized for the next time you go around. What I'm really inspired by and what
I work a lot with is younger people who really have a passion for healthcare and want to be in this space and don't really know how to do it. They're all bringing the energy that Reggie was talking about. Energy trumps everything, in my opinion, because you'll run through walls if you don't run tired. So I'm focused on continuing to evolve the Cordis model. We're applying it to
that actually we're not acquiring. So we bought Cordis and owned Cordis X, but there are dozens and dozens of large med tech companies that need innovation that don't want to sell their company, but they want to create divisional growth. So we're evolving the Cordis X model to those companies. That's what we're doing. We've just raised a
billion dollars to be able to do that. The real fire in my belly, the thing that I love is trying to take on what Reggie did for me, which is the role model ship and the mentorship and try and provide that to a next generation of
really bright people that will trump me in terms of the outcomes and the benefit that they'll have on the space. That's what I'm driven by now. That's great. Reggie, you have focused your whole career on healthcare innovation. I know that you've been frustrated at the pace at which innovation can occur within the industry for all the reasons you cited earlier. Do you really see this as a game changer that could remake the ability for people to innovate in the healthcare space in the next five or ten years?
That's why I got in touch with you, Brian. I think it's a tremendous innovation. But in addition to that, this is the golden era of technology in medicine. The recent winners of the Nobel in medicine, you'll be glad I'm not going to describe it, but it will transform medicine.
how drugs are made to be personalized to your particular structure and my particular structure, the development in the AI and the ability to understand better how medicine can be delivered in a more standardized and efficient way, huge opportunity.
Medicine is very inefficient. Every expert in the field has said that at least a third of it could be cut out. It's a third of $4 trillion. Substantial sums. So...
I think it's just a wonderful time to be in the field. And finally, I'm so glad I've lived so long because I think this is the time where innovation will be happening. What do I mean by innovation? It will be better. It will be cheaper.
it will be more accessible. We still have 23 million people in the U.S. who don't have health insurance, despite Obamacare, and tens of billions all over the world. I think we're going to see a change in that.
And Ajax is an example of a model that can make healthcare so much more efficient. And on that optimistic note, Reggie, thank you for joining me on Cold Call. Always a pleasure. Thank you very much.
Thank you.
If you have any suggestions or just want to say hello, email us at coldcall at hbs.edu. Thanks again for joining us. I'm your host, Brian Kenney, and you've been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.