The Strategy of Identifying Solid Investment Opportunities in Healthcare

Whitepaper by Dr. Tamas Ban, PhD, MBA ©2017.
The strategy of identifying
solid investment
opportunities in healthcare

The absence of regulatory and
reimbursement requirements makes
investments in healthcare service
platforms profitable. Combined with short
development cycles, they are ideal
venture and PE investments.

v Consumerism in the healthcare industry is an inescapable growing
trend. Patients are increasingly taking an active role in their care
experience and are ever more empowered to choose their own
care alternatives.

v The key to driving a more consumer-based healthcare experience is
to devise a cost-effective method to capture and analyze such
information.

v Healthcare is transforming into value-based healthcare, requiring
investors to adjust their investment risk measures.

v At the crossroads of healthcare and innovation lies service platform
technologies. Hardware and service technologies will finally meet
in 2016 to enable patient-centered healthcare services.

v New key performance indicators (KPls) are necessary to measure
patient outcomes, and new service platform technologies will use
these new KPls.

v Successful investments in healthcare ventures must show a
positive impact on healthcare. The impact can be measured by
cost, outcome, and alignment of incentives across payers,
providers, and patients.

v The 100-year-old methods used to measure the effects of medicine
do not allow for personalization. Service platforms will bridge this
gap.

v Continuity of care relies on increasing the number of touch points,
which service platform technologies will expand. They will also lead
to connecting patients, providers, and payers to increase efficiency
of patient care.

v This paper will highlight a Quick Healthcare Value Assessment
Tool for the investor.
“If you think about how
healthcare is delivered [today],
it’s on an ad hoc basis.
Someone comes into a
hospital, someone comes into
a pharmacy, someone comes
into a doctor. But beyond
those touch points, the
patients are on their own.
There is no real continuity of
care.”
Christopher A. Viehbacher, CEO, Sanofi,
2015


Service platform technologies link healthcare and lT to fuel development
of patient-centered healthcare and healthcare platform technologies.
1
Value-Derived Incentives
The banking industry has embraced technology and has
transformed into a customer-centric industry. Customers can
access their financials 24/7 using the internet and mobile
technologies. This personalized service experience does not exist
in the U.S. healthcare industry. Healthcare service platforms can
bridge the gap between personalization and extension of care,
leading to better patient outcomes and lower total healthcare
cost.
Misaligned Incentives
Pharmaceutical companies are in business to provide medical
solutions to health problems. They get paid at the point of sale, no
matter what the outcome of the patient’s use of that product is.
This is just one of many examples of misaligned incentives in the
healthcare industry. The "dotcom" era created many great
technologies, the integration of which now enables the creation of
patient-centric solutions. Now is the time to recalibrate how we
measure outcomes, which can be accomplished using platform
technologies that will provide data to measure and engage the
desired outcomes.
Value Driven
Incentives &
Outcomes
Economy
Smart investors know to
invest in IT, health, and
consumer products.
Smarter investors invest in
companies whose
products fit all three
criteria.
2
Who Benefits?
Everyone benefits! Patients, providers, payers, and companies will
all benefit from value-derived incentives. Patient engagement will
increase in preventative care, resulting in an overall increase in
quality of life. Providers will see shorter hospitals stays and more
effective treatments. Payers will see lower cost treatments with
better outcomes. Companies will profit as they provide products
and services that lead to better health treatments/diagnoses.
Products that do not measurably improve outcomes will diminish,
which benefits the healthcare industry. Successful investors will
see improved ROl with their investments in healthcare-related
platform technologies.
The Alternative
The broad effects of information platform technologies will lead to
silos in the current healthcare system. These technologies will not
only improve the outcome economy, but they will meet the
demand for personalized healthcare experiences.

