The healthcare value chain (new business models?)

(please see previous post as well)

Many start-ups that I’m working with are disrupting in one way or another the traditional healthcare value chain. There are (at least) three new connections that are re-inventing how the healthcare is provided to citizens (see red arrows in the diagram). In essence, what is happening is that the three actors are interacting more and more between them in many different ways.

Payers have traditionally disintermediated financers by requesting and paying services directly from MDs (i.e. in private practice). And now, a new model emerges: retail healthcare. When it comes to routine healthcare, many consumers want more convenient, faster, and more affordable care. The idea of retail healthcare (a chain of private “minicenters” at malls or other high traffic areas, treating common family illnesses, with no necessary appointment and open 7 days a week) makes a lot of sense. Many entrepreneurs saw the trend and reacted accordingly. Currently, there are three initiatives going on in the US (MinuteClinic, RediClinic, and TakeCareHealth) and their expansion is phenomenal (from one to more than 600 clinics in just 4 years). And it does not stop here. The expansion plans of these three companies are predicting a tenfold increase in the next years. Maybe (sooner than we think) bold entrepreneurs will bring this concept to Europe.

Payers and producers are talking to each other as well. More and more citizens buy healthcare goods directly from producers. A good example would be citizens “sequencing” their genome at 23andme (see previous post). This is just one of the multiple implications of the advent of Consumer Driven Healthcare (concept coined by Regina Herzlinger): a healthcare system where citizens take an active role in managing their health and are ready to pay for it. Consumer-Driven Health Care brings to healthcare the benefits that other consumer-driven industries enjoy—choice, information and control—plus more focused and integrated care. The results: improved quality at reduced cost.

Finally, I see as well projects willing to bring personalized medicine to the marketplace. Personalized medicine means distributing “one tailored product” to “one patient” at a time, and therefore it is a model where traditional distributors tend to be disintermediated. Producers interact with providers in a one-on-one relationship (i.e the doctors send the requirements to the producer and the producer sends the “personalized” goods straight to the hospital).

As we can see new business models are coming to the marketplace, distorting and re-inventing the value chain.

The healthcare value chain (classical view)

Best advice to entrepreneurs: understand (deeply) the healthcare value chain. Understanding the value chain means understanding the ecosystem of relationships between all actors in the sector. It is the only way to identify who is going to be your friend (and will be happy to welcome you in the market), and who is going to be you enemy (and will crush you totally if given the chance). And it helps you defining strategic partnerships.

The value chain is simple (Lawton R. Burns has the best book on this subject, I strongly recommend it): it has three actors and two intermediaries. And that’s all there is. The actors are:

• the individuals and institutions that purchase healthcare (the governement paying for national health services or the individuals paying for private practice),

• the individuals or institutions that provide healthcare (hospitals, MDs, nurses, pharmacies…),

• and the companies that produce healthcare products (producers of drugs, pharma companies, biotech companies, medical devices, IT systems, etc…

The intermediaries are:

• those who finance healthcare (for example, sometimes citizens don’t pay to providers, they do so through an insurance company, or other companies that offer insurance to the purchaser and reimburse the provider)

• and those who distribute products (products need to get from the producers to the providers, i.e. drugs need to arrive to hospitals and pharmacies, medical devices to doctors, etc…)

All the money enters the system on the left side and flows to all the boxes on the right. All the innovation starts in the right side, the producers, and goes to market in the left direction. The two flows meet in the middle, at hospitals, at physicians, at nurses at pharmacies, where much of the spending on healthcare and the consumption of products takes place.

Patents are so XXth century

The patent system seems in dire need of a rethink. Yes, we all know the rationale behind it: without patent protection an inventor has no incentive to invest time and money into something that can be easily copied by its competitors without incurring significant R&D costs. Patents correct this market failure by providing a temporary monopoly to the inventor. All this is true (and useful), but this rationale may be nonsense in the future.

Patents were created in the XIXth century to meet the needs of an era where innovation was scarce and large corporations dominated the scene. Today, innovation is infiltrating everything around us. “David” beats “Goliath” every day; thousands of small companies compete with large ones. We live in the era of the open-source movement, the free access journals, the peer to peer collaboration among scientists. Today innovation is so fast that a patent may become obsolete the day after is granted. In our time, “sustained” innovation is the important asset.

