Believe it or not, healthcare startups are pretty hard to find.
True, a search in the Google Play store or the Apple Store will yield plenty of health-related apps, from sleep trackers to Google Fit. Along the same lines, e-retailers stock a host of health-related products, such as Fitbits, Apple Watches, and other wearable devices that can measure your glucose, your heartrate, and your cholesterol.
But notice that all of these products, whether they’re apps, physical devices, or a combination of both, are all in the consumer health field. Few, if any of them, go deeper into more specialized healthcare fields, such as pharmaceuticals, or health forecasting.
The obstacles facing specialized healthcare and pharma startups
There are reasons for the lack of small, high-growth startups in healthcare and pharmaceuticals: a fragmented market, regulatory hurdles, and a high level of infrastructure is necessary.
If you are a startup that wishes to break into pharmaceuticals and healthcare, understand that there are a host of regulatory bodies that vary from country to country. Their names and exact laws may be different, but each share the same purposes: to ensure the safety, quality, and efficacy of medicine and medical devices, and to ensure compliance.
Case Study: 23 and Me
While these agencies are a necessary part of the societal fabric, at times, they do end up impeding innovation. For instance, take 23 and Me, one of the hottest startups (and a rare unicorn valued at $1 billion in its Series D funding). Built on the premise of genetic sequencing, 23 and Me offered a tantalizing vision of the future: imagine sequencing a diverse array of genomes from simple cheek swabs–unwinding a whole story from a few milliliters of saliva. This information that could then be used to develop cutting-edge medicines and health products in addition to the traditional standby of selling customers information on ancestry.
However, in 2013, the FDA, which banned 23 and Me from selling health-related genetic tests directly to consumers. Among the FDA’s concerns were faulty interpretations of test results (which could lead to unnecessary treatments and expenses), as well as the risks that arose from selling to customers rather than doctors.
When the FDA ban was partially lifted in 2015, 23 and Me returned to genome sequencing in a more limited capacity, developing tests for specific genetic conditions such as Bloom syndrome. But this was not to last: in October of this year, 23 and Me announced that it was abandoning its signature genetic testing tech, likely a victim of complicated regulatory obstacles, despite (unconvincing) statements to the contrary by CEO Anne Wojcicki.
Complexity: a high level of infrastructure is necessary
This brings us to our next obstacle: complexity. Because of the scale and difficulty of the drug development life cycle, which averages 12 years for a drug to from research laboratory to consumer, innovation and creation is a fraught, arduous endeavor.
In a McKinsey report on the emerging challenges of pharma, the cost of building a large-scale biotech manufacturing facility ranges from $200-500 million, with a build time of approximately 4-5 years. This high cost is understandable: one aspirin molecule alone consists of 21 atoms, while a single molecule of a biopharmaceutical can consist of anywhere from 2,000 to 5,000 atoms.
Further, since drugs cost an average of $2.5 billion during their development life cycle, big pharma companies are often the only ones who can foot such massive costs. While advances such as 3D printers have the potential to revolutionize the industry (such as the FDA-approved Spritam, a 3D printed drug from Aprecia Pharmaceuticals), the technology is still in its infancy. True, esteemed institutions like MIT have developed 3D printers that can print both liquids and solids, but this technology has many years to go before it can find a place on the assembly line, rather than an enthusiast’s home or lab.
A Fragmented Market
The last, and perhaps largest, obstacle to pharmaceutical startups is a fragmented market. The reasons for this are complex, but the main factors are lower profit margins brought on by an increasingly fragmented, globalized market with plenty of players. In 1989, there were 84 biotech, life-sciences, and Big Pharma companies; by 2010, that number had risen to 192 organizations.
But a fragmented market has serious implications for companies and consumers alike: big pharma corporations are spending more money on marketing and advertising than on research and development. In 2013, Johnson and Johnson spent $17.5 billion on sales and only $8.2 billion on R&D, a ratio of nearly 2 to 1.
A new way forward
Yet big pharmaceutical companies aren’t going anywhere just yet. For all their weaknesses, they still have some key advantages over startups, notably size, experience, and machinery.
Towards that end, a new trend has emerged: startups drive innovation and creation, after which they sell their ideas and patents to larger pharmaceutical companies to produce, market, and sell. For instance, approximately 64% of the new drugs approved in 2015 were developed by smaller companies, funded by venture capital, government-backed initiatives, and incubators.
But another part of this boom is being driven by the exodus of talented researchers and scientists from more established pharmaceutical companies. From 2000-2011, the pharma industry cut nearly 297,650 jobs, a result of mergers, contracting profits, and recession. Many laid-off scientists have made their way to startups, further cementing the role of small biotech firms as the market leaders in research and invention.
In fact, McKinsey speculates that pharma may be headed towards a decentralized model along the lines of the auto industry, which relies on many component manufacturers and designers rather than creating everything in-house (vertical integration).
Clearly, biotech firms inhabit a confusing and volatile, but dynamic space in the pharmaceutical industry: beset by regulations, a fragmented market, and very real entry barriers, biotech startups have nonetheless managed to carve out a niche for themselves. In the next installment, we’ll take a look at the intersection of pharmaceuticals, technology, and healthcare, as well as some exciting developments.
Author’s Note: This article was originally published on LinkedIn Pulse on Dec. 8, 2016.