Healthonomics

A new generation of healthcare services is on its way

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Tue, 18 Nov 2008 08:57:00 +0000

The full-service, general hospital is evolving to a new conception. The growing clinical complexity, the need of performance transparency to evaluate quality, the rising costs and the increasing competition are questioning the old paradigm that any hospital could excel across a broad spectrum of clinical service lines.

Most private hospitals have nowadays shrinking profit margins, and they are focusing on analyzing cost-accounting data to determine the profitability of patients and the different procedures they offer. This analysis is uncovering very profitable margins in certain activities, while pointing at other activities that are a clear loss to the center.

This is why new healthcare services, including specialty hospitals and outpatient centers with low-cost structures, limited complexity, and focused, high-quality service are emerging. Competitors like these are raising the performance bar for general acute-care hospitals.

Well, the old paradigm says “all volume is good volume”… and this is clearly nonsense from an economical point of view. When a hospital understands where its true profitability and expertise lies, it can be focused to generate value while cross-selling other hospital services to current patients.

Of course, there will always be procedures that are necessary while being not profitable, so, some procedures should continue operating at some level to help hospitals meet basic community needs and cover fixed costs. But my point is, in the private space we will see more and more specialization to achieve better efficiency. A new generation of healthcare services is on its way.

Philantropy and VC

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Thu, 13 Nov 2008 08:16:00 +0000

(click on the image to make it bigger)

Philantropy plays an increasingly important role in promoting innovation in healthcare. Every year larger quantities of money are invested in philantropic projects around healthcare, usually in projets needing large amounts of cash.

These philantropic contributions generate as a byproduct numerous innovations and smaller projects, that finally end up generating spin-offs and new start-ups. Venture capital invests in some of them and they eventually become large companies operating in the healthcare space.

So, the value chain is clear, but there's still one extra step that could "close" the circle... can philantropy become an investor in VC funds?

I've always said that social entrepreneurship should not generate causes, but real businesses, because that's precisely the way to help society, by generating value and growing while having a "doing good" mindset deeply engrained into the start-up values.

We will see more going on in this space.

94%

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Tue, 04 Nov 2008 08:33:00 +0000

Just a very quick thought today...

94% of life sciences companies (biotech, diagnostics, medical devices) start in hospitals or academia... So, no "garages" in healthcare entrepreneurship.

When will hospital managers realise the immense potential they have inside their institutions?

From IP to IPO

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Wed, 29 Oct 2008 10:10:00 +0000

Now and then, you find someone that completely changes how you think about an issue... well, that happened a few days ago, in a lecture given by Ophir Shahaf (CEO Hadasit Bio-Holdings ). Ophir manages a portfolio of innovative ideas arising in a big medical center in Israel.

To make it short, they built a company to invest in those healthcare ideas from within their hospital and in doing so, they essentially took their portfolio public (the IPO was succesful...).

So... more IPOs coming in the next years trying to raise funds for innovative hospitals?

Amazing.

Die fast!

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Wed, 22 Oct 2008 08:39:00 +0000

I just had a meeting with Luis Ruiz (CEO, Advancell, a biotech company), and he shared with me a very interesting concept... Luis is an expert at adding value to early-stage biotech projects, and while discussing several opportunities ahead, he mentioned he wanted to be involved in projects where

(a) if the project is going to fail, he knows it will fail fast (die fast), meaning he wants always to concentrate all the problems ahead in the initial phase

(b) if execution cost is small (both in time and in money), exploring should be really a no brainer

(c) all biotech projects have a critical path, with several identified "killing" points. Usually solving those key points is cheap, and if you are able to do so, the risk of the project is considerably reduced.

I found these thoughts really worth sharing.

Evaluating a medical device opportunity

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Fri, 17 Oct 2008 09:13:00 +0000

When evaluating an opportunity in the medical devices sector, it is always iteresting to focus on how the product fits with the fundamental economic drivers of the health care system. Investors usually assume anything you are telling them about the product is fine (subject obviously to a later thorough due dilligence), but they want to see the medical device from the business side of health care and work their way back to its science and technology.

The important questions here are:

(1) Does the product improve clinical quality—or at least deliver equivalent outcomes in a less costly and better way?

(2) Does the product more than offset its cost through reduced overall health care expense to the system, such as reducing costly side effects or replacing or eliminating other expensive procedures?

