Build or outsource?

Healthcare entrepreneurs face an important (and difficult) decision when launching their start-ups: which capabilities should they build and which ones should they outsource?

We can define outsourcing as subcontracting a process to a third-party company. The decision to outsource is often made in the interest of lowering firm costs and focusing energy in the “core business” (concentrating the efforts in what is important for the company, where we really add value, and subcontracting the rest).

In the early stages of a start-up it is usually interesting to outsource when a certain function has a potential to become more economic when subcontracting it with little strategic cost to the organization. In the healthcare sector the most frequent reasons for outsourcing are achieving a faster time to market, reducing costs, or gaining access to intellectual property, wider experience and knowledge.

If a start-up decides to outsource some of their activities, it can do so through strategic partnerships, contracts and/or market exchange. I usually recommend deciding which is the most appropriate way taking into account whether the nature of the transaction is unique or common, and the frequency of the transaction (see my diagram).

Health vs. e-health (from an economic perspective)

Value is defined (economically) as outcome divided by cost. Value is created when the price that a patient is ready to pay for a service (or a product) is higher than the cost of providing this service. The potential value that a company willing to provide medical services can get can be represented by the area between the demand curve (maximum price a client is willing to pay for the service) and the cost of providing the service (see my diagram).

When we add an e- to the word health, when we for example provide medical services through the internet, two things happen to this potential value:

- The demand curve shifts to the right, because the same offer arrives now to more potential buyers, i.e. patients that can get the service through the web without going to a “real” building

- The cost curve shifts down, because there is a lower cost for any transaction, we don’t need intermediaries and there are more efficiencies.

Therefore the potential value (the triangle area between both curves) increases.

Scientific breakthrough of the year: Human Genetic Variation

Science magazine presents each year a special issue on the scientific breakthroughs of the year. It ranks the 10 most important discoveries and breakthroughs, and this usually triggers many interesting business trends and opportunities. This year, 5 out of 10 breakthroughs are related to healthcare.

The breakthrough of this year has to do with the human genome, or more interestingly, with your particular genome, or mine, and what it can tell us about our backgrounds and the quality of our futures. Scientists have moved this year from asking what in our DNA makes us human, to striving to know what in my DNA makes me “me”.

I can imagine today is a great day at 23andme headquarters (see previous post where we discussed this promising new start-up). Today, techniques that scan for hundreds of thousands of genetic differences at once are linking particular variations to particular traits and diseases in ways not possible before. Already, the genomes of several individuals have been sequenced, and rapid improvements in sequencing technologies will make the sequencing of "me" a real possibility.

These were the other healthcare related runner-ups:

- Research on how to reprogram skin cells to make them look and act like embryonic stem (ES) cells. ES cells are famous for their potential to become any kind of cell in the body. But because researchers derive them from early embryos, they are also infamous for the political and ethical debates that they have sparked. This breakthrough will foster research allowing more and more new breakthroughs in the coming years.

- The discovery of the molecular structure of the adrenalines’s target, the beta2-adrenergic receptor. Having a clear picture of the receptor's binding site will allow the development of more potent, safer drugs.

- Research on how immune cells specialize for immediate or long-term protection

- New insights on neural mechanisms for memory and imagination, linking both concepts in a revolutionary way. It appears that recalling past life experiences and imagining future experiences activated a similar network of brain regions. On the basis of such findings, some researchers propose that the brain's memory systems may use remembered fragments of past events to construct possible futures. As science magazine writers say “memory may indeed turn out to be the mother of imagination”.

See the whole article here, and a video prepared by science magazine.

And by the way, Merry Christmas to everybody.

A not-to-be-missed presentation

Here's a very inspirational video from Esther Dyson on what venture capital wants to see in a healthcare start-up. Esther is one of the most influential venture capital investors and sits in the board of several healthcare companies such as Medscape, Medstory, and 23andme.

Link to the source.

