Some thoughts on personalized medicine

Personalized medicine could be seen from an economic point of view as delivering “mass customization” to people in a healthcare context at an affordable cost. Personalized medicine has attracted a lot of hype and is often perceived as a far-future initiative that is not yet ready for useful value delivery to real-world patients.

Personalized medicine uses an evidence based approach, maximizing efficacy and the best therapeutic outcome, while minimizing adverse events. So far, so good, who could say no to that?, but this utopic vision will need to overcome several barriers to become a reality. There are at least 4 problems to address:

#1 Personalized medicine is more expensive. Who will pay for the incremental cost? Why should payers pay for this without compelling and clear evidence of superior therapeutic outcomes in patients that can be delivered cost effectively? Our current healthcare systems pay for volume rather than for value, we cannot measure quality of delivered healthcare, and this is going to slow down personalized medicine adoption if we don’t solve the problem.

#2 The blockbuster model does not work here. The economics of delivering a large number of molecules targeted at smaller patient populations will demand a radical transformation from the current model predicated on the discovery, development and commercialization of a very small number of molecules targeted at large patient segments. How can we define viable business models of “targeted therapeutics” to very small populations of patients while assuring profitability? This will be clearly the age of biotech (small size, high speed, more adaptability), and pharma companies will suffer.

#3 Drug approval is so XXth century… It is so slow (7-10 years to market), it is so expensive, and more importantly it is so flawed when analysing drugs for very, very small populations of patients… Fundamental rethinking of the regulatory regime to assure safety and efficacy will be needed to be agile. Additional periods of exclusivity may be imperative for targeted therapeutics to be rendered viable.

#4 Protection of the patient’s privacy and non-discrimination laws need to be in place for personalized medicine to become a reality. Whether we like it or not, this is something that worries patients, and we need to be prepared to offer solutions to it.

Identifying lies in financial projections

One of the most dangerous mistakes an entrepreneur can make is to seek confirmation of his actions rather than seeking the truth. They want to do something, so they talk about it with people who work for them. They talk to their families and friends. But they're only looking for confirmation; they're not looking for the truth. They're looking for somebody to tell them they're right. But the truth always comes out, especially in financial projections.

Entrepreneurs usually “lie” to themselves (without knowing it) when preparing the financial projections. This is not “technically” their fault, they are just too excited about the opportunity and they usually end up by setting wrong assumptions when building their numbers. Sometimes is excessive demand, sales, time to market, market share, speed of growth… you name it. Some get mad at me when I point out their inconsistencies (it happened to me again yesterday, and it will happen many more times in the future, I am used to it now).

Financial projections usually tell a great deal both about the start-up and the entrepreneur. One gets very fluent at identifying “lies” in financial projections by seeing a lot of them. Healthcare entrepreneurs should be aware of what an income statement says, and what it hides.

Investors are looking forward to investing in start-ups that offer a very large opportunity (which could become 1st, 2nd or 3rd in the market, could generate long term competitiveness and, let’s say, a 10x return on investment). Every entrepreneur knows that when looking at the numbers, investors will be trying to anticipate how much total financing will the company need, how probable is liquidity and how long to get there, when does profitability occur, and milestones and fundraising events.

But there is much more information hidden in the financials besides that. For example, does the business model “scale” well? Do revenues increase at greater rate than expenses? Are sales projections realistic? Is the total amount of financing needed realistic? Have the costs of growth been factored in?

When analyzing 5-year projections, I usually look only at the first three years to learn about the start-up. Anything longer than that is just science fiction, the entrepreneur just does not know. But years 4 and 5 offer very useful information as well, not necessarily about the start-up but about the entrepreneur himself… Is he ambitious? Is he consistent? How aggressive is he? What is his vision of the company for the future?

