The Usefulness of Technology – A Perspective from Industry by Tim Czartoski

Well, thank you, Charlie. And first of all, thank you for the opportunity to be here. It's an absolute privilege to be with this group. Dr. Mata, all that you've contributed and your approach and this organization. Charlie, your talk this morning was amazing — a number of pearls. And throughout the day there have been some amazing speakers. So the question about economics that you were asking is completely relevant to what I want to try and accomplish today.

I want to talk a little bit about how we think about the valuation of technology. This is hard. It goes to the essence of what you're talking about: what should we spend and invest, as a company, as surgeons and surgeon owners of ASCs. Really consistent with what was just talked about.

So we use the car example. I pulled this out from the past because there are a couple reasons I want to use it. In 1996, I bought my wife a brand new Camry — loaded Camry, leather seats, anti-lock brakes, everything you had in 1996. Really not connected, not enabled, not digital. In 2016, I bought my daughter a brand new Camry, 20 years later exactly. Guess how much both of them cost? $21,000. The price of technology comes down over time. This Camry versus the first one — connected with whatever she wants to do with her iPhone, lots of technology, completely digital in 2016. And where have we come today? A whole different game. We've jumped the S-curve of technology in cars. We've gone up the S-curve and evolved with cars; they became more connected. But things have really changed. My car screen is on the right, all touch screen, digital, completely connected. And obviously you all know about self-driving or assisted driving cars and where we're headed for the future. We have jumped the S-curve when it comes to technology. And I think it's really important that you consider where you are as an industry, as an individual practice, on that S-curve. We as a company need to look at this on a continual basis. So what is the acceleration of technology happening? And that S-curve shape is changing. So you get to the top of it, get closer to commoditization. ASCs is a shift and a jump to a new S-curve in my opinion. Charlie, you said it so well: the economics are different, and what you can accomplish in the ASC is completely different. It's changing the game. It makes the bricks and mortar and the asset specificity of a hospital system a different equation in terms of competitiveness.

So understanding where we are with technology — that car example. We've jumped the S-curve with electric vehicles. Ford, turns out four years ago I was doing a master's degree in technology and we had a case study on Ford. One of the most demanded products today, vehicles today, is actually the Ford electric truck. It's transformed. They transformed what they did. We had to write a case study on Ford at that time to understand where should they spend their limited resources and dollars, on what bets. And if you did an NPV and you looked at the economics of that, you probably say it's not worth it. But if they didn't do that, they would have missed the S-curve jump. And today I believe they're going to be competitive going forward. So we all have to figure that out.

Technology is everywhere in everything that we touch. We all know that. But it's connected, and the connected part makes a big difference in terms of data collection and what we do with that data. And it's not just data, it's what we do with it — the insights we generate. You know that 90% of big data projects fail. They fail because there's not a good definition of what data is needed and what the use case is and what you want to accomplish. So when you think about technology, you have to zone in on really what's important. And one of the aspects that we as a company look at is personalization everywhere. With an iPhone, we all have different apps, we all use it in different ways. But that's an N of one. In marketing and business, you look at segmentation of different markets to understand what markets are like. Well, with the use of an iPhone, with the use of technology, it enables you to get down to the individual. Personalization: I want it my way now. And that's what technology enables. So you have to consider that. The experience of the ASC is part of that. Telemedicine — it's been around for a long time. You guys probably know better than I. My brother is the chief medical technology officer for Providence Hospital in Seattle. He started telemedicine in neurology 16, 17 years ago. Technology has to be adopted at the right place at the right time. They expanded their footprint across the Pacific Northwest, but the last two years — right place, right time for telemedicine. It's changed completely and will forever change the way that medicine is delivered, not only in outpatient with what we do but also in general practice.