(3) Does the product offer clinical and/or financial advantages for patients, payers, and providers alike? (see my previous post on healthcare value chain)

If an investor can answer yes to these questions, they will want to learn more. But if they cannot understand how the technology will improve quality, reduce costs, and align the incentives of key players in the health care system, you are probably "dead".

Healthcare services value chain

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Sun, 05 Oct 2008 10:25:00 +0000

(click to make it larger,

adapted from Porter)

This is a useful diagram to show how value is generated in a healthcare service... This concept was created by Michael Porter, and I find it extremely useful to evaluate healthcare opportunities in the services sector.

Coachability, strange concept...

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Mon, 29 Sep 2008 06:10:00 +0000

Excellent presentation from David Rose on pitching a VC... all the issues that matter in a 15 minutes lecture, I think it is worth watching.

The ten things a VC will be looking at when deciding whether to invest in you or not:

Integrity + Passion + Experience + Knowledge + Skill + Leadership + Commitment + Vision + Realism + Coachability = selling youself

In my experience, the most difficult thing to understand for entrepreneurs is the last one, coachability, meaning a VC wants to invest in people that excels in "listening", in using somebody else's experience...

Watch it here.

Why us???

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Thu, 25 Sep 2008 06:04:00 +0000

Real life, one week ago, the last question at a venture capital presentation... the entrepreneurs wrapping up, everything went well, but then one partner asks "yes... but why us?"... Fire at will.

This is one of the most important questions to prepare if you are looking forward to receiving venture capital money. Investors want to add value, "smart money"...

If you are willing to raise money, you should know about other companies invested by the VC... are they aligned with your goals as well? Can you find hidden synergies to explore?

You should always have a clear picture of what else this particular investor could add to the initiative besides money.

Cost structure

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Tue, 23 Sep 2008 13:26:00 +0000

(click to make it larger)

Most healthcare professionals are not aware of the nature of the different types of costs involved in launching a healthcare start-up. This is something of great importance, let's see why. This is the first of a couple of posts that I'm willing to write about this important matter. Let's start by understanding the different types of costs, using a "hospital" as an example to make it more understandable...

Let's imagine a hospital that has many departments (neurosurgery, cardiology, radiology, legal, human resources...), and each department provides many services (coronary bypass, pacemaker implant, heart transplant). Let´s have a look at the structure of costs in one of these departments (see two by two matrix):

(1) Variable Direct costs: All costs that can be specifically traced to the service given, and change in strict proportionality with the volume. An example could be materials used in a neurosurgical procedure (sutures, gowns, antibiotics...).

(2) Variable Indirect costs: Costs that cannot be traced to a single activity but are variable in nature, that is, they do vary with volume. For example, electricity: I know that if I give more services I will spend more, but I cannot measure it (if I were able to measure it, it would be a variable direct cost). Another example: the need of maintaining a health records department for the whole hospital is obvious, and every department uses it. The medical records personnel salary would also be a variable indirect cost.

(3) Fixed Direct Costs: All costs that can be specifically traced to the service given, but do not vary at all with volume. An example could be the neurosurgical navigator (a computer) in the operating room.

(4) Fixed Indirect costs: Costs that cannot be traced directly to a single activity, and do not vary with volume, such as the salary of medical director of the hospital.

More on this in my next post.

Refining healthcare business models

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Wed, 17 Sep 2008 07:06:00 +0000

Nice discussion yesterday with an entrepreneur trying to help him to improve the "contribution" of every client to his healthcare start-up. I am not at liberty of discussing the details of the business, but let's say it is a retail healthcare initiative where we try to sell a product for 100€ and then we charge a 25€ monthly fee to every user. To produce the product has a cost for us of 25€.

The question here (and in every healthcare initiative) is "where is the money"?

In the sale of the product?
In the recurrent revenues month after month?
In services that we may sell in the future to this customers?

Business model #1: Sell at 100€ and charge 25€ monthly fee. Well, it certainly would work, but the price 100€ would obvioulsy detract some customers into buying, so we would have let's say a demand of 1000 customers. According to this, total value the first year would be:

(100-25)€*1.000 customers + 25€*12months*1.000 customers = 375.000€

Business model #2: What if we gave away products for free, focusing on generating revenues from monthly fees? We would sell at 0€ (with a loss of 25€) and then we would charge again 25€ per month. Giving away something for free usually generates more demand, let's say for the sake of the argument that with this new "free" strategy we sell 5.000 products instead of 1.000. Total value the first year would be:

(-25€)*5.000 customers + 25€*12months*5.000 cusotmers = 1.375.000€

So, yes, giving away the product for free is more interesting than charging 100€ for it. The question here is are we sure that we will get a demand of 5.000 if we give the product for free? If the answer is yes, then the decission is a no-brainer... give it for free!