Adapted from Preqin: Venture Deals, 2015


11

1
Adapted from Patient Engagement and the Healthcare Ecosystems 2.0, March 2014.
Current U.S. Healthcare System1
Lack of personalized experience
Consumerism in the healthcare industry is an inescapable growing trend. Patients are
increasingly taking an active role in their care experience and are evermore empowered to
choose their own care alternatives.
1

therefore

- -
is

soon

2
As a result,

are

all the required

necessary

2016: Cross Roads of Innovation Government mandates will enable
smart ventures to create patient-centered healthcare. Integration of
hardware and software must include assessment of health outcomes.
Service platforms with an emphasis on outcomes will succeed.
1

the

I
-

the -

The 90’s also saw the
the

Personalized experience
in health care is finally
possible
Infrastructure and healthcare are finally aligned to
extend care beyond the hospital. Mobile
technologies serve as a platform to bring healthcare
into the home.
2
This by

the emerged

12

23

2
Porter, M. E., Lee T. H. (2013, October). The Strategy That Will Fix Health Care. Harvard Business Review. 3
Van Biesen, T., Weisbrod, J., Sawhney, R., Coffman, J. (2015). By the numbers: The shifting US healthcare landscape. Front Line of Healthcare Report, Bain & Company.
Value-based healthcare requires
new measures that incorporate
outcomes. These measures will
arise from interfacing new
hardware, software and
information platforms
technologies.
1
At its core, value based medicine strives to provide a high quality
of care at the lowest cost possible. Supply-driven healthcare is
losing to patient-centered healthcare, which is planned around
the patients' needs. New hardware and software clinical
solutions must show an improvement in patient outcome; new
solutions must show a solve for a health problem.
Outcomes Economy
Measured by life expectancy, the U.S. is in the top tier amongst
developed countries. Furthermore, hospitals are well-equipped
to address the delivery of healthcare. This comes at a high cost
to the healthcare system. Individuals in the U.S. spend 90% of
their lifetime healthcare cost in their last year of life, yet
continuity of care is subpar in the U.S. compared to other
developed countries.
Prescription/OTC Oral Medication
Monetization of pharmaceuticals occurs at the point of sale. The
value-based intent is to take the medication and have a positive
clinical outcome. A company called Proteus Digital Health
(Redwood City, CA), has a small chip that can be placed on a pill.
When the chip is exposed to stomach acid it creates a small
electric field, which can be monitored remotely to determine if
the pill was ingested. This is actionable information that can be
useful for pharmaceutical companies. Direct and accurate usage
information is important to both the physician and
pharmaceutical company. This kind of actionable information
leads to patient education and reminders to take their
medication, not to mention that drug prescription patterns of in-
network physicians is of value to the insurance company. Big
data analytics and methods help to design medical, hardware,
and software revisions that improve patient outcomes. Such
improvements drive technological innovations, which nudge
2
toward service platform technologies.
Soft Data is the key to the other 50% of healthcare
ln the world of Big Data and the internet of things (lOT), there are
two basic types of data: hard and soft. Hard data is quantitative
data based on numbers and graphs, also known as structured
data. Soft data, or unstructured data, is in the form of text and
multimedia content. Unstructured data does not fit neatly into a
database. Healthcare today uses structured data, mostly in the
hospital environment for documentation purposes. Hospital
lnformation Systems (HlS) software such as Epic, McKesson,
Allscripts, Cerner, and Athena Health utilize structured data to
create performance metrics to enable monitoring and
identification of bottle necks in their respective medical groups.
Although unstructured data, such as radiology scans, do exist on
the HlS and EMR, they still accompany a textual report by a
radiologist, which is then used to make clinical decisions by the
attending physician. Clinicians know the patients well during their
stay at the hospital, but do not monitor or know the patient
before or after the hospital visit. New ventures that offer solutions
to knowing the patient after discharge can use structure and
unstructured data gathered by hardware and software
technologies to enable clinicians and insurance companies to learn
the real value of the care that was provided.
Care delivery is also shifting toward a more integrated, systemized
model. Providers have invested in new tools to support more
systemized care. These tools cover telemedicine, transparency
initiatives, remote patient monitoring, predictive analytics,
comparative effectiveness data, wellness programs, patient
adherence initiatives, and care coordinators.