So there are a lot of trends out there, and certainly where we're focused as a company is understanding the rapid evolution of enabling technologies, understanding what are the breakthrough therapies we need to consider. The data explosion — and for me, it's more than data. It's understanding what do you do with that data. What data do you collect? How do you make sure that you're able to use that data? I had a surgeon once tell me — he's actually in the audience. Dr. Curtin, you suggested to me we need to prescribe how to put the implant in. And you caught me off guard because we're not the surgeon. But with the right data and the right collection of data, we have hundreds of thousands of variables that we collect on. And being able to use that versus any of you and the number that you put in — we've got to partner together and figure out how do we make use of that data.

And value is incredibly important. So what keeps us up at night, what makes us think? Data is a big part of that: the integrity of the data, the cleanliness of the data, how you manage the data, who owns it, how you integrate it. It's not an easy undertaking when you're negotiating with a hospital for a BAA, when you're looking at what that agreement looks like — who owns that? And quite frankly, the patient owns their own data, right? Regulatory pathways for all the technologies — and hopefully in the Shark Tank we'll talk about some of that with new and innovative ideas. It's a challenge getting through the FDA and understanding what they need, what the requirements are. Liability and shared risk. And then there's GDPR, the global requirements for privacy that happened in Europe, and you've got to consider that with what you do across the globe. How we look at liability with technology and the place that we play. Security is incredibly important. And you can imagine a company like Johnson & Johnson — we're a target for pretty much everything, whether it's lawsuits, liability. We're an international corporation, a Fortune 500, one of only three triple-A rated companies in the world. People come after us. So we have to make sure that we're secure in our data systems. So these aren't easy to solve because when we take on a technology and innovation, we've got to make sure we consider that.

Speed: 5G changes the game. It no longer is the bottleneck in terms of bandwidth to be able to do things. And Manish Qatari was talking earlier about being at the edge and doing things that don't have to go to the cloud. But 5G actually allowed — there was a video shown about an operation or a surgery that was being done remotely. It changes the capacity and bandwidth to do that. So how do we take our legacy systems and adapt? Another challenge: sustainable business model. So the essence of the question there is value creation in technology. But how do we have value captured? Some of it, like the Tesla versus the Camry: you have to invest more in technology because you're not going to be left behind. And some of it we as a company have to take those risks and decide what do we invest in, what do we not. And we all know the value equation: outcomes over cost. Both of these — the rubber band — both of those have to decrease costs and increase outcomes. We're all set up to do that.

And when you think about what it requires to do that: efficiency and partnership. We can achieve efficiency through having the right partnership, sharing data, sharing information, figuring out how do we take our costs down, how do we spread the cost of our assets and make sure that we use those assets fully, how do we minimize our time, maximize our value for maximizing the outcome, create smarter insight. So it's not about data; it's about what insights you can generate and what you do with that. And then how do we increase our productivity at the same time? All of those things have to happen with the introduction of technology, because technology costs hundreds of millions of dollars over time in investment. I can tell you that. And any company representative will tell you that. And you guys experience it. So together we've got to figure that out. But we can't just sit and not invest in it — both of us.

So there's huge opportunity to change the model in what we have: decreasing the cost through the complete episode of care, delivering just in time, just what's needed, being able to anticipate that. That requires technology to do that. It drives the business and it also reduces costs. So I want to pause here on this slide for a second and think about how do we as a company look at this, and how should we look at it? Historically, valuation of technology or any asset, company, whatever, is a result of a discounted cash flow. You take the revenue that's going to come in, you do your best estimate of the cost associated with it from a cash flow perspective, you apply a weighted average cost of capital, and you calculate what is the discounted net present value from the discounted cash flow over time. That model doesn't work with technology so well, because you can't figure out all the direct and indirect returns you're going to get. Direct returns would suggest I'm going to sell it for this, I'm going to get a revenue on it, and that's what I would get. Generally, it won't pay for itself. So you got to place bets and say which technologies do we want to place bets on that will shift the S-curve of technology. And that's a hard process because you got to know that some of them are going to work and you're going to hit on those bets and others aren't. And I work for a very large, disciplined financial organization in Johnson & Johnson. And there's an expectation with shareholders that you can invest in some that are mulligans, but if all of them turn up mulligans, you're going to have a challenge. So you have to manage what's the right balance to doing that. And indirect and direct returns — there's this thing in technology called the garbage can model. The garbage can model says you put all this in and there's a bunch of chaos trying to figure out what the returns are, value of technology. And you need to understand and look at the indirect returns.

