The Christmas season is always about waiting. The same is true in the current pandemic situation, in which the whole world is waiting for that certain vaccine to be developed. However, a biotech startup developing a medical vaccine must also deal with many other circumstances. In an online roundtable discussion, we spoke about the life cycles, different capital needs and product development methods of biotech and medtech companies with dr. Krisztián Szigeti, managing founder of Kinepict Health Kft.
The lean startup or blitzscaling method, popular among companies developing fast-growing technologies, cannot be directly applied when building companies carrying out medical technology development, meaning biotech and medtech startups. The reason for this is that even the first working prototype, or MVP, that medtech startups can develop at the fastest pace requires several years of research and development, which is significantly complicated by clinical trials and regulatory barriers, says dr. Attila Pintér, an investment law specialist.
Although parallels can be found between the development of biotech, medtech and pharma companies — collectively, life sciences companies — and classic tech startups, there are nevertheless key differences between them.
First of all, life sciences startups typically develop some kind of medical product or pharmaceutical product, which must undergo testing subject to strict requirements before entering the market. It follows from this that the initial capital required for testing life sciences startups is high, and may exceed by orders of magnitude the amount required to launch a tech business. In addition, in the absence of feedback from beta testers and early consumers, life sciences companies must also cope with repeated and new testing of pharmaceutical products. For biotech and pharma companies, this type of validation is particularly difficult due to the amount of data required by law.
Another major difference between the development of life sciences startups and tech startups is the staggered nature of the former’s revenue sources. According to dr. Krisztián Szigeti, early users, who are clinical researchers and innovators in their fields, often purchase the startup company’s products for their own scientific research or for occasional off-label use from research or grant funding. In the second stage, users often finance the purchase of the product from the funding available for the given clinical intervention, meaning that improved cost-effectiveness of care provides the basis for product procurement. Once comprehensive international clinical studies and recommendations are available for the clinical use of the product, as well as the appropriate health economics models, insurers may also accept the diagnostic or therapeutic method and, on this basis, reimburse users — who by then are usually no longer only early users — for purchasing the company’s product for clinics.
It may seem that an early-stage life sciences startup faces more difficulties in almost every respect than a classic tech startup. According to dr. Krisztián Szigeti, however, it is important to mention that these ideas are often based on basic research, and inventors often reach a so-called prototype during such research. However, life sciences startups may have a major advantage in that they do not need to fear copycats or slow-moving competitors if they obtain protection certificates in due time, allowing them to enjoy protection during the exclusivity period. The managing director of Kinepict Health Kft. believes that the existence of protection certificates is sufficient only at the beginning of the life cycle. If the product is copied, competitors must also obtain CE/ISO certification and carry out the necessary clinical trials. This, however, takes time for every competitor and involves significant medical and technological risk. For larger companies, a full development, approval and market launch product cycle takes at least 5 to 15 years, which gives smaller life sciences companies significant room for manoeuvre.
However, the path to profitability for biotech and medtech startups is long, characterised by a high burn rate and capital intensity. For this reason, the financing of these projects is best aligned with the illiquid nature and timing of venture capital investments: biotech or medtech startups typically require additional financing in several rounds in order to carry out expensive clinical trials. Since pharmaceutical developments are surrounded by significant risk, biotech startups face considerable pressure when finding suitable investors. At the same time, for investors who are willing to take risks and understand the asymmetric returns of early-stage life sciences investments, the success of a single biotech or medtech investment may offset the risks arising from long-term illiquidity. According to dr. Krisztián Szigeti, however, founders should take into account that the life cycle of market-based funds is often shorter than the time required for product development and market launch, so choosing the wrong investor, or managing the expectations of investors entering at different stages, may represent a significant risk for companies.
In recent years, however, overlap has also emerged between the medtech and tech sectors, mainly in the field of digital health, and the line between tech and medtech appears to be blurring. The expert believes that one manifestation of this is a business model in which a startup primarily developing data processing, which provides lifestyle advice based on data from smart devices or warns of the need for early disease diagnostics in a B2C model, further develops a device that is not a MedDev device from a regulatory perspective into a medical technology direction in a B2B model. Of course, the appropriate clinical trials must also be carried out, but market revenues and user data reduce approval and development risks. However, due to different customer attitudes and sales channels, this may also involve significant risk for the developing company.
Despite the overlaps, we believe that this process will not result in a drastic change in the life cycle of startups, since the world of biotech and medtech startups differs substantially in terms of both regulation and financing. It can therefore be stated that life sciences startups represent a markedly distinct group within the world of business.