Political triage and healthcare economics

I have a bit more to say about social entrepreneurship in healthcare. Entrepreneurs, venture philanthropy funds, governments around the world, they all struggle to choose the right thing to do when addressing healthcare needs. We live in a world where there are a lot of healthcare related problems. 800 million people are starving, 1 billion lack clean drinking water, 2 billion lack sanitation, 2 million die of AIDS every year, and the list has no end, malaria, communicable diseases… In an ideal world, we would solve them all, but we can’t.

So, if we can’t do all things, we should start asking ourselves which ones are we going to solve first. And that’s the question I would like to ask to the readers of this blog: if you had a venture philanthropy fund to spend money in the next years to do good in healthcare, where would you spend it? Can you give me your list of problems to solve? This is a stimulating intellectual game with important real-world consequences. We should stop talking grandly and vaguely about solving healthcare problems and instead rank them – based not only on the potential harm they can cause but also on our ability to turn things around. To govern is to choose.

Top of our list would probably be malaria, aids, hunger, sanitation…. But the point I want to make in this post is that it is unfair to ask people to come up with a list of problems and prioritize them, because there are problems we can’t solve anyway. The useful thing to do is not to prioritize problems, but to prioritize solutions to problems. Then our list becomes more “buying mosquito nets” (malaria), “give away condoms” (aids), etc… and becomes much more understandable.

But there’s still something we need to be able to choose. Imagine going to a restaurant getting a big menu card without no idea about the prices. We need the prices to decide, don’t we? There are many things we could do out there, we have the choices, but for wise decision making, we need as well the prices and the expected outcomes. Only then we can decide and prioritize what to do.

If you accept the challenge and think about your own list, you need to have in mind that at the same time we decide what we should do, we decide what we should NOT do, what should be at the bottom of the list. Prioritization is incredibly uncomfortable, nobody wants to do it.

If you want to know about AIDS, you ask an AIDS expert, if you want to know about malaria, you ask a malaria expert, but if you want to know which one of the two problems should be prioritized, you need to have an economic perspective. So here’s when political triage comes to the scene. Resources are limited, political leaders must make choices, and those choices should be governed by where the most good can be done for humanity. Solving problems is not about making us feel good, not about what media emphasizes the most, but it is about acting where we can obtain the maximum benefit.

General policy should always be to:
(1) focus on solutions,
(2) don’t do things that do little good at high costs,
(3) don’t do things we don’t know how to fix,
(4) start with problems where we can do most good, at lowest cost, now.

The problem is I don’t see this kind of analysis in healthcare. There’s an excellent project going on, the Copenhagen project, led by Bjorn Lomborg, which already did that on a general scale (climate crisis, immigration, healthcare, education…). Its results are astonishing, I think healthcare needs to follow its example.

10 trends that will reshape healthcare in the next decade

My view on the most interesting areas for healthcare entrepreneurs, problems not solved, opportunities and areas of growth.

(1) Hospitals no longer buildings
Today, a hospital is “perceived” as a building. 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.

(2) Commoditization of healthcare services and retail healthcare
As consumers are forced to pay more out of pocket for healthcare services and as information becomes more widely accessible, retail markets will emerge. Medical service providers will begin to compete more on price, convenience, and quality.

(3) Social entrepreneurship comes to healthcare
Social initiatives to deliver basic healthcare to the third world, undeveloped countries and under-insured citizens will blossom. Initiatives like the (RED) manifesto, micro-credits, green agendas, etc. will find its way in healthcare through vaccine and drug access programs, teaching initiatives, non-profit disease specific foundations.

(4) New players targeting healthcare
Lowcost firms, big IT companies, “green” initiatives… Entrepreneurs see healthcare as a big opportunity. Companies delivering essential services + better operations + good quality healthcare will thrive in the XXIst century. Technology will drive operational and managerial excellence.

(5) Focus on patient safety
Hospitals will focus on prevention of medical errors and improvement of patient safety at all levels of the organization. Wireless will be an enabler helping to merge and deliver information to avoid mistakes.

