Contributors: Wren Keber and Lisa Soroka
To learn more about Wren and Lisa, click here.
Source: Bigstock |
Introduction
In this fourth installment of our series on healthcare disruptors, we focus on the intersection of research, science, and clinical practice. We discuss medical devices, pharmaceuticals, and other life sciences because of the impactful positions in the healthcare ecosystem and exponential growth in all these sectors. Disruptors specific to these sectors rely on a diverse network of pathways that allow innovations to first be born from research and then invested in for commercialization. Throughout this article, we contrast and compare startup disruptors with large established life sciences firms (e.g., biopharma, biotech, biomedical, etc.) as they share some of the same facets of their business models; therefore, facing some of the same opportunities and threats. We start with external factors and conclude with some keys to success to consider.
External Factors
In the current environment, a wide range of investments being made in startups (often disruptors) are now facing many evolving external factors. These include changing priorities within Health and Human Services Administration (HHS) and Centers for Medicare and Medicaid Services (CMS) that could impact funding for development activities on a moment’s notice, as well as ensuring sufficient reimbursement levels critical for long-term sustainability in the market. These unpredictable factors influence the reliability of future-focused business plans. Disruptors may face increasing pressure from stakeholders (such as investors and potential customers) during and after both funding and development phases. We look at each of these here:
General Threats to Research and Innovation Due to Funding Cuts
The historical course of development often included external funding from third parties; a mix of government-funded (the predominant source) and/or sponsored research, coupled with private investment, to reach commercialization. Large companies would (and still do) invest in their own research and development activities, whereas disruptors braid together various funding sources to be able to bring a disruptive innovation to market. In recent times, anticipated or actual reductions in government funding for research pose a great risk to initial stages of a disruptor’s path to connecting innovation with commercially viable offerings because of the dependence upon the success of early-stage research (i.e., bench research). Promising results in early development may not be realized (and therefore may not attract investors if grants are cancelled or not awarded at that stage), potentially resulting in disrupting the progress and forcing the research to end altogether. Large and/or more established private firms may be able to react to this impact and cost-shift across a diverse range of offerings/products, whereas a disruptor often brings a single or limited number of offerings forward and therefore may be more vulnerable to upheaval pre-commercialization.
Healthcare Reimbursement
Once commercialized and sold into the healthcare delivery market, disruptors rely on reimbursement for medical services to pay for and sustain the product. Reimbursement in the U.S. continues to face downward pressure from all parties on the payor side. For those products that are separately reimbursable (e.g., pharmaceuticals), any threat to coverage or reimbursement levels can destroy demand. As an example, GLP-1 class drugs have been prescribed and dispensed with favorable reimbursement by many payors (including Medicare) – generally for all indications, including other than weight loss. Recently, CMS has disallowed coverage for off-label indications for GLP-1s for Medicare recipients. Therefore, patients who were being treated medically for an obesity diagnosis now need to cover their own drug costs, which we believe will lead to significant decreased demand. In some cases, it has also led to a utilization drop off after a few months of treatment. Commercial payors are following this lead by using primary diagnoses to deny coverage. Other classes of drugs face similar pressures. For others, such as wearables or tools used in procedures (e.g., robotics and remote glucose monitoring) the same issue will apply.
Pressures from Investors and Third Parties
Investors and other financial third parties play a crucial role in the lifecycle of healthcare disruptors, because they can often provide the necessary capital to bring innovative solutions to market. However, their expectations and demands can exert significant pressure on these companies even during normal times – not to mention in times of uncertainty like today. Some key factors investors typically consider can include:
- Return on Investment (ROI): Investors are primarily focused on potential financial returns. They look for disruptors with scalable business models and ability to generate sustained margin over time. This often means that startups must demonstrate a clear path to commercialization and profitability.
- Market Potential: The size and growth potential of the target market are critical success factors. Investors favor disruptors who address large, unmet needs in the healthcare sector. However, the current environment may unpredictably and negatively change demand for innovations in traditional growth areas such as chronic disease management, telehealth, and personalized medicine, due to the external factors already described above.
- Regulatory Pathway: Navigating the regulatory landscape is a significant concern. Investors typically prefer companies with a well-defined strategy for obtaining necessary approvals from bodies like the FDA. A clear regulatory pathway reduces uncertainty and accelerates time-to-market. Given the external factors we discussed earlier, investors in certain segments of life sciences may not feel confident that approvals can be attained timely, or even at all.
- Management Team: The experience and expertise of the disruptor’s management team are crucial for success. Investors look for leadership and management teams with a proven track record in the healthcare industry capable of executing the business plan and adapting to challenges. If the work of the original/founding team is interrupted due to external factors, this reduces the attractiveness of the disruptor overall (e.g., if a founder leaves due to an external factor.)
- Risk Mitigation: Investors are wary of risks associated with healthcare innovations, including regulatory hurdles, market adoption, and technological feasibility. Disruptors seeking external partners must present a comprehensive risk management plan to anticipate and address these concerns. In fact, they may need to get through this period of uncertainty before a reasonable risk mitigation plan can be adopted.
Keys for Success
There are a few ways to still navigate toward success as a life sciences disruptor in uncertain times. A few potential keys for success could include:
- For organizations currently aligned with funders, partnering more closely to increase any investment and/or involvement that offsets the drop in funding that may have been cut or reduced from the public sector. These kinds of tactics are often coupled with a stronger business case, except with philanthropic funding sources. Consider some ways to mitigate the uncertainty we have outlined in this article as part of a recast business case.
- External pressure on reimbursement from payors such as Medicare can be offset in the market by buyers realizing efficiencies or transformations in other parts of the delivery system. For example, as reimbursement drops for office-based procedures as contemplated by the current Medicare Provider Fee Schedule (MPFS), a disruptor selling to office-based providers must highlight any cost savings and/or efficiencies their product offers.
- Pressures from investors and third parties may be addressed in a few ways. First, pushing for alignment across investor portfolios may result in economies of scale to address external threats. Consider agreeing to consolidate administrative services (e.g., Human Resources, Information Technology, etc.). Consolidating services may produce savings without negatively impacting the costs associated with commercialization of the innovation itself, as those savings accrue to the investor and allow continued focus on getting products to market.
Conclusion
In conclusion, we have covered how disruptors are individuals and/or organizations aiming to transform parts of the healthcare ecosystem through some transformation and/or innovation.
In our next article, we will focus on healthcare payment systems and how disruptors in that space are focused on changing the status quo of medical/healthcare economics in general and reimbursement.
Contact Wren at: [email protected]
Contact Lisa at: [email protected]