A New Model for Funding Healthcare Innovation

BRIAN KENNY: Launching a successful startup is no small feat. Each year, around 600,000 startups spring to life in the United States alone. Yet, brace yourself—10% stumble and fall within the first year, and a staggering 90% never see their first decade. When it comes to the medical technology sector, the odds get even tougher. Startups here face a mountain of challenges: regulatory mazes, clinical trials, hefty capital demands, and reimbursement headaches. With so many obstacles, it’s hardly surprising that only a handful of med tech startups make it to late-stage development.

In this exciting episode of Cold Call, we delve into a groundbreaking innovation that’s poised to reshape the landscape for med tech startups—and potentially for startups across the spectrum.

Today on Cold Call, we’re thrilled to welcome Professor Regina Herzlinger and her guest, Duke Rohlen, to explore the case study “Ajax Health: A New Model for Medical Technology and Innovation.” I’m your host, Brian Kenny, and you’re tuned into Cold Call, part of the HBR Podcast Network.

Professor Regina Herzlinger, known as the Godmother of Consumer-Driven Healthcare by Money Magazine, is a powerhouse in the field. She’s the author of Innovating in Healthcare: Creating Breakthrough Services, Products, and Business Models. Welcome back, Regi! It’s fantastic to have you on the show.

REGINA HERZLINGER: Always a delight, especially with Duke here.

BRIAN KENNY: Absolutely! And let’s give a warm welcome to Duke Rohlen, the Founder, CEO, and Chairman of Ajax Health. He’s the central character in today’s case discussion and a proud alumnus of Harvard Business School—no need to name the year! Duke, it’s great to see you here.

DUKE ROHLEN: Thrilled to be on the show. Thank you for having me.

BRIAN KENNY: I know you’re on campus today for a case discussion. Did you just finish up?

REGINA HERZLINGER: Yep!

BRIAN KENNY: Sounds like it was busy!

REGINA HERZLINGER: Absolutely! The students just couldn’t get enough of us.

DUKE ROHLEN: Right! I had to practically be pulled out of the classroom.

BRIAN KENNY: That’s fantastic! For our listeners, an exciting perk of being a student at Harvard Business School is that the protagonists featured in case studies often join these discussions. They’re right there, digesting the students’ insights into real-life decisions. Duke, tell us—what’s that experience like for you?

DUKE ROHLEN: I genuinely love this process. The students are sharp and engaged, and they often hit the nail on the head. Even when they miss, their reasoning is insightful. It’s incredible to see how they dissect situations overnight compared to the real, messy challenges I navigated while actualizing those decisions.

REGINA HERZLINGER: That’s one of the coolest aspects! Seeing Duke in action brings the case to life. He radiates passion and success, yet he candidly shares, “I’ve almost failed at everything I’ve done.” It’s like giving them a roadmap, along with a hearty dose of courage.

BRIAN KENNY: Hearing that personal journey truly humanizes the case study. The aim of Cold Call is to shed light on the protagonists’ experiences while showcasing the insights that can resonate with managers everywhere. So, Regi, let’s start with you. What initially captivated you about Ajax Health, and why was it important for you to document this venture?

REGINA HERZLINGER: The healthcare landscape is characterized by oligopoly; it’s dominated by a handful of massive players, making it hard for newcomers to penetrate. Innovation in these behemoths is an uphill battle. I was on the board of a major pharmaceutical company that was the first to commercialize interferon. The CEO, a lawyer with limited scientific know-how, recognized that launching new products within the existing framework would lead to a stifling “not invented here” mentality. Hence, he formed a separate, secretive entity focused solely on that innovation.

I have two additional cases illustrating similar situations where visionary leaders had to break away from corporate giants to launch groundbreaking innovations. Ajax’s model reflects a brilliant response to the stagnation prevalent in large healthcare companies, enabling them to innovate.

BRIAN KENNY: Duke, let’s pivot to you for a moment. You entered the healthcare industry relatively fresh-faced, having no background in the field before your journey at HBS. Can you share what those early days were like and the pivotal moment that propelled you into this path?