(6) Size and focus
Bigger hospitals as spaces to concentrate technology and achieve excellence, and “focused factories” (centers dealing with just one disease or specialty), will blossom in an effort to provide appropriate, high quality care at every level.

(7) Personalized medicine drives the agenda
We are in the midst of a fundamental, significant shift in healthcare philosophy and medical research: from a world in which we “react” to disease and illness after it has happened we will evolve into one in which we will be doing far more to “prevent” health care problems through highly personalized medicine.

(8) Bio-informatics gets respect
The billions of measurements on an individual patient that is leading us into the era of personalized medicine will need highly sophisticated computer databases and computational software.

(9) Bio-connectivity becomes the next big thing
A new generation of intelligent, Internet-connected medical devices flood the industry, providing new opportunities for monitoring and managing chronic health care conditions. Furious pace of innovation will occur here with medical devices and medical technology.

(10) Electronic signature everywhere
Electronic signature will be a pervasive element of everything done in the next ten years. Electronic prescription, medical electronic records, telemedicine, all initiatives will require strong and compliant systems to authenticate both sides of the “conversation”.

The emerging healthcare consumer

We give a large amount of our money each year to those who manage our healthcare, to governments, to insurance companies, hospitals, etc. without holding them accountable for efficiency or quality. Why?

Supply and demand are the fundamental forces at work in retail consumer markets, and the drivers of innovation in most industries, but healthcare seems a different market. The problem with healthcare? It has, for many years, been in denial about its status as a service industry. It has seen itself much more as a scientific and technological industry, with poor levels of customer service, competition or choice. But healthcare will evolve in the next years into an increasingly competition-driven service industry.

The XXIst century is about information, is about consumerism, is about empowering patients. Healthcare consumers are becoming more aware of both quality and cost, shopping for products and services, and expecting competition among providers and suppliers. Whether we like it or not, patients are becoming militant consumers, and they are likely to be even more demanding in the future. In some circumstances, they will end up buying healthcare products and services (and paying out of their pockets), looking for quality, convenience or cost. And this is good news to lots of entrepreneurs around the world willing to enter the healthcare market. This emerging trend will open a new space: you can call it retail healthcare, consumer-driven healthcare or whatever you want, but it is my contention that it will bring new products and services to the marketplace.

I am not at liberty of explaining here the early stage companies that we are monitoring, but I can assure you a significant number of them are leveraging on this trend and will target this emerging healthcare consumer. And as I said, this is good news for our healthcare system.

The future of biotech: Pay-per-performance deals?

Some weeks ago something happened that could change the biotech industry. To make it short, Janssen-Cilag, the designer of Velcade (bortezomib), the only drug known to have efficacy for relapsed multiple myeloma, proposed a pay-per-performance deal to the UK National Health System. It will only get paid if blood tests indicate that the drug is working. The deal will ensure that all patients suitable for treatment will get the chance to see if the drug works well for them, but that the NHS will only pay for the drug when it has been proven to work.

Why this happened in the first place? There is a crisis facing healthcare systems as the cost of new drugs skyrocket. Older drugs worked as blunt instruments. The drugs produced today by innovative biotech companies are more precise, more effective, and they are getting more and more expensive. This price inflation seems to have no end. We could end up in the situation where drugs are only developed for a portion of wealthy people around the world. We need to radically rethink how to fund drugs.

My first reactions to this deal:

(1) Until now, society has been paying the biotech companies for the promise, not for what it got. These kind of groundbreaking deals are the ones that set up a precedent that is usually followed by many others. And more importantly, there is no reason why we could not apply the same pay-per-performance rationale to medical devices or services. Can you hear the winds of change?

(2) This model sounds great in principle, but we should not forget that it transfers the risk to biotech (an industry that has more than enough risks already), and could disincentive innovation in the long term. Policy makers should be very careful with that.

(3) Implementation of this model could be tricky; biotech companies could factor the cost of the “unpaid” patients to the “price tag” of their drugs, producing the paradoxical effect of even faster skyrocketing costs.