VC Seed/Angel round participation is still leading over early stage and late
stage; the time is ripe for service platform investments.
Founders demand larger
seed rounds to reach the
metrics Series A
investors now require.
Seed round investments must cover the requirements of Series A investors. General
requirements are market fit, proof of repeatable business, and a clear path to scale.
The management team and customer acquisition costs are primary sources of
concern.
Product and market fit are essential components of any new venture, and can be
qualitatively validated when people who know the product want the product and
are happy with it. Therefore, medical devices and platform technologies must show
clinical efficacy. Some efficacy studies include human proof-of-concept studies as
part of an Institutional Review Board (lRB)-approved study. lRB protocol are
approved in a university setting. The market for these devices must be a large
population (e.g., heart disease, diabetes, glaucoma), meaning millions of patients.
The number of tests per year performed on the device yields a good measure of the
market.
Having a large market demand proved by data ensures proof of repeatable
business. A productized solution shows repeatable business. A customized
solution does now show repeatable business. By typical standards, when a medical
device passes through FDA approval, it by default becomes a productized solution as
it cannot be changed and altered to meet the specific needs of a specific customer.
The product design must appeal to a variety of consumers, patients, and physicians.
The business must be able to scale, and this must be shown to the Series A investor
via analogs or a clear path to scale and growth strategy.
Entrepreneurs underestimate the effort it takes to acquire customers, and this
information is necessary to the Series A investor. Identified customer acquisition and
customer lifetime value metrics should point to profitability. lnnovative ways to
acquire the first beta customer with a minimum viable product is the key for success.


14

4
Safavi, K., Ratliff, R. (2015). 2015 Health Tech Vision. Accenture.
Successful VC firms invest in companies that have a demonstrable
impact on lowering the cost of healthcare and improving outcomes
while aligning incentives across payers, providers, and patients.
Investments in ventures that are based on value-based and
personalized experience in healthcare will fuel return on ROIs.
1
What is the solution to the user?
About a decade ago a meaningful value inflection point was
regulatory approval. Today, investors recognize the uncertainty
and complications of the reimbursement process, which can be
just as long and difficult as the regulatory pathway. Furthermore,
the exit lPO strategy for venture-backed medical device ventures
is virtually non-existent. Strategic acquirers don't present
themselves until revenue momentum has been achieved.
Typically, this happens in the $30-$50 million annual range4
. For
this reason, investors have shied away from investments in
early-stage ventures, which require regulatory and
reimbursement approvals. Clinical decision support and
dashboard ventures began to spark the interest of inventors.
Most of these technologies don't require regulatory or
reimbursement approvals, yet they are an integral part in the
delivery of healthcare. These devices help, but they defer clinical
judgment to the physician; thus, they are not considered
medical devices.

2
Health apps and mobile health apps (mHealth) challenge
regulatory bodies all over the globe. Although the FDA has created
guidance for mHealth, many healthcare-related apps are not
regulated. This allows investors to participate in healthcare
investments without the regulatory and reimbursement
headache. Value-based healthcare nudges toward a personalized
experience in healthcare, and the extension of healthcare outside
the hospital is the future, especially considering the increasing use
of mobile devices by patients of all ages. Five healthcare
revolutions are the lnternet of Me, Outcomes Economy, Platform
Revolution, Intelligent Enterprises, and Workforce Reimagined.
Investments in ventures that are value-based and offer
personalized experience in healthcare will fuel the return on ROI.

Participate in
healthcare
investments without
the regulatory and
reimbursement
headache


The 100-year-old methods used to measure the effects of medicine do
not allow for personalization. Service platforms will bridge this gap.