Successful medical start-ups are the ones that are always ahead, because when competitors copy them, they already have developed something new. The real success of a company in the XXIst century is to be able to smile at competitors and say “you guys are so late”, again, and again, and again… The only way to compete and innovate in our era is to show everyone in the marketplace that you will be delivering newer and better stuff in the future. And that is all. Patents (as understood today) may not help that much in the future (at least to small start-ups). So, maybe at some point in the future we will consider to publish our ideas in wide audience journals, in full detail. This could safely “lock” the idea away in the public domain, preventing others from attempting to patent them, allowing us to concentrate our efforts not on patent litigation, but on faster innovation.

Consider these facts:

• A patent does not prevent others from stealing or using your ideas. If you patent something, anyone is free to market your product or copy your ideas. There is nothing immediate you can do to stop this from happening. All a patent does is give you the right to sue someone in the future, in a ridiculously costly, and easily circumvented legal process.

• There have been several patent productivity studies done. Less than one patent per hundred will ever show any positive cash flow (and think about the costs generated by patents).

• In our technological era, there is always a surprisingly wide range of alternative methods of getting a job done. Most inventions can easily be «patented around» by making small modifications.

• All you really have to do to invalidate any patent is show that the claims would have been reasonably obvious to any "practitioner in the field." That’s all it takes. If you search deep enough, almost every patent can be invalidated or weakened.

• Patent holders may capitalize on inventions by suppressing their development, even though these inventions would benefit society (in a sort of “anti open-source” way, conflicting with the nature of our present world).
  

The system is not working well. I know by heart all the arguments to support patents, and yes, I agree with some of them. Some sort of intellectual protection may be needed (especially in pharma and biotech where R+D investments are so huge). But I think the future needs a different patent system.

Google goes biotech: Welcome to the age of retail genomics

23andme is the most inspiring biotech venture I have heard about in a long time. It is a “search engine meets life sciences” kind of start-up (I always thought the best opportunities were at the frontiers of disciplines). 23andMe is a web-based service that helps you read and understand your DNA. It gives people a look at their genome and helps them make sense of it. In a way it is a search engine for human genetic information. No wonder why Google has been interested in it since its very beginning (I must admit googling your genome sounds really cool).

23andMe closed recently its series A round of financing. The startup’s funding round included Google and Genentech. 23andMe didn’t disclose the overall size of the round, although we know Google invested $3.9m and I’m told the whole deal was in the vicinity of $10 million.

After providing a saliva sample using an at-home kit, 23andme genotypes your DNA for under $1.000. You send the saliva, and two to four weeks later you get an email inviting you to log in and review your results. You can explore your genome, you can discover your origins, learn what the latest genetic findings may mean for you, and connect genetically with friends, family, and others across the globe. 23andme keeps you updated on the latest genetic discoveries, and clients can keep checking their account to see what those advances may mean for them. The company will also tell you which diseases and conditions are associated with your genes — from colorectal cancer to lactose intolerance — giving you the ability to take preventive action. In short, life will become a little more like a game of strategy, where we're always playing the percentages, trying to optimize our outcomes.

The advent of retail genomics will bring personalized medicine to the marketplace. We will no longer live according to what has happened to us. We will live according to what our own specific genetic risks predispose us toward.

But demand, as usual in disruptive innovations such as this one, could be a concern. There's nothing intuitive about navigating your genome; it requires a new scientific vocabulary most people is not ready to learn. My own view on its first clients (early adopters): either adopted children, willing to trace back their origins, or wealthy parents willing to contribute to medical research, having for instance a disease and wanting to make sure their kids don’t develop the same disease. Will people embrace this new product? Time will tell, but I presume they will.

From a medical vantage point, I love the fact that 23andme will foster research in medicine: imagine how much a data base made of millions of human beings whose genotypes and phenotypes appear would advance gene mapping and medicine. The product will stimulate conversation among doctors, patients and researchers about genes and their role in human health. As I said, very inspiring, indeed.

On innovation and creativity among physicians

I recently had the pleasure of watching Sir Ken Robinson (chair of the National Advisory Committee on Creative and Cultural Education, UK) addressing an audience on creativity, and I must admit I was completely blown away by the whole lecture, it really fascinated me.