Strategy 101 for healthcare start-ups

Healthcare professionals are not used to strategical thinking. Strategy is about choosing a future for your idea and about defining how to get there. Strategy is about choice, which affects outcomes. Healthcare start-ups can survive for short periods of time in conditions of relative stability and little competition. But, guess what, in the real world there is no such thing as stability or little competition. So, you need to have a strategy.

Strategy is more a science than an art. It is difficult to encapsulate in just one post how to design a strategy, but from a conceptual point of view, strategic thinking should follow these steps:

#1 Understand the drivers that influence your future profits. Any variable that will affect your profit and loss and therefore can create or destroy value for your start-up needs to be deeply understood. Your future profits depend on what? The objective of this first step is to learn why can we have better or worse results.

#2 Understand your environment, both the general environment (economic, social, technological…) and the healthcare one (healthcare value chain). Who is your competitor, who is your provider, who is your client? Are there trends that could change the marketplace in the near future?

#3 Understand your scope, where are you competing, from a geographic (where do you want to sell?), product (which products?) and segment (to which clients?) point of view.

#4 Understand the resources you use, and your capabilities. Can you develop a future capability that could give you a competitive advantage over your competitors?

#5 Where are you then? At this point, by combining what you learnt from the previous steps you can build a Strengths, Weaknesses, Opportunities and Threats (SWOT) matrix. Strengths and weaknesses are internal characteristics of your start-up (#3 and #4), and opportunities and threats are external issues from your environment (#2).

#6 Formulate your strategy. After detecting the opportunities and threats around, and knowing about your capabilities today, you can define how you should compete in the future. Is what you do today sustainable? What do you want to be when you grow up?

At the end of the day, a strategy chooses a position for your company, that is, a scope and a set of activities able to benefit from your capabilities and able to protect you from the “forces” that will try to limit your profits. Obviously, when choosing this positioning, you are forced as well to decide what new resources or capabilities you will need in order to compete in the future. And this is strategy.

Strategic thinking has no end. Once you define a strategy, you need to anticipate again future changes and go back to #1 to dynamically rethink your strategy again and again.

What is value in healthcare?

Value can be defined from an economic perspective as outcome divided by cost. Value in healthcare services is often defined as clinical excellence, and that means that receiving the best medical treatment at the lower cost would be the best value scenario. Right?

Wrong. There’s a lot more in value than its economic perspective. Some healthcare initiatives are failing to see this and are betting on the excellence dimension as the only dimension that really matters. I am not saying that excellence is not important, I am just saying that in a world of “excellence inflation” (everybody is excellent), there are many other dimensions of value that really make a difference when the patient chooses to stay at a hospital or pay for a service.


Here’s my list:

(1) Personalization: Patients want their healthcare their way. They want healthcare to be aligned with their preferences and personal needs.

(2) Transparency: Patients increasingly want to know more about their diseases, they want to have intelligent conversations on how a course of treatment will impact them. Building trust through transparency is becoming essential.

(3) Simplicity: The old “kiss” rule (keep it simple, stupid) applies more than ever. Patients are stressed, worried, they really value simple processes of admission and discharge, information request and many other minor things that at the end of the day can make their lives so much easier.

(4) Human interface: A lot of doctors are not good at bedside manner, the human relationship with patients. And excellence is no longer enough. Patients need a human interface to communicate with. A caring staff can make again a difference.

(5) Time: Anything that saves time is greatly appreciated. Waiting lists, queues at emergency department, weeks to know the diagnose… All these matter too when citizens are making their healthcare choices.

If you are building a healthcare start-up willing to provide healthcare services, try to compete in all the dimensions, and not just the “excellence” one.

Some politically incorrect thoughts about healthcare

The more I work with hospitals, the more I believe hospitals are uniquely positioned to benefit financially from discoveries in the medical field. This is not only true for cutting edge research but as well for any operational or management related initiative. Hospitals may be an outstanding partner for start-ups willing to enter the marketplace.

But the more I work with hospitals, the more I see they don’t get it. They don’t see the potential and they do nothing to capture it. Why?