Besides that, achieving a larger customer base is usually strategically more interesting because you may sell in the future more services to a larger community of customers, increasing therefore even more the revenues.

The point of this post is that business models depend at the end of the day on a bottomline, on a number... The more value we can get from any customer while having him/her happy, the better, so you need to fine-tune very carefully your business model in order to accomplish that.

Price wars coming to healthcare?

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Fri, 12 Sep 2008 10:06:00 +0000

Any economic crisis forces competitors to fight harder for a reduced demand, and healthcare is no exception. Competition on price is one of the options available to try to attract new customers and retain old ones.

For instance, it seems like 23andme has started a price war in retail genomics. They have just slashed the price on their personal DNA test from $999 to $399 (some would say it is quite a "significant" price drop, don't you think?).

According to 23andMe, this price drop has nothing to do with our present economic situation, and they claim that next-generation DNA analysis chips have made the process of scanning a person's genes significantly cheaper. By cutting the price of its service, the company hopes to increase demand and hasten the day when a full genetic screening becomes routine medical practice... or so they say. Well, you can read between the lines if you look deep enough, I guess.

For those interested in retail genomics, here's my personal list of the companies competing in this space (probably there are some more outside my "radar" ...):

23andMe
Acu-Gen Biolab, Inc
Consumer Genetics
Cygene Direct
DAT Direct
deCODEme
Dermagenetics
DirectLabs
DNA Direct
Genelex
Graceful Earth
Health Tests Direct
HealthCheckUSA
Holistic Heal
LabSafe
MedLabUSA
MyMedLab
Mygenome.com
Navigenics
Personalized Lab Services
Private MD Labs
Quixtar
ResultsDirect
Salugen
Sciona
Suracell

How much is your idea worth?

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Tue, 09 Sep 2008 14:48:00 +0000

(click on the image to make it bigger!)

Today I am sharing a case that I wrote for an MBA lecture on healthcare venture capital investing. It is a one pager, and it shows four interesting companies while "forcing" the investor to choose one and only one. It tries to bring the elements you need to think about when valuing opportunities in the healthcare sector (team, market size, path to market, product, competitive advantage, intellectual protection...). It belongs to a 20 microcase series (I call them "microcases" because they are all one pagers, easy to read...).

I decided to share this particular one because it usually generates fantastic discussions in class, and now it has become my favourite case for teaching entrepreneurship (!!!). As in real life, there is no right answer to the question about which company would you pick as your preferred investment, your rationale in picking one or the other is what matters.

As you know, an idea is worth nothing... if you execute your idea, it can be worth a lot, but its value therefore depends on its execution.

Hope you like the case, enjoy!

(Note: I uploaded the pdf file to scribd for those of you interested, here's the link)

Technology inflation???

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Fri, 05 Sep 2008 07:38:00 +0000

I meet entrepreneurs with new healthcare ideas every day, and I’m happy to say that both the quality and the quantity of the ideas has improved very consistently in the last couple of years.

However, in the last months I can’t help having the impression that maybe we are under some sort of technology “bubble”, with lots of new medical devices that just improve “a little bit” what the previous one was doing… Improvement is fine, but we have the risk of adding more and more “qualities” to a product that the market does not need. Cost benefit analysis is always important in a cost constrained healthcare.

In other words, disruptive innovation is always… well, disruptive… brings new things to the marketplace that are needed, and therefore is always welcome. But incremental innovation may be entering sometimes a spiral of inflation, meaning we develop and invest in more and more things that really don’t add critical value to healthcare (while contributing to skyrocketing costs…).

Just a thought.

Trends, trends, trends...

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Wed, 03 Sep 2008 05:39:00 +0000

(Click on the image to make it bigger!)

We have been anticipating year 2009 as the biggest year in biotech and medical devices investments, both in the US and in Europe. Here's the last data from pwcmoneytree.

Number one investment in last quarter... biotech
Number three investment in last quarter... medical devices.

If we combine both areas (into life sciences), we would literally "fly" outside the slide...

As we said, the trend is here to stay for a while, now is the time for life sciences...

To have skin in the game...

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Mon, 01 Sep 2008 16:23:00 +0000

Back to work. How important is it to invest your own money into your start-up?

