Diligencing Healthcare Companies, Part V: Understanding Healthcare Verticals

Introduction:

We spent the last 4 weeks covering how we at The Healthcare Syndicate evaluate early stage healthcare companies for investment. While we wrote general diligence advice that can be applied to most healthcare companies, the trillion dollar healthcare market is made up of several subcategories, each with their own specificities that make their businesses tick. Understanding these nuances will help you further understand whether the startup has a shot at success.

So what are the different healthcare categories, and what are the keys to success?

Medical Devices

What are they?

Medical devices are instruments, machines, implants, or software intended to diagnose, prevent, monitor, treat, or alleviate health conditions.

Examples range from the simplest tongue depressor (you might know it as a popsicle stick), to the complex pacemaker to treat arrhythmia.

Keys to success: Strong distributor relationship

Physical products need to be put into the hands of users, and in healthcare there are parties (broadly named distributors) that control whether a product gets into the hand of users. Making sure the needs of these distributors are met is critical to the successful commercial launch. Some important groups to know are:

• Group Purchasing Organizations (GPO): GPOs negotiate bulk purchase agreements on behalf of multiple healthcare facilities to obtain volume discounts and streamline procurement processes. GPOs are likely to adopt a new medical device if it offers cost savings, improved clinical outcomes, or both, aligning with their goal to enhance value for their member organizations.

• Value Analysis Committee (VAC): VACs are a multidisciplinary team within a healthcare institution that evaluates and approves medical products based on their safety, efficacy, and cost-effectiveness to ensure prudent spending and high-quality patient care. VACs are likely to adopt a new medical device if it demonstrably enhances patient outcomes, offers a clear cost-benefit advantage, and aligns with the facility’s clinical protocols and priorities.

• Durable Medical Equipment (DME) Providers: DME providers supply medical equipment intended for long-term use in the home to support patient care, such as walkers, wheelchairs, and respiratory machines. DME providers are likely to adopt a new product if it features superior functionality, patient preference, ease of use, and reliability that can justify a higher reimbursement potential from insurance companies.

Diagnostics

What are they?

Diagnostics involve technologies and methods for determining the nature and cause of a health condition, often through in vitro tests on samples taken from the body.

Examples include continuous glucose monitors for diabetes management.

Keys to success: Integration into, and influence on clinical workflow

Although additional information about the patient’s disease state is always welcomed, success in diagnostics hinges on providing clinicians with actionable insights that significantly alter downstream treatment or disease management. Note the use of the word “significant”: Inertia is high in healthcare, and the clinical outcome needs to be large enough that stakeholders are motivated to add an extra diagnostic step in their clinical workflow.

Digital Health

What are they?

Digital health encompasses a broad range of technologies that use computing platforms, connectivity, software, and sensors for health care and related uses.

Examples include telehealth and patient monitoring platforms.

Keys to success: Engagement at scale

While Digital Health products can be thought of as a “virtual medical devices”, its intended effect typically isn’t apparent unless it is deployed at scale, unlike physical medical devices where individual outcomes can be easily measured. What we’ve frequently seen in this space is that digital health companies can easily get piloted to death if they don’t figure out how to get the organization the end user is a part of to distribute and champion the product on your behalf.

Healthcare IT

What are they?

Healthcare IT refers to the use of various information processing involving both computer hardware and software that deals with the storage, retrieval, sharing, and use of health care information, data, and knowledge for communication and decision making.

Examples include Electronic Health Records, AI scribes.

Keys to success: Integration and Interoperability

Healthcare digital infrastructure is archaic and complex, reflecting not just the slow uptake of technology in healthcare, but also uneven technology uptake and availability across different healthcare stakeholders. Even for healthcare payor/providers with robust IT infrastructure, upstart healthcare IT companies need to contend with large incumbents (Epic for EHR, Optum/Change Healthcare for payments), either through direct competition (which is always a tall task for startups), or integration with their systems to ensure data flow, which itself can be rife with challenges that have nothing to do with the startup’s core product, and everything to do with their customers’ IT capabilities.

Pharmaceuticals

What are they?

The pharmaceutical sector involves the research, development, production, and marketing of medications intended for use in medical diagnosis, treatment, or prevention of diseases.

Keys to success: Understanding Large pharma pipeline priorities.

Most healthcare startups exit via acquisition, and pharma companies are no exception. To paraphrase one of our LPs who works at an ALS therapy startup, “we serve as the R&D pipeline for large pharma companies”. Large pharma companies’ strengths are in commercialization and distribution, and look to startups who are more nimble and geared towards risk-taking to fill their product pipeline. Acquisition picks up especially when there is a hot sector they are trying to cash in on or a strategic initiative to bolster their existing portfolio.

Life Science Tools

What are they?

Life science tools encompass instruments, reagents, and technologies used in laboratories for research, diagnostics, and analysis of biological processes.

Examples include DNA sequencers and Mass Spectroscopy.

Keys to success: Partnerships with Academia and Industry

Similar to pharma companies, how well life science startups can aid the R&D pipelines of pharma companies to help them develop more drugs is critical, and having prior relationships is key to getting pilots set up and converting those pilots into paid contracts. In addition, partnering with leading KOLs or top tier academic institution can also aid in adoption by other research organizations that look up to the leaders in the field.

Conclusion:

While there are numerous sector-specific factors influencing the success and failure of healthcare startups, it is crucial to focus on the most significant drivers rather than attempting to address every possible question. Early stage startups are never perfect to begin with, but understanding and leveraging these distinct keys to success enables us to make informed investment decisions and support our startups in achieving their full potential in the healthcare market.

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