The new Age of Healthcare startups
Health is an essential dimension of our life.
It is the most intimate, the most existential topic. The Healthcare sector represents the second industry worldwide by market capitalization:
With aging population, drug price inflation and constant improvements in treatments, healthcare costs have been exploding across the OECD:
Let’s sum this up: 10% of GDP in average for OECD countries, 18% of GDP in the US: an enormous amount of the wealth created is channeled towards the Healthcare sector and the trend will not change anytime soon.
A unique status
Healthcare has always had a unique status and is not considered on the same grounds than other sectors. Why?
It might come from the fact that in healthcare unlike any other business, prices bear no relation to value (life has no cost!).
It might come from its regulatory bodies which are omnipresent.
It might come from the hard-to-crack oligopoly status of big Pharmas.
It might come from the difficulty of financializing healthcare.
It might come from the perceived binary nature of its R&D: ‘success’ or ‘failure’.
For those reasons among many, the Healthcare sector tends to be treated as an exception.
An inefficient system
The Healthcare system fails to deliver value to patients: prices are too high, innovations are long and costly, research lacks transparency and interests are not aligned between Pharma companies, shareholders, health practitioners and patients. Moreover the current patent-based business model stifles competition while no new paradigm is in sight.
Knowing these uncertainties, it would be easy to avoid the sector altogether.
The graph below shows that innovation stalls as the productivity for each $ invested in R&D decreased nearly by a factor of 100 in 65 years.
Startups will not fix all the healthcare problems and certainly not its pricing/IP issues, but they will help reinventing the pharmaceutical industry’s R&D thanks to their agility and their fresh approach to ever existing challenges.
Healthcare is multifaceted
They are 3 main sectors in the Healthcare industry which are distinctive:
e-Health, Medical Devices and Drug Development.
E-health projects are generally more digital than medical projects.
$50k is more than enough to develop an MVP. They are BtoC, marketing avid, web-based projects with no regulatory hurdles and limited scientific values.
Ex: diabetes monitoring.
The Medical Devices sector is scientifically more challenging.
Project’s total costs are generally around $50mln while less than $1mln usually suffices to get started. It is generally a single product company with under 20 employees. A lot of hardware and engineering is involved; startups from this sector are scalable as production is usually outsourced.
They are BtoB companies which tend to be purchased when products are approved by the regulatory bodies.
Drug Development is considered the noblest and is generally what pops in one’s mind when ‘Healthcare’ is mentioned.
It is a long, costly and complex process where only 10% of projects are successful in clinical studies:
The total development cost of a single drug lies in the vicinity of $500mln (some studies argue its real value is north of $2bln).
Around $10mln are necessary to kick-start a project. The sheer size of the financing needed to fund such projects makes it particularly challenging for startups to succeed. The startups defying the odds tend to be attractive after a successful phase 2: pharmaceutical firms will put up a fight to snatch them and add them to their pipeline.
Below is a decomposition of the 11.8 years it takes on average to get a drug to the market:
An incredible opportunity
Bearing in mind the challenges healthcare faces, the industry has tremendous characteristics that make it attractive in the long run for venture capitalists.
Purpose
Founders follow their passion for a reason. Nothing can be more powerful than having a personal reason to cure a disease. This is what happens in fields as diverse as stroke treatment, brain degeneration or heart failure. Everything is easier when you have a calling in life.
Innovation Outsourcing
Whereas the bulk of drug research was impulsed by big Pharmas in the past, the situation is now more complex. Startups flexibility and risk-taking abilities allow Big Pharmas to intensify innovation through the outsourcing of the early phases of their drug discovery process. Hence the startup relevance.
Merger & Acquisition
Healthcare has a market capitalization exceeding $3 trillion and more than 50 companies with over $50 billion in market capitalization.
It makes it one of the most compelling markets to identify potential acquirers.
Market-neutrality
Healthcare constitutes one of the basic needs of humanity, procuring de facto a hedge against strong market swings as companies stop buying enterprise softwares but individuals can’t stop requiring healthcare products.
This hedge does not suppress market risk but highly reduces it.
Potential/Market
With a growing and aging population, an easier access to top-notch treatments and ever-growing range of curable diseases, the addressable health market will keep growing in the foreseeable future.
Intellectual Property
All patents exist to be challenged, but Healthcare is a sector with a long-term defensibility thanks to its IP culture. It is a reward for innovation; it transforms any patented market into a de facto monopoly where the competing products are impeded.
Regulatory path
Regulations can be seen as a burden slowing down innovation. They might also represent a precise pathway towards commercialization with very clear target milestones.
KOL
Hiring good physicians and pharmacists is crucial for operational reasons. Getting international KOLs on board is important to accelerate healthcare projects’ success. What is a KOL?
Key Opinion Leaders are the best practitioners in specific medical fields like immunology, otology or eye implants. They are the best experts in their field and possess expansive spheres of influence.
Mapping the main KOLs for a therapy area and collaborating with them will a minima help better understand the challenge at hand and could bring a top-notch scientific board to boost the project’s research and ambitions.
Future
IA, VR/AR, blockchain, cloud, miniaturized tools, health avatar, personalized medicine….are blooming technological bricks that will help foster future innovation in Healthcare.
At Indigoblue, we strongly feel that Healthcare embodies our values and the mark we wish to leave on this Earth.
The industry has tremendous know-how, stories and returns to offer. We are comfortable navigating its intricacies and can’t wait to discover the future that the industry holds for us.
I’ll be glad to discuss any of it, reach out at frederic@cenitz.fr
If you’re an actual European startup looking to close a Seed/Series A stage, make sure to hit us at frederic@cenitz.fr