(1) Most healthcare managers still see innovation as a task. Most physicians still ask questions such as “I am already seeing patients, doing research, teaching… and you you want me to innovate as well?”. Well, innovation is not a task, it is not something that has to be done, it is a state of mind. Innovation is a permanent questioning of how we can do things better. You can innovate while you see patients, while you do research, or while you teach. But you need to see things differently, you need to be constantly looking for needs.

(2) The idea that hospitals should be promoting and funding healthcare start-ups that are designed to have a profit is still politically incorrect. For most CEOs, nurturing healthcare innovations should be directly tied to a nonprofit's mission… Well, I am afraid this may be politically correct, but from an “efficiency” point of view, it may be totally nonsense. Improving healthcare should not be a cause, but a “business”. If it is just a cause, many start-ups won’t flourish, and important innovations that were meant to save thousands of lives or make patients lives better won’t never reach the market.

So, if you are a hospital CEO, a medical director, a healthcare manager, I beg you to see the innovations around you as potential venture capital (VC) investments… Try to see reality with a different mindset. VCs aren’t dreamy idealists. They are indeed ruthless realists. They’re pragmatists, looking for returns on investment, and a piece of the future action. Successful VCs try to define the risks they have to take and to minimize them as much as possible. They’re not risk-focused but opportunity-focused. They are looking for unfilled niches. And when they find one, they invest in it, and they profit from it.

Nurture and invest in the innovation that flourishes at your hospital trying not only to do good, but to capture value as well. Innovation is a for-profit business if you want to do it well. Sophisticated hospital executives are increasingly realizing the potential benefits of such an investing philosophy.

"Free" business models in healthcare

(Click on the image to make it bigger)

Yesterday I was invited to give a lecture at the “Instituto de Empresa” in Madrid, Spain. The topic was innovation as a driver of healthcare in the XXIst century. I shared the floor with two amazing healthcare professionals from the New England Journal of Medicine. I want to thank both medical economics and instituto de empresa for having me.

One of the most interesting things we discussed was “free” business models in healthcare. I am sharing with you one of my slides on the topic. Is it possible to give away something for free in healthcare and still make a decent profit out of it?

Well, in my opinion it certainly is. Free or “low-cost” will come to healthcare in the coming years. Free is what citizens want — and free, increasingly, is what they are going to get. But free does not mean no profits. The start-up that is giving away the good for free can make a living by “capturing” the client and charging him/her for different things.

As you will see on my slide, in healthcare there are at least six different strategies to capture value when giving away something for free. If you want to go deeper into the subject you may find very interesting to read Wired magazine's article about “Free”.

The science is the business

Science plays an important role in the XXIst century. In other sectors of the economy, the science behind any product is increasingly important. In biotech and medical devices, science is even more important, in fact, here science is the business. This might scare some venture capital firms that are generalists (non specialized in life sciences). Educating the non-specialized venture investors is therefore essential to gain more “visibility”.

If you present a project to a generalist venture capital firm, you should have in mind why biotech is a great market to invest in:

Pricing power and high margins
The administration has tried for a long time to reduce prices on older drugs (generics). They have been successful indeed in cutting prices on the old drugs, but never on the innovative drugs (their cost-effectiveness is usually very well documented). The classical supply-demand law does not apply in this sector. This means a new drug can potentially achieve margins of more than 90%, and even drugs targeting reduced communities of patients (rare diseases) can create a multimillion business.

Monopolistic market
Barriers to entry are enormous. Know-how and investments create indeed big barriers to entry, and the 20 year protection from patents and the Orphan Drug legislation usually give new drug developers a monopolistic market to exploit.

Market target clearly defined
Biotech companies selling drugs have access to markets that are clearly defined by physicians and by patient registers in hospitals. The demand structure is therefore highly predictable, which is rare in other sectors where markets need to be created.

Revenue stability
Unlike other markets, drug sales are stable on not subject to sudden loss of consumer appetite.