Ken Robinson built his presentation explaining an anecdote that happened in a classroom. A 6 years old girl was in a drawing lesson. This little girl hardly ever paid attention in class, but in this drawing lesson, she did. The teacher was immediately curious about her behavior, and went over to her:
- What are you drawing?
- I am drawing a picture of God.
- But nobody knows what God looks like.
- Well…, they will in a minute.

It is amazing how kids will take a chance. If they don’t know, they’ll have a go. They are not frightened of being wrong. I don’t mean to say that being wrong is the same thing as being creative, but, one thing is certain: if you are not prepared to be wrong, you will never come up with anything original. And by the time they get to be physicians, most healthcare professionals have indeed lost that capacity. They have become frightened of being wrong.

The way we educate our physicians, in universities, does not foster innovation at all. We stigmatize mistakes. Mistakes are the worst thing a student can make. We are taught about facts, not about questioning those facts and seeing things from different perspectives. Our whole curriculum is based on publishing papers, and papers, and more papers. No one values patents, innovation, start-ups or entrepreneurial projects. No one values attempts to challenge the status quo. No one explains anything on entrepreneurship in medicine.

It is my contention that we are educating our physicians out of their creativity. We need to change that.

In search of the perfect healthcare start-up

Some days ago, an entrepreneur asked me which were the “qualities” that I valued the most in a healthcare start-up. It is really a fair question, but it has no easy answer. Investing is both a science and an art, and therefore it is difficult to categorize “qualities” that add up to the perfect company. There is no such thing as a “perfect” healthcare start-up.

However, I will give it a try (this is highly personal, different investors may provide very different answers). These are the qualities I value the most:

(1) Compelling product or service, that brings something new to the market, something different to what competitors are doing. An improvement over the current “gold standard” of practice, suggesting market uptake of the technology/service could be fast.

(2) Strong intellectual property, or at least solid barriers of entry ready to be built and not easily replicable by competitors

(3) Target a big “niche” market, the bigger, the better.

(4) High quality team, a team that can be trusted to accomplish its goals. Investors do no invest in ideas, but in the execution of ideas, therefore, the people behind the execution must be the most appropriate to the task

(5) Smooth path to market, meaning the start-up should have definable and visible regulatory and clinical paths. This is mandatory in an extremely regulated market such as healthcare.

(6) Be clear and focused, with a well thought business model.

To those “present” qualities I would add a “future” final one: the investor should be able to imagine who would be willing to buy the company in the future, and under what circumstances.

Hospitals no longer buildings

Today, a hospital is “perceived” as the facilities that make up its constituent parts, that is, its buildings. A place where people go to receive medical services.

But this is changing. When a patient is being visited/monitored at home through a telemedicine system, where is he? At his place? At the hospital? Tomorrow, a hospital will be defined by the reach of its virtual relationships. It will be thought of as the extended community network by which its services are provided. It will no longer be a place, but a network of relationships.

Many projects that I am seeing in the last months are leveraging this change of perception to enter the healthcare market. If a new start-up aims at bringing the hospital closer to the citizens, it is indeed aligned with this trend (and I like it). Wireless disease management programs, or technologies that enable online physician-patient relationships are two excellent examples of the interesting niches that are going to be filled with hundreds of start-ups in the coming years.

Welcome to Healthonomics

To all of you reading, thanks, and welcome to Healthonomics. In this blog I will be discussing issues around innovation, entrepreneurship and the economics of healthcare. I’ll try to keep things short and stick to one topic per posting.

Healthcare and life sciences are considered to be one of the key high-technology sectors of the future. Therefore, healthcare entrepreneurship and technology transfer should be encouraged in all healthcare organizations. While pure basic science research has value, discoveries and inventions cannot help patients unless they make it into the marketplace.

The good news is every year thousands of healthcare startups are created around the world. Unfortunately, only a small percentage of healthcare professionals participate in the process. For the industry to achieve its full potential we need to attract more physicians and healthcare workers to the task. We need to encourage bioentrepreneurship among physicians as well, and I will try to do so here.

I hope you will find this blog useful and you will keep in touch with me. I would prefer the blog to be a dialogue rather than a monologue, so please post your comments or email me your insights, ideas, disagreements … they will all add up to the discussion.

I am looking forward to hearing from you.