Internet of Me We live in an instant gratification society where we can research, compare, price, and
purchase airline tickets online and chose our own seats. Our TVs can suggest movies to us based on our TV
watching habits. The Internet of Me has supercharged and empowered consumers in the last decade. So
why have we not personalized our healthcare? DNA sequencing is available to anyone for a modest cost,
and this information could be integrated and shared with our physicians to make better clinical
recommendations. Drug dosing is still based on gender, weight, and family history, but genetic information
is readily available and can be invaluable to drug administration. Warfarin sensitivity is just one example.
Hospitals should know us before we arrive and continue knowing us after we leave.
Outcome Economics We track medicine based on whether an activity occurred, not whether a benefit
occurred. Pharmaceutical companies are in business to create medical solutions to health problems, yet
their incentive structure is based on selling the medication, not whether those medications were taken and
had a medical benefit. Technologies could be integrated to help track adoption and adherence to drug
therapy regimens. The federal government has placed certain quality measures and mandates in place to
evolve healthcare from payment for activity to payment for value. With the latest IT infrastructure in place,
it has become easier to measure and manage such a system.
Platform Revolution Platform technologies assemble various technologies to offer a comprehensive
platform of care. These technologies can be sensors, computing, storage, communication, analytics, or
biotechnology. Assembling a synergistic group of technologies will be the next driver of healthcare
innovations. For example, Nanosphere offers targeted molecular diagnostic tests that identify infections in
the bloodstream, the respiratory system, and the GI tract. Data fed today from various information sources
will enable service platforms of the future.
Intelligent Enterprises It is estimated that 30 billion devices will be connected to the internet by 2020. This
will create a groundswell of real-time information that we have never seen before. Integrating these data
sources into an infrastructure is going to be a huge milestone. Customer experience will be improved
greatly by utilizing advanced data science. Physicians use a lot of their time hunting for information, but
with this new technology, they will spend more time with patients and will have access to prepackaged
data. Being a physician is going to be data driven, resulting in physicians and nurses spending less time
gathering information.
Workforce re-imagined Google knows us better than we think they do. Our internet searches using Google
are customer-based and are customized using our historical preferences. Why can't this be done for
healthcare? The hospital should know us and our problems before we walk into the emergency room, and
they should know our medical treatment status after we leave the hospital. Improvement from the status
quo does not have to be this intrusive. Suppose a hospital app allows me to locate the most convenient
parking area based on where in the hospital I am visiting; this instantly improves the customer/patient
experience. This may also allow the hospital to know that l am about to walk into the door before l actually
do. Once at the hospital, using geosync that is already available in our smart phones, we could get turn-by-
turn directions to our specific destination (patient room, labs, imaging, etc.). Security measures could be in
place to prevent unwanted individuals to wander in the hospital and hospital grounds.

15

5
Key Indicators of Well-Being, agingstats.gov, 2012.
Healthcare service platforms will
play a crucial role in tying
stakeholders (patients,
providers, technology, and
payers) together. This will lead to
better results for patients and
providers at a lower cost.

be able to

otherwise

investment

Integrated Strategy
New ventures seeking funding must include the
benefits to payers and providers. Showing a
benefit to patient outcome is not enough in this
money-stretched economy.