Well, there are no fixed rules about this issue, but most of the VC firms will ask entrepreneurs to invest some money into their project. Why? To show commitment, to demonstrate they believe in what they are doing...

There is a saying for this: "to have skin in the game". Having skin in the game, that is, having something to lose if things go down the drain is important, because it aligns very clearly the entrepreneur's goals with the investor's goals.

To have skin in the game is not necessarily related to money... if the investor perceives that this start-up is your plan B, for instance, you are dead, you won't have the money.

Or else if they perceive you have a plan B and you may leave the boat before success and you are not risking anything with the project, they won't see either the alignment they need to see in order to invest.

So, it is important to have this in mind... Just a quick reminder for all entrepreneurs!

Healthcare investments set an all time record for VC investing in 2007!

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Wed, 25 Jun 2008 13:46:00 +0000

Venture capital firms are investing heavily in the healthcare sector. Life sciences (biotechnology and medical device industries) and healthcare services are a trendy investment nowadays… and we have been anticipating the trend for quite a while now, I’m so happy to say so!

Last year was by far the biggest year in health-care venture history, according to the MoneyTree Report. The medical devices and health-care services and information technology sectors have generated an intense deal flow in the past six months here, at the Barcelona Medical Association. From one idea per week last year, we’ve moved to more than one idea per day.

An aging population that refuses to give up its active lifestyle, coupled with evolving medical technologies, are fueling those health-care deals.

Here in Europe, at last, we are seeing new capital being raised by dedicated health-care funds, or even diversified funds with a strong health-care focus. About time!

Moving from academic research to entrepreneurship

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Sun, 15 Jun 2008 08:44:00 +0000

There is always some tension between academic research, applied research and entrepreneurship. While academic research is primarily driven by curiosity, applied research and entrepreneurship need to solve a real world problem. Scientists working in healthcare (and I guess this could apply to any field) have an extraordinary desire to test things, curiosity is what at the end of the day makes them go to the lab on a Sunday afternoon just to see if an experiment has proved them right or wrong (where else would someone go to work on a Sunday afternoon?). This is obviously great, and it is a fantastic driver of science, but to help people, ideas need to move to the real world and get to the marketplace, and therefore they need to be able to solve problems.

Basic research pursues an increase in knowledge. More and more knowledge is again the driver of scientists. But this knowledge needs to be protected in order to get to the marketplace, and (whether we like it or not) this is done through IP protection, through patents (see my previous post patents are so XXth century).

And finally, scientists are eager to publish things, to show their accomplishments, to get respected in their academic world. The system rewards or punishes them depending on the impact and number of publications in prestigious journals. Again, this is not good or bad, it just reflects how science is structured, but scientists working in healthcare should be aware that publishing is not the ultimate goal, but commercializing whatever they are working on to help patients and society.

By solving this tension between the two worlds, we will innovate faster and better.

From idea to opportunity

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Wed, 11 Jun 2008 13:27:00 +0000

A lot of good ideas are, well, good ideas, but not opportunities. I went yesterday to an international event about technology transfer hosted by ACC10-COPCA-CIDEM, excellent event by the way, and someone from the Massachusetts Institute of Technology (M.I.T) really described the process of identifying opportunities in a very appealing manner. He recommended entrepreneurs to ask themselves four questions:

(1) Who needs this and why?

(2) What attributes are important? (meaning, how should the product or service that I am willing to bring to the marketplace be to become really useful?)

(3) What are the economics?

(4) What will investors need to see in order to get interested?

These four questions can probably be answered in one hour if the entrepreneur really knows what he/she wants to do, and the answers are crucial to define the magnitude of the opportunity.

Keiretsu

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Sun, 08 Jun 2008 13:24:00 +0000

The japanese word Keiretsu defines a set of companies with interlocking business relationships and shareholdings. It is a type of business group.

Keiretsu Forum is the world’s largest angel investor network with 750 accredited investor members throughout sixteen chapters on three continents. Since Keiretsu Forum’s founding in 2000, its members have invested over $180m in 200 companies in technology, consumer products, healthcare/life sciences, real estate and other segments with high growth potential. Forum members collaborate in the due diligence, but make individual investment decisions, with rounds in the range of $250k-$2m.

Its Barcelona chapter just opened some months ago. I’ve been following it since then, because it represents a very interesting alternative for raising money for very early stage start-ups looking for a small quantity of money. I’ve participated in all their meetings so far, and I must say I am deeply impressed by their professionality. Interesting companies, interesting opportunities.

