Maybe it has to do about the inflated valuations. At one San Francisco healthcare company, the head of strategy related to me that that his oncology technology development firm would be a multibillion dollar company in a few years. In a healthcare sensor company, that founder and CEO of a sensor related to me that his cancer diagnosis technology would generate hundreds of millions of dollars in a few years, while being distributed to research clinics and universities nationwide. His estimated valuation for his company also topped a billion dollars. At an international stem cell summit, the senior executive informed me that he raised over $2 billion through a State of California bond to fund clinical trials, and funded fifty such research firms while generating only $248 million. In fact, I have observed that every new technology or treatment related to oncology estimates that its valuation is over $1 billion. In the case of stem cell technologies, the scientists expect treatment costs to exceed $1 million per patient. But how realistic are these assumptions? Is the cure for cancer an inelastic model for every point in the value chain for treatment? Are these costs exploding because of the expensive scientific staffing? Does the high valuations from investors fuel this medical healthcare bubble? And are these realistic valuations for these companies?
Let’s start with some numbers: as of this year, the average American family earns around $56,000 a year. By looking at cancer treatments alone, currently 1,000,000+ patients are diagnosed with lung, thyroid, prostrate, breast, ovarian, leukemia, lymphoma, gastric, and bladder cancers in the US annually. And there about 25,000 medical clinics and over 2,000 colleges and universities – a fraction of which do any oncological research.
In the case of the $1 million cost for stem cell therapy, the estimated costs for treating all cancers described above in one year would be over $1,000,000,000,000 ($1 trillion or $1 million squared.) Let us compare this number against the total spent on healthcare. The per capita national health expenditures were: $9,523 (2014); the total national health expenditures: $3.0 trillion (2014). That would suggest that over third of all healthcare expenditures would be allocated to cancer treatment through stem cell treatment alone. Yet there other “cures” or diagnostic solutions in the same chain with the same revenue expectations.
But these GDP numbers are deceiving since they are spread across the whole population. By focusing only the narrow population suffering from cancer, we can honestly question where a population of over 1 million oncology patients can afford to pay for $1 trillion. And this is one part of the pyramid of services. In the case of the sensor, the company promises to show early diagnosis of cancerous cells. And the founder stated that the product would be distributed to clinics with revenues exceeding $300 million annually. In effect, each clinic is expected to pay over $12,000 for that sensor. That is calculated by dividing the number of clinics, 25,000, into the annual revenues exceeding $300 million, as stated in his projections. Again, how can the average family can afford such preventive or curative medicine when facing such daunting costs.
Why are these valuations and expectations so high? I once interviewed a CFO for a clinical trial group attempting to raise $10 million. The founding team, replete with academic degrees and currently employed by pharma companies, expected to retain over 80% of the company, although contributing not one dime. The founding team expected to be create the value on account of their expertise – even though I knew it was not unique. The company was not reducing costs
Now we should explore why such costs for the medical solutions there – investors requiring their ROI and under the standard Economic Value Added Analysis model, the ROI must exceed the cost of capital. With VC funds demanding double digit returns, they expect their portfolio companies to provide them their return.
Then comes their expensive, management teams. I personally know of one medical founder, entrepreneur, who holds a M.D., Ph.D., and a M.B.A. He lives well in Marin country. Another, a M.D. lives in Half Moon Bay. Many of these medical startups are founded by many with advanced degrees that, in ordinary marketplace, they would be well compensated. They expect the same, if not more, from their startup companies.
Yet, we expect that the average family can afford to pay for such services where each service provider for each portion of the stream of medical services is looking at over $1 billion worth of valuations. At the stem cell conference described earlier, the scientists were disappointed that the insurance carriers were not willing to reimburse medical costs exceeding $1 million. So we know that the price for healthcare is not inelastic, in other words, unlimited pricing. But where does society draw the line?