16

6
Congressional Budget Office
1
Business Case for Healthcare Investments
Size of Market: A+ ln its entirety, the U.S. healthcare industry is
$3 trillion. The U.S. government spends 27% of its outlays on Medicare and
healthcare. Healthcare is just shy of social security at 33%, with military spending
in third place at 16%. Demand for healthcare will increase due to the aging
population. The conundrum is that healthcare supply is being squeezed to lower
costs. Any new healthcare solution must address the benefits to patient,
provider, and payer. The overall philanthropic goal is to reduce total cost of
healthcare.
Uncertainty: C The current regulatory and reimbursement
environment is embracing value creation from their applicants. Historically,
regulatory approval was the first major milestone sought by investors.
Reimbursement has been assumed to be easier than regulatory approval. Today,
the FDA & the reimbursement approval processes have become more complex.
Uncertainty does not begin to fade until both FDA and reimbursement approvals
have been secured. Successful adoption requires acceptance by consumers,
payers, and providers. Technology sustainability is another key factor to consider.
Customer: A- The introduction of the iPhone in 2006 created the
instant gratification generation. This empowered customers to do research and
read reviews right at their fingertips. This trend is slowly migrating into
healthcare, changing the relationship between patients and doctors. Service
platforms, like some health apps, further empower patients to take charge.
Mobile health apps are a nudge toward industry-specific service platforms.
Competition: B The healthcare competitive landscape is strong.
New ventures that close the loop on the ACOs mandates should come to fruition.
Even insurance companies are changing their risk methodologies. Physician
groups and hospitals are changing the way they deliver care as patients demand
value from insurers and providers. Patients are well-informed enough to take on
needs they feel are not being met. Healthcare is crowded, but niche markets
open up new opportunities.
Entry Barrier: B The regulatory and reimbursement uncertainty
creates a barrier to entry into the existing healthcare market. Entrepreneurs are
discovering ways to offer healthcare solutions that do not require FDA and
reimbursement approval. Creation of measureable healthcare values seems to
play a major role. The regulatory nature of healthcare will never disappear, so
smart entrepreneurs and investors find innovative ways to participate in
healthcare without the regulatory/reimbursement headache.
Suppliers: B Ventures that can't scale and have no current customers
result in poor pricing with suppliers, causing difficulty in maintaining good
margins. Medical devices that require specialized components might pose
difficulty in sourcing and consistent costs. The key factor to consider is the use of
non-specialized materials and goods and packaging those into a specialized
offering/solution.

2
Substitutes: B Providing a good value to the patient, provider, and
payer ensures higher switching costs, though network effects are important in
healthcare. New ventures that can't clearly articulate their differentiation will not
survive. Successful ventures that create real and differentiable value will exhibit
the appearance of less substitution for their product/solution.
Market: A The healthcare market is highly fragmented. Switching costs
are high due to self-inflicted silos. Complex health care and delivery systems
require many subject matter leaders, though with many decision makers, the
system become more inefficient. Clinician leaders in hospital want change. IT
leaders in the healthcare industry are bound to their infrastructures, which are
immobile. Today any meaningful change on the surface requires deep financial
investment.
Model: The universality of money gave rise to Accountable Care
Organizations. These organizations are able to make quicker decisions. They are
nimble enough to accept change and embrace valuable service platforms and
solutions. The key for a new venture is to market their solutions to nimble
customers.
Management: Management teams that thoroughly understand the
three arms of healthcare (patient, provider, payer) will out succeed teams that
don't. Investors can safeguard their success by providing and ensuring new
ventures have management teams that are smart and nimble and that possess
areas of expertise in all three arms of healthcare.
Qualitative Factors: The healthcare market will continue to
grow well beyond 2020. The baby boomer population of the U.S. (65 years and
older) has begun to increase at a rate never seen before. Baby Boomers are
estimated to increase to 55 million in 2020 and 90 million in 2050. The market for
healthcare services is therefore bound to significantly increase as the U.S.
population ages. Pressure from insurers and the government will force health
technologies and services to become more efficient. The national move toward
consumerism of healthcare is here to stay, and ventures and investors that
realize and ride this trend will continue to be successful.