Well, two months ago, while advising a very promising team of entrepreneurs willing to bring a new medical device to the marketplace, I suggested them we should present their company to Keiretsu. And we did.

Everything went OK, and after the general presentation, and some “face to face” meetings with investors, last week I received confirmation from the entrepreneurs they finally raised €500.000 with a very competitive pre-money valuation and a very interesting deal structure.

So, yes, the Barcelona Keiretsu forum is here to stay! Congratulations Keiretsu Barcelona for your second “completed” investment, and congratulations Health Solutions for a well managed fund-raising opportunity.

Healthcare 2.0: hype or reality?

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Sun, 01 Jun 2008 20:22:00 +0000

Tomorrow I’m giving a lecture on Healthcare 2.0, trends that will drive the future of our healthcare system. While preparing my slides, it came to my mind that the Internet will end up by rationalizing, and making transparent all of those forces that have contributed to the current health care market failure.

Health 2.0 will be a game changer, wikis, mash-ups, videos, bloggers, and assemblers of user-generated data – all designed to connect health care consumers, providers, and players in a seamless web of data and ideas.

Health 2.0 will provide simple applications allowing the use of information at the site of care by end-users, that is patients and doctors and everybody else connected to health care. A winning combination of evidence-based information, sophisticated algorithms, centralized data repositories, and user-generated data will hold health 2.0 together

Websites such as Sermo or patients like me are gaining speed at attracting physicians and patients. Other European initiatives, such as esanum are coming to the marketplace as well.

Drivers of competition among healthcare services

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Fri, 23 May 2008 10:08:00 +0000

To be attractive to a venture capital investor, a healthcare service company should fulfil a compelling need with a novel service model (i.e. meeting an existing market need in a new way). It needs to have convincing strategies for customer adoption and sustainable business models that offer significant value to physicians, hospitals, patients, suppliers, or payers.

We have been seeing quite a lot of healthcare services in the last months, and after long discussions with all entrepreneurs, it came to my mind that the three issues that usually draw all the attention are demand, operative margin and the capital intensiveness of the investment at hand.

The more “proved” demand is, the better. Some healthcare services are willing to bring a new service to the marketplace, and sometimes demand is highly controversial, particularly in Europe, where citizens are used to have healthcare for free (obviously, this is not true, we don’t have our healthcare for free, we pay taxes for it, but somewhat 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). Any pilot test to prove demand right is highly appreciated by investors.

Operating margin is a very important issue as well. It is important to see if the business model wants to make a lot of money from a few users, or a few money from a lot of users. As demand is uncertain, a high operating margin model is usually pursued.

Finally, the capital intensiveness of the project is critical, especially if the money needs to be allocated to marketing or brand generation. In case of failure, this "marketing" money has no salvage value, it cannot be recovered easily (it is not invested in something tangible, that could be sold by “pieces”) so it usually scares investors away.

Value for physicians (I)

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Sun, 18 May 2008 13:33:00 +0000

Physicians and investors have a very different view on value. Physicians tend to focus only on the product (they love to talk about it, to share it with others), and therefore they are concerned about product-related milestones, such as prototyping, patent request or administration approval (FDA/European approval).

(see next post as well)

... and value for investors (II)

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Sun, 18 May 2008 13:26:00 +0000

(see previous post as well)

Investors on the other hand, think in a more complex way. They are not really interested on the product, they are more interested in all the milestones needed to take it to the marketplace, and capture value. They focus on team building, distribution, manufacturing, market introduction and potential exit milestones. Both parties speak different languages.

The best projects flourish when both sides learn from each other and speak a common language.

Knowledge is slower than innovation

noreply@blogger.com (Luis Pareras M.D., Ph.D.) — Thu, 15 May 2008 21:07:00 +0000

Imaging technologies are nowadays so good at peering inside our bodies they may have surpassed our capacity to interpret the results. Many findings are today what we doctors call “incidentalomas”, that is, false positives; for instance, images that look like cancer but after surgery turn out to be benign. We see “smaller things”, and smaller, and smaller, but we are unable to correlate them so quickly to what is normal and what is not. This should be a concern for healthcare professionals.

The same happens with biotech and diagnostics. The new detection techniques such as proteomics have made great progress in associating particular biomarkers to certain diseases, but we still don’t know how often those same markers turn up in non-diseases outcomes. Knowledge moves forward significantly slower than technology.