DUKE ROHLEN: Certainly! After graduating from Stanford, I found myself stumbling into the restaurant business with a friend. We had a successful run in Palo Alto—ultimately opening nine restaurants. However, after a couple of years, I realized I thrived on the bustle of entrepreneurship but wasn’t keen on making a career in restaurants. The turning point came when I declined a CEO position at Sizzler to return to Harvard Business School, determined to transition to another field.

I believed that having successfully managed chefs—who, like doctors, often assume they bear all the knowledge—could prepare me to lead teams in healthcare. I was fortunate enough to take Regi’s class at HBS, which opened my eyes not just to the medical profession, but also to the operational side of healthcare businesses. During my second year, I took on a job with a California startup, flying back and forth every week, which accelerated my entry into med tech.

BRIAN KENNY: You’ve certainly built an impressive portfolio of successes with various startups in the med tech realm. At some point, you discovered the concept of growth drivers and the chassis model. Can you describe this as it forms the core of our conversation today?

DUKE ROHLEN: Absolutely! Each of the five previous companies I led faced immense risks. I shared with Regi’s class earlier that there were moments in each startup’s journey when failure loomed large. The crux of the challenge lay in our uncertainty about whether we could attract buyers or effectively commercialize our technologies. The medical device space is particularly daunting due to its exorbitant capital needs and lengthy development cycles. You’re often looking at four-to-five-year timelines, yet most med tech companies have a mere nine-year lifespan.

Instead of scrambling to create a technology that might attract buyouts, my approach was to purchase companies desperate for innovations—like the case we’re profiling, Cordis. We assess the gaps in their technology portfolio, then develop the necessary innovations tailored for Cordis.

In this orchestration, I liken it to capturing the essence of a vehicle: the “chassis” represents the commercial engine driving growth, while the “growth driver engine” articulates the product innovation pathways. Together, they create a combustion engine of sorts to transform stagnant companies into thriving enterprises.

BRIAN KENNY: The car metaphor resonates—it’s a classic American image! Regi, you’ve extensively observed the healthcare sector; why is innovation here so difficult?

REGINA HERZLINGER: The difficulty primarily stems from the complexity of medicine itself. Innovating in healthcare goes beyond surface-level knowledge; you must fundamentally understand intricacies of human anatomy, the diverse functions of organs, various ailments, and the expectations of different healthcare professionals—who happen to be some of the brightest minds in the world. Understanding how to motivate these individuals to embrace change is another challenge entirely.

Healthcare is also heavily regulated, primarily by the Food and Drug Administration. While this oversight is crucial, navigating it can cost tens of millions, if not hundreds of millions, in compliance. Unlike consumer goods funding through direct purchases, a third party typically pays for healthcare services, which complicates acceptance. Innovators must persuade these third parties that their innovations justify costs. The nuances of coding and reimbursement further blur the waters, making it tremendously challenging.

BRIAN KENNY: Regi, you previously highlighted how brilliant Ajax’s approach is when confronting such hurdles. Can you elaborate on that and how they’re innovating within these confines?

REGINA HERZLINGER: The ingenious aspect of Ajax is its ability to empower extraordinary minds—scientists and engineers who visualize improved healthcare solutions—by alleviating operational burdens that typically impede progress.

A second innovation Duke introduced is mind-blowing: he secured $1.3 billion in private equity funding right off the bat—not venture capital—but big money. This means he and his team don’t have to repeatedly grovel for smaller allocations. They can fully focus on innovation and execution. I believe this model is adaptable across various sectors, and I’m thrilled it found its way into healthcare.

BRIAN KENNY: Duke, what you describe sounds daunting, especially amidst the obstacles we’ve discussed. How did you rise above these challenges to devise the model now utilized at Cordis? Can you share what Cordis is and why acquiring it made sense?

DUKE ROHLEN: Certainly! My overarching goal has always been to leverage lessons from each venture—ensuring that each successive company is more adept than the last. In my journey of leading five companies, I encountered common pitfalls I diligently sought to avoid: primarily, the difficulty of capital acquisition. Like Regi stated, relying on the typical venture model often distracts organizations from focusing on execution and growth. It’s a broken system that demands exorbitant investments and lengthy timelines.