Managing risk in healthcare start-ups

Venture capital investors focus on risk and how they can decrease it. They want to make sure the entrepreneur knows about the risks ahead, and how is he planning to cope with them should he need to. Some entrepreneurs are not willing to talk about those risks, as they think maybe the investor will factor them and therefore the start-up will receive a lower valuation… Right?

Wrong. Well, if the investor does not hear about the risks, he will quantify them himself pretty ruthlessly, usually with a bigger impact on the valuation. The message you want to send to the investor is that risks are under control, and you are ready to face them. It is therefore useful to include in the presentation:

• What are the risks?
• When are the deciding events going to occur?
• What are the chances of those events occurring?
• What is the upside versus the downside of the event?
• How can you prevent them?
• How much does it cost to prevent them?

Risk in healthcare has five dimensions:

Operational risk
Can the people in the company deliver? Do they have the skills and the energy to execute the business plan? Is there a clear path to market?

Technological risk
What if the technology does not show itself as feasible? What if our product does not work as expected, or a competitor introduces a better product on the market, with superior technology?

Intellectual property risk
Healthcare relies heavily on intellectual property. The nature and size of the investments required for many start-ups, specially those related to life sciences or medical devices, needs some sort of market protection. The risk of not receiving a patent is therefore an important issue.

Regulatory risk
What if the different administrations don’t approve the market launch of our products?

Financing risk
What if at some point in the progression of the start-up the entrepreneurs cannot find more capital needed to grow, and the present investors don’t want to throw more money at it? Will the company need several rounds of financing? Is it possible to stretch the lifetime of the current capital by taking the burn-rate down?
(*burn-rate is the speed at which the start-up consumes its money, If the shareholder capital is exhausted, the company will either have to find additional funding or close down)

Reward success and tolerate failure

Innovation has become synonymous with survival in the current healthcare environment. Hospitals, however, tend to be conservative, hierarchical, conforming and risk-averse. And they don’t reward innovative physicians.

To innovate, there’s always a risk. For physicians or healthcare professionals to assume the necessary risks of innovation, they must have some confidence that their hospital will reward success and tolerate failure. I don’t see that very often in our healthcare ecosystem. A climate of trust is so much better than a climate of punishment. The carrot is so much better than the stick.

Innovation, for hospitals, means economic survival. Market pressure from the administration, patients and the rest of the healthcare value chain induces hospitals to (a) try to be perceived as better than their competitors and (b) to reduce health-care costs through efficiencies. Today’s best hospitals are the ones that have been very active at innovation, and this trend will continue in the future, as innovation will be the most important differentiator among hospitals. Excellence will no longer be enough.

So, yes, innovation provides competitive advantage, and failure to innovate will be very dangerous in the XXIst century. What’s the first step? What’s the single most important thing to foster innovation at a hospital? Develop a climate of trust.

Milestones

I had a very nice discussion today in a board of a company that is looking forward to raising venture capital. We were talking about milestones, specific goals and tasks that the start-up was willing to accomplish in order to succeed.

The milestones slide is usually one of the most difficult slides to define when preparing a VC presentation. Venture capital investments are usually "staged." A certain amount of money is invested right away and additional money is invested later, as certain milestones are reached. From the company's perspective, it's important that these milestones are clearly defined and reasonably obtainable.

Investors love to see different things in the milestones slide. For me (I love simplicity, maybe different investors would think different ways of structuring this slide), a milestones slide should try simply to structure the future of the company into two or three stages, and define for each stage three things:

• What is the company going to do (where is the company going to spend money)
• How much will it cost (and therefore, when does the company need the money and how much is it for every stage)
• What would be the end result of it (goals accomplished, providing a good framework to evaluate the progression of the start-up)

It is as simple as that, but it takes a lot of perspective, clarity of goals and commitment from the start-up, as it establishes compromises that will be probably linked to the investment.