Defining value in healthcare is
complex. It can be summarized by
patient outcomes, safety,
experiences, and costs.
2
Due to the many stakeholders in healthcare, there is no
industry guideline to estimate value. It is recognized that
patient outcome outweighs all other measures for value. For
investment purposes, the three stakeholders are treated to
have equal contribution to value. Value is then defined as the
ratio of quality over costs. Stakeholders are set to contribute
equality to value. By definition, there are three components
to quality: quality to the patient, quality to the provider, and
quality to the payer. Similarly, there are three components to
cost, one for each of the stakeholders. Therefore, the usable
form of the equation becomes:
Status quo is defined as 1.0.
The numeric value indicates whether the concept has healthcare
value. A value greater than 1.0 indicates a benefit to healthcare. A
value equal to 1.0 indicates no added benefit to healthcare. A value
less than 1.0 indicates there is no added healthcare value and total
cost to the healthcare system is unfavorable. The relative value is not
indicative that the new venture solution is 12.2 times better than
status quo. Relative values can compare two ventures and see which
has better healthcare value. Traditional and gut feel valuations on the
business side are still necessary to perform successful venture
investing. However, the question of "How much value does this
product/service has to the healthcare industry?" may be answered by
the proposed calculation. The result of the proposed calculation may
be qualitative (better, same, or worse) or quantitative.
For successful venture investments it is necessary to perform risk-
based analysis, analysis of fundamentals, build a business plan, market
analysis, and it is proposed to perform the above healthcare value
calculation to determine how the healthcare industry will perceive the
value of the product/service.
!"#$% =
'$"#()*
+,-)
Quick Healthcare
Value Assessment
Tool for Investors
Value > 3.0 “Adds Value”
Value = 3.0 “Status Quo”
Value < 3.0 “No Value”
1
Example:
A new venture offers a healthcare solution that gives a 10%
quicker recovery time, and the provider can perform tests 3x
faster, readmission rates are cut in half, and it costs 50% less
across the board.

'./01230 = 1.10, '.7891:27 = 3.0, './=27 = 2.0
+./01230+.7891:27+./=27 = 0.5

!./01230 =
'./01230
+./01230
=
1.10
. 5
= 2.2
!.7891:27 =
'.7891:27
+.7891:27
=
3.0
. 5
= 6
!./=27 =
'./=27
+./=27
=
2.0
0.5
= 4.0

!B2/C0DE/72 = 2.2 + 6 + 4 = 12.2


About the Author
Dr. Tamas Ban, PhD, MBA is an entrepreneur and accomplished biomedical engineering
executive with over 20 years of startup and Fortune 500 experience in medical device,
healthcare, and instrumentation industries. His proven ability to drive system, technology, and
business integration has led to multiple acquired ventures and startup companies. His ability to
bridge technology with business needs to identify novel or disruptive technologies in the
healthcare and medical device markets is unparalleled.
Dr. Ban is currently the President and CEO of RetMap, an ophthalmic diagnostic start-up located
in the northern suburbs of Chicago. He oversees corporate strategy, organizational development,
and management and commercialization of the RetMap technologies.
Previously, Dr. Ban was a Senior Member of Technical Staff at Hospira (now a Pfizer Company) at
the Advanced Technology Center, where he consulted C-level executives on healthcare
technologies. During his six years at Hospira, Dr. Ban patented numerous healthcare-related
hardware and software technologies. He presented numerous times to the CEO, COO, CMO, CSO,
and VPs of R&D, sales, and marketing and conducted a number of training seminars for the
national sales teams, demonstrating novel technologies and educating the salesforce on
healthcare trends. He was a key member of a cross-functional team that lead the acquisition of
start-up companies in the infusion therapy industry.
Dr. Ban spent 13 years at Instrument Specialist, Inc., learning the nimble operations of startups. His
work on several thermal analysis instruments have been used by NASA, the U.S. military, and other
major pharmaceutical and materials engineering corporations.
Dr. Ban received his B.S. and Ph.D. in Bioengineering from the University of Illinois at Chicago. His
thesis research at the Neural Engineering and Vision Laboratory was to construct the first complete
system to measure the multi-electrode electroretinogram (meERG) with the CLEAr Lens™ System.
His research discoveries led to two NlH-funded grants and the founding of RetMap, lnc.
Dr. Ban received his executive MBA at The University of Chicago Booth School of Business
concentrating in finance, strategy, and entrepreneurship.

Venture Capitalist, Entrepreneur,
Bioengineer, and Medical Device Inventor

The Strategy of Identifying Solid Investment Opportunities in Healthcare

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