When we procured Cordis, we recognized it was struggling. Initially, it had stagnated in terms of growth and EBITDA, and its distribution was a mess. However, that’s precisely what attracted me; I saw an opportunity. The potential for value lay hidden within technologies I believed could be revitalized—a spark that would ultimately transform Cordis.

We launched Cordis-X, spearheaded by $300 million, assessing technology gaps within its portfolio and constructing bespoke solutions to meet those needs. It’s akin to how app developers work within the Apple App Store—designing applications tailored to a commercial engine aimed at fostering growth.

BRIAN KENNY: Can you provide a specific example of a growth driver? What does that look like within this chassis structure?

DUKE ROHLEN: Growth drivers aren’t always about revolutionary technologies. In our “middle path to innovation,” we observe two extremes: iterative technologies that simply tweak existing products and transformative innovations that radically change paradigms. At Cordis-X, we curated a well-rounded basket of both. We’re introducing transformative technologies like a next-gen, drug-coated balloon alongside more modest iterative improvements, thereby targeting a range of growth strategies across our product lines.

BRIAN KENNY: Regi, Duke is presenting this model as if success is a walk in the park, but I imagine there are significant challenges in merging innovations with established infrastructures that often create silos. How tough is it to integrate these innovations effectively?

REGINA HERZLINGER: Integrating innovation into a legacy system, particularly one as established as Cordis, is incredibly challenging. When Duke acquired Cordis, he faced a demanding restructuring journey, inevitably fostering a turnover in personnel—not from a malicious intent but driven by a shift in culture and mentality. Transitioning from mere survival to a mindset fueled by success requires immense effort.

BRIAN KENNY: Duke, can you speak to that cultural shift? What was it like for you?

DUKE ROHLEN: The core of my focus lies in cultivating a mentality of speed, hunger, and drive within the team. Think of our crew as Navy SEALs facing off against the traditional US Army’s operational tempo. The challenge was directing a company stuck in a rut to embrace competitive thinking rather than settling for the status quo. That was an unexpected hurdle when we acquired Cordis. I needed to supercharge the organization—and change its foundational mentality.

Not only did we need to overhaul leadership, expanding the ranks of individuals who searched for high growth opportunities, but we also needed to empower those who embraced this ambition to challenge legacy thinking. Beautiful as it sounds, it’s an uphill battle when individuals resist change. We faced personnel changes, but it wasn’t due to a lack of talent—rather, it was essential for reshaping Cordis into a high-growth company within a manageable timeframe.

BRIAN KENNY: Regi, how does one approach such challenging transitions without risking the morale of long-standing employees who’ve invested years of hard work into building the company?

REGINA HERZLINGER: That’s indeed a tough question. The caliber of individuals Duke attracted is commendable. His general counsel came from clerking for the Chief Justice of the Supreme Court! But how do you gracefully execute personnel changes? It’s unavoidable, especially in an aspiring organization like Cordis. I can only imagine the pain involved for those affected, despite recognition and fair compensation for their past contributions. However, fostering a culture that quietly embraces future opportunities often makes that transition easier.

BRIAN KENNY: Regi, your insights illuminate the path to innovation that could benefit many industries. Greater flexibility with the right structures can lead to breakthroughs. Duke’s model offers new opportunities for developers akin to those app creators you mentioned. They now have a communication channel to innovate—something previously unavailable.

REGINA HERZLINGER: Absolutely! Another case I’m excited about involves a company called Sword, which utilizes AI to revolutionize physical therapy. The CEO is charismatic and tech-savvy, just like Duke. He pivoted the company into addressing women’s health issues through a fantastic product called Bloom. He’s adopted a model reminiscent of Duke’s, establishing divisions that directly deal with discrete innovations, employing AI, sensors, and varied therapeutic approaches. I firmly believe this model has transformative potential across different industries, whether through acquisitions or breaking up companies to form accelerator divisions separated from traditional operational constraints.