(4) Finally a reminder for all: we can’t fight the increasing power of patients. It was precisely an alliance of informed patients and cancer organizations who forced the UK national health system to accept a drug treatment it originally refused for cost control reasons. We live in a world where patients can radically transform the healthcare environment overnight, globally. Let’s just accept it.

Zero distance between labs and hospitals

Technology transfer can be defined as the process of developing practical applications from scientific research. Many hospitals and universities are starting to acknowledge the need of having some sort of "Office of Technology Transfer" (OTT) dedicated to identifying research which has potential commercial interest and strategies for how to exploit it. This means providing patenting, licensing, and other commercialization support to MDs and researchers.

Here’s my view on what an OTT should be doing to foster innovation:

(a) It should be encouraging entrepreneurial culture among all healthcare workers, explaining them the language of innovation and entrepreneurship, and all the tools they have to "move" an idea to the marketplace.

(b) It should detect opportunities through individual interviews with professionals and brainstorming sessions across the hospital.

(c) It should help in the execution of projects, defining implementation and follow-up for every individual idea, from concept to opportunity, from business plan to financing.

(d) It should define (and leverage on) an ecosystem of relationships between the hospital and the different innovation agents, that is, business schools, venture capital firms, business angels, governmental agencies, technology parks, labs, …

(e) It should define the “rules of the game” inside the institution to deal with intrapreneurship, that is the relationship between the hospital and the individual (team) willing to innovate, ownership issues, etc…

(f) It should always benchmark with “the outside”, keeping an eye open to what other hospitals are doing, and learn, learn, learn.

We have already implemented an OTT in a paediatric hospital, and the results are surprising. When someone takes an active role in exploiting innovation in a hospital, many (hidden) opportunities arise. The process to commercially exploit these opportunities varies widely. It can involve licensing agreements, joint ventures, partnerships with third parties, creation of spin-outs (usually when the hospital does not have the will to develop a new technology), or creation of start-ups raising venture capital. In creating those OTT we all help technologies move from hospitals to the marketplace, and therefore benefit society and the global economy.

On social entrepreneurship and healthcare

I recently had the pleasure to listen to a presentation from one of the founders of Aravind Eye Care. Aravind is the largest and most productive eye care facility in the world. This company provides cataract surgery to blind people in the poorest regions of India (people that after the surgery become able to see again). Aravind treats every year more than 2.3 million people (yes, you read it right, 2.3m) and performs more than 250.000 surgeries. Their business model charges fees to the wealthy and provides free surgery to the poor, and it works.

Social entrepreneurs focus on health and social welfare issues unaddressable by the administration or market forces. They choose to take on society’s problems, and they face a great challenge not only in performing their work, but in finding the financial resources to grow the business. Whereas business entrepreneurs typically measure performance in profit and return, social entrepreneurs assess their success in terms of the impact they have on society. The big difference between social entrepreneurs and business entrepreneurs is that those who create a start up focusing on creating a social change are less motivated to make a lot of money since that usually isn’t the “upside”. For them the upside is not getting rich but to change the world.

Traditionally, for social entrepreneurs it has been difficult to raise money from venture capital. But this may change in the future. Some VC firms are beginning to recognise that some social businesses can be extremely profitable, because of being “social”, not in spite of it. In fact, there is nothing that prevents a social start-up from being profitable. Social entrepreneurship is not about giving away all the revenues to the poor and underserved. It is about building something sustainable, able to help more patients in the future.

We are seeing as well more and more venture philanthropists, often people with VC backgrounds, who want to invest their money and their skills to provide financial rigour, play a highly engaged role in building the business and who want to get their capital (+a bit) back to go out and do it again (see for example, the foundation for change).

A final thought: I think nonprofits should admit that they're businesses, not just causes. This would attract more brilliant entrepreneurs to solving “social problems”. There's probably a way to combine the very best of the philanthropic world with the very best of the enterprising world. We will see (and invest in) more and more of these companies in the coming years.