Stop Ignoring this Healthcare Customer

See if you can guess a company based on a few facts:

1. Based in the Bay Area

2. Product revenue was $30 billion in 2016, up from $10.8 billion in 2013

3. Gross margins were 86% in 2016

Did you guess Google? Nope— Google’s gross margins were quite a bit lower at 61%.

What about Facebook? Wrong again — despite a remarkably similar financial profile, Facebook had $28B in 2016 sales, $2 billion shy of this company.

You’d be in good company alongside many in the tech community with those guesses, but you’d also be wrong. Keep guessing.

…

Give up? The answer is Gilead. This is probably obvious to anyone with a biotech background given the success of Gilead’s hepatitis C and HIV drug launches, but the company is relatively unknown in the tech ecosystem. While Gilead has performed remarkably well, it’s just one example of success in the biotech world. With this kind of financial success (in addition to improving patients’ health!), healthcare tech entrepreneurs should take note that the biopharma industry can be an incredibly valuable customer that sometimes goes unnoticed compared to B2B healthcare business models focused on providers, plans and employers.

While biotech is a huge opportunity in itself, I’m a big believer there’s also an enormous market at the intersection of tech and biotech. I think about the space in three large categories: 1) Pharma IT — technology infrastructure that helps pharma operate their core underlying business (e.g., successes like Schrödinger, Medidata, Veeva, Flatiron and IMS), 2) “Pill Plus” — digital interventions that improve patient health either independently or in combination with traditional therapeutics (e.g., DPP players like Omada Health and Canary Health, digital CBT players like Big Health, Ginger.io, Lantern and Ieso, or digital therapeutics like Proteus, Propeller Health, Chrono Therapeutics and Pear Therapeutics), and 3) Genomics — an adjacent space of bioinformatics companies with a huge opportunity now that we’re over 15 years into the genomics revolution.

There are a few reasons that the intersection of pharma and tech will have many winners:

It’s a huge market. Biotechs have an incredible business model once they’ve launched their drugs: there are massive revenue opportunities and software-like gross margins. The industry’s top-line was over $300B in the US last year. Unsurprisingly given the size of the opportunity, biopharma companies spend hundreds of billions globally on services related to R&D and commercialization, with over $40B spent on technology. A common knock on the space is that the market size is limited because the industry is relatively concentrated with 20–50 natural top pharma customers, but there are many opportunities for business models that fractionalize and upsell an organization through selling product by clinical trial, therapeutic area, brand, division or region.

Drug development success is rare and efficiency is worsening, opening an opportunity for new technology to fill pharma’s innovation gap. Despite the large prize at the end of the tunnel, any pharma exec will be quick to point out that the odds are stacked against them. Getting a drug approved is a long, expensive process with a low hit rate.

Also, unlike most areas of tech where Moore’s Law applies and costs decrease exponentially over time, R&D efficiency is worsening in pharma, often dubbed Eroom’s Law. For drugs pre FDA-approval, costs are increasing and R&D timelines are lengthening. Post-approval, the clock continues to tick on a patent expiry, making every day of sales and marketing that much more critical to the bottom line. Given these challenges, there is often a ready buyer looking to improve their odds of success across the development and commercialization spectrum. That said, biopharma has used tech effectively for years and computer-aided drug discovery isn’t new, so like any market, entrepreneurs should have a healthy respect for incumbents.

Pharma is looking for new solutions. Given these trends, the industry is seeking new, tech-enabled solutions. Nearly every large biotech and pharma company has hired dedicated digital health teams. Over half of pharma execs believe that their digital health strategy is crucial to their business today, and 84% believe it will be crucial by 2020.

New pricing models and regulatory regimes create new needs. Drug pricing continues to be under attack, and the Martin Shkreli “Lady Gaga defense” isn’t helping public opinion. Like many other areas in healthcare, value-based pricing could be the answer, and new payment structures are emerging where payment depends on outcomes. Plus, the new administration has promised FDA reform (albeit vague). Any payment and regulatory reform will open opportunity for new technology to help biopharma companies transition to a new world.

Competition is nascent (for now). “Pharma IT” (infrastructure tools for pharma) is an under-invested category within digital health. There’s been a flood of $21.5B+ dollars into digital health more broadly, but less than 3% of these VC dollars since 2011 have gone towards the “life sciences tools” category according to Rock Health’s funding database. The majority of digital health companies funded focus on selling to providers, payers, and employers, but pharma is somewhat ignored. Given the relatively lower funding amount in the pharma software space, we think this creates an opening for those companies traversing the relatively less competitive biopharma ecosystem. More venture dollars have gone into the pill plus and genomics categories, but we’re still in early innings for both of these fields.

There will be more genomics data than YouTube data by 2025. A whole genome sequenced over 15 years ago cost north of $100m. Today, costs are ~$1,000 and rapidly decreasing. At some point in the next 5–10 years, it’s going to be so cheap that every person in America could get their genome sequenced if they wanted. Many new companies are emerging that use genomics data to help biopharma discover new drug targets through AI, help clinicians better diagnose and treat disease, and provide workflow support to clinical teams interpreting the data.

For all of these reasons, it’s a great time to build product at the intersection of tech and life sciences. As investors in both biotech and digital health, we think there’s a huge opportunity to create big, important companies at the convergence of these two industries. If you’re building a healthcare tech business focused on biopharma, I’d love to hear from you.