BRIAN KENNY: Returning to Cordis, you’ve got diverse products set for market launch, and the chassis is primed for action. Do employees working on the chassis need to grasp every single product detail, or do specialists manage pieces of the portfolio?

DUKE ROHLEN: Transparency is vital to us. Everyone aligns with our overarching vision. While not every individual manages every project, all members of the organization are aware of how their work supports key drivers. Our company—a powerhouse with nearly $900 million in sales covering over 50 countries—boasts hundreds of products. There are key drivers, including innovation and growth, which every team knows must be prioritized.

BRIAN KENNY: Regi, you have spoken about the charisma that Duke brings to this process. How critical is his leadership in driving this model’s success? Is it replicable without a charismatic leader like Duke at the helm?

REGINA HERZLINGER: Charisma is undeniably significant, but competence and unwavering energy matter equally. This transformative journey is not for the faint-hearted and comes with its own set of challenges. Being mission-driven is key here; we are shaping lives, ensuring healthcare access, and improving lives. Those are qualities that cannot be overlooked, in addition to what Duke embodies.

BRIAN KENNY: Duke, if you had to choose, what aspect of the chassis or the growth engine do you find easier to manage?

DUKE ROHLEN: Currently, I delegate the management of the chassis to a brilliant CEO mentor of mine while I focus on overseeing growth drivers. Our leadership teams synchronize across both wings of the operation. I thrive in fast-paced environments and enjoy working at a speed typically unseen in larger companies. We aim for rapid execution—getting done in five days what others might take two months to accomplish. The success at Cordis-X is truly astounding; I’m proud of how we revised expectations for a company that once struggled to thrive.

BRIAN KENNY: Regi, you mentioned your enthusiasm for the potential of Duke’s model beyond healthcare. For instance, we previously discussed innovations within the military, which mirrored this idea. Other industries that grapple with rigid guidelines or bureaucratic constraints could also benefit, correct?

REGINA HERZLINGER: Absolutely! Defense is a prime example, as noted in our article—a sector that could flourish from this approach. Let’s not forget the entertainment industry, where creativity is regularly stifled. A model like Duke’s could deliver fresh innovations in that space. For instance, I’d compare it to Universal Studios’ partnership with a small firm known for its unique horror films—allowing them the creative freedom to flourish without hampering oversight.

BRIAN KENNY: This has been a riveting dialogue, and I’ve got one last question for each of you before we wrap this up. Duke, I know you have big aspirations. What does success look like five years down the road for Cordis, and how do you envision applying this model to other companies and industries?

DUKE ROHLEN: My vision is always adaptive. Refinement is at the heart of everything I do. The exciting aspect lies in guiding bright young minds passionate about healthcare while evolving the Cordis model for other organizations that require innovation but aren’t keen on selling themselves. We’ve just secured a billion dollars to foster this evolution—experience has shown me that mentoring the next generation of talent is vital. They’ll surpass me in transforming this industry.

BRIAN KENNY: That’s inspiring. Regi, you’ve dedicated your career to healthcare innovation, and I know the slow pace can be frustrating. Do you truly believe Duke’s model could dramatically change the healthcare landscape over the next five to ten years?

REGINA HERZLINGER: Absolutely! It’s an immense innovation. We stand at the forefront of an unparalleled wave of technology, poised to make healthcare better, more affordable, and accessible. We must acknowledge that, despite advances, we still have around 23 million people uninsured in the U.S. alone, prompting a demand for improvement. Ajax Health exemplifies a model capable of streamlining efficiency and elevating healthcare.

BRIAN KENNY: Regi, Duke, thank you immensely for sharing your insights today on Cold Call.

REGINA HERZLINGER: Always a pleasure to be here!

DUKE ROHLEN: Thank you for having me!

BRIAN KENNY: If you enjoy Cold Call, don’t miss out on our other shows: After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, Think Big, Buy Small, and Women at Work. Find us on Apple, Spotify, or wherever you tune in. If you could take a moment to rate and review us, we’d appreciate it. We’re always eager to hear from you! Send us a note at [email protected]. Thanks for listening; I’m Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School, powered by the HBR Podcast Network.