The question you asked earlier, I would pose a question to all of you: For a large organization that you may have worked for, who made the decision to buy laptop computers for everybody? Do you suppose there was a return on investment for those laptop computers? Probably not using discounted cash flows. But if we don't have them, we're not existing. We can't connect, we can't do all the things that we do. So that's an interesting proposition: how do you make that decision? So we have to invest, but we also have to make creative ways for value capture — whether it be financing deals, putting things together, click-per-use, rental-purchasing agreements, or combination of what volume comes with that business. So we consider that and we look at that in the entire equation. But how we invest — I will tell you it's harder to value technology, it's harder to value our innovation more than ever. And oh, by the way, innovation costs us more as a percentage of our business because of declining prices and the cost associated with innovation more than it ever has. That's the problem that Ford had. Ford had to make this decision: Do I invest in connectivity, self-driving cars, electric cars, compact cars? And they had to make decisions and choices to do that. In that case study I was referring to, it's a really interesting proposition. I think they made the right ones.

So as a company, we're focused on our capabilities in digital surgery, and we really look at connectivity, robotics, and AR — and I'll talk about AR in a minute — surgical planning, and data insights. I'm not going to go into each one of these in detail other than to tell you that's the capabilities we believe in. Insights be incredibly important. Within J&J, we have over 200 data scientists that help us work on that. And our vision really is to create insights in each one of these columns. Patient expectations — what happens before surgery, getting the patient ready mentally, expectations pre-op. Post-operative outcome is related to pre-operative expectations. So how, using data, computer says you're a good candidate, you're not a good candidate, here's the things that are going to happen — that helps enable that. So we're investing in that area. We're investing in surgical planning: what is the right approach for this particular patient given their variables, and how can we use prescriptive analytics and AI to be able to do that? You got to get good analytics before you can get good at AI. And then implementation is really about automation. The robotics platform we have, things like VERASENSE, automating that procedure in a way that delivers that. And then post-op monitoring is collecting that data. So a complete connected platform that allows you that pre-op and post-op and intra-operatively.

AR was talked about — an amazing, exciting opportunity. But the challenge is you got to make sure you know what the use case is and what you're trying to solve. And when you think about the opportunity to use AR to one, engage the patient so that they know what's going on and bring them along as part of the process, it's a huge opportunity. Two, to be able to practice — you can't practice now on an individual patient, but you can with AR or VR. And AR used in the OR, you can see things you wouldn't otherwise be able to see. So there are certain solutions there. But how do you package up what the use case is and where does it make sense and what are you paying for?

Last concept: convergence. We have a convergence across different industries using different technologies that can be applicable to our business. But also convergence within our orthopedic industries — whether it's the implant and taking a look at — somebody made the comment earlier, we're not done with the implants. We're not done with the implants because technology is going to change our view and understanding of what works and how it can be put in. So the implants are going to continue to evolve as both technique and technology intersect.

At J&J, we approach innovation in a different way. We have a global network of J&J Labs, innovation centers, investment banking, and our own development. We can't afford R&D — it's too expensive. We can't afford to do it all, and we're not smart enough to do it all. So we have to have an open platform for innovation, and that's what we look at. And there is a stated strategy on buy vs. build. It is around what do we look at buying, what do we look at? We will buy, we will build, we will invest in startups, and we will partner with our surgeon partners and business partners. A balanced strategy around that. A balanced strategy on big bets. A balanced strategy on how we look at the payback over time. I don't know if that answers your question, but it's a difficult one to say because if you don't invest in technology and you don't innovate, you will not jump the S-curve, and everybody else will. But there's a balance to all that. So that's how we think about it. Those are some of our challenges, and we just wanted to share what's on our mind relative to innovation. Thank you very much.