1       Validation

Healthcare innovations constantly validate themselves across different parameters, not only from a clinical and patient standpoint (i.e., research and development), but also from payer and provider and feedback from the healthcare system more broadly (i.e., commercial).

1.1       What are the main validation activities?

Traditionally, we define validation as means for an innovator to test their assumptions regarding desirability, viability, or feasibility in order to de-risk the success of their innovation. The primary experimentation of products and services in healthcare and life sciences has focused on testing feasibility assumptions. For example, clinical trials are concerned with confirming high-risk assumptions around safety and efficacy. However, as a ‘scientific’ solution is brought to market through both digital and physical services, they can demand adherence or new delivery methods from users. As a result, user needs and care pathways need to be fully considered to ensure validation around the desirability and usability of the service. The below table outlines a top-line view of these validation activities by sector:

Validation dimensions
	BioTech	MedTech	Digital Health
1: Science/data	Aim: To demonstrate safe and effective data outcomes via: –  Discovery –  Pre-clinical testing –  Clinical testing	Aim: To demonstrate safe and effective data outcomes via process and design validation and verification: –  Discovery –  Pre-clinical testing –  Clinical testing –  Tests –  Regression testing –  Inspection: Traceability matrix, QMS –  Establish process controls Note: Applies across Hardware & Software	Aim: To demonstrate safe and effective data outcomes via: –  Discovery –  Customer Tests –  Regression testing –  Inspection: QMS –  Establish process controls Note: Applies across Hardware & Software
2: User Needs	– Clinical trial data	–  Clinician and payor led feedback on care pathways –  Patient led feedback – Clinical trial data for “high-risk” and novel devices to assess safety or benefits	–  Clinician and payor led feedback on care pathways –  Patient led feedback
3: Regulation/ IP	–  Patents – FDA approvals	–  Patents –  Classifications –  ISO certifications – FDA approvals	–  Classifications –  ISO certifications – Data privacy regulation (GDPR)
4: Commercial	–  Reimbursement codes –  Market sizing and fit –  Partner evaluation and engagement –  Market access and pricing	–  Customer needs evaluation –  Payer needs evaluation –  Pathway analysis –  Reimbursement codes –  Market sizing and fit –  Supply chain and manufacturing costs Process controls (regulatory changes, complaints)	–  Market sizing and fit –  Business model – Go to market strategy

1.2       Which activities take priority?

We have observed some variance in how the sectors prioritize these research/ discovery activities over commercial ones:

1.2.1      BioTech

A division of labour has been observed between R&D and commercialization activities, particularly who carries these out. For example, the emergence of the ‘outsourced’ discovery model in BioTech has meant that traditional commercialization activities have been left to partners in BioPharma, who possess the relevant market access and pricing expertise and networks. That does not mean to say that commercialization activities remain solely under the purview of BioPharma. It is often observed that the ‘thinking’ on these commercial activities may occur early-stage predominantly by investors, whilst the actioning of them tends to typically happen after Phase IIB.

In the face of increasing competition and higher volumes of capital flow, there is a greater need to demonstrate commercial acumen and understanding upstream to secure investment. However, this does not mean to say that commercial expertise is needed pre-seed. Instead, what has emerged is that some research activities can be deployed for commercial impact. For example, the activity of clinical study design can be used as a mechanic to not only demonstrate efficacy but also for commercial validation and endorsement. By tactfully choosing KOLs, who typically advise large partners, to design their study, ventures can leverage these individuals as advocates for potential partners or buyers.

One of the digital health startups worked closely in consultation with the former Chair of the British Menopause society in order to advise on building their solution. Her networks in this field helped to build the solutions credibility and in turn to secure key initial partnerships with employers. Within the MedTech space, we similarly observed how the KOLs advising one of the Paris based startups have been working to not only advocate for the solution, but also demonstrate how readily it can be assimilated into the care pathways and processes within their hospitals, who are potential customers.

Whilst MedTech and Digital Health can readily consult potential ‘customers’ to help shape their vision, BioTech faces a hurdle when trying to engage potential customers (i.e. BioPharma).

Many whom we interviewed described the hesitance of entrepreneurs to share their innovation with larger partners early in their development owing to a lack of trust. However, it is increasingly critical to understand how such solutions could fit within the operations and pathways of these businesses given primary exit opportunities occur via acquisition or partnership by such companies. To do so, such ventures need to overcome this ‘trust’ barrier in order to build early proximity to these potential partners. For example, some accelerators and incubators try to increase communication by connecting big players with early-stage BioTechs.

1.2.2      MedTech & Digital Health

In the MedTech and Digital Health space, we see the activities of R&D and commercialization going in parallel throughout the lifecycle. Need to demonstrate safety and efficacy as well as commercial value. How clearly can this solution fit in the market today, what reimbursement codes exist for this to be realistically successful, what clients or revenue streams exist for the solution? Here, investors are less focussed, particularly in Digital Health around ‘data or outcomes’ given the relatively ‘intangible’ nature of these in many cases. Thus, during the evaluation of such investment opportunities, the business model and potential revenue streams become critical evaluation metrics. By contrast in MedTech, if reimbursements codes do not exist, the time horizons for return on investment are longer and more uncertain as negotiations with payors will slow down the process and even force the company to change the business model.

1.3       Which activities have greater influence on the validation?

Across each of the sectors, below are some key activities we have observed which appear to have a substantial or disproportionate impact on other validation activities.

1.3.1      Indication selection

1.3.1.1     Effect on ‘Science/data’ and ‘Regulatory’ dimensions

Indication selection can have both advantageous and disadvantageous effects on your ability to pass clinical hurdles – how compellingly a venture can demonstrate efficacy.

Advantageous & Disadvantageous: Within BioTech, ventures focussed on rare and orphan diseases may face difficulties when designing clinical studies. In the absence of extensive data on the disease progression it can be challenging to design a compelling study with clear ‘end points’. However, accelerated regulatory pathways are available in these cases, and it can also be easy to identify patients through well-structured patient organizations allowing for faster approvals. Pursuit of such an indication can be advantageous in this respect by helping the venture to validate its proof of concept as a result of comparative flexibility in regulatory pathways.

1.3.1.2     Effect on commercialisation

Indication selection can have positive and negative downstream effects on potential fundraising and even exit or partnership opportunities, impacting ‘commercial’ validation:

Advantageous

• Reimbursement mechanics informed one MedTech startup choice of indication selection and more favourably positioned them for evaluation by potential investors. Specifically, the ‘elective’ nature of the infertility market meant that their indication selection/ application to PCOS would not be limited in commercialization avenues given the willingness to pay of the customer segment.
• Within BioTech, our discussion with a Partner at a large VC fund highlighted the tactical nature of indication selection and the merits of a ‘beachhead strategy’. For example, where a biological mode of action or mechanism can be applied to multiple indications, there are strong merits to pursuing a rare or orphan disease as a primary indication. This offers the potential for faster regulatory approval, better patent protection, and better pricing, taking you more quickly to a proof of concept and demonstrations of commercial value for further fundraising.

Disadvantageous

• For example, the pursuit of Stroke as a primary indication, in which there is a large addressable market but no existing therapies available, presents challenges in identifying a partner with the expertise to lead the market access piece. The result requires such ventures to consider commercialization activities earlier upstream as they may need to pursue growth independently after Phase IIB.

1.3.2      Regulatory activities

Regulation activities typically have a significant influence on the whole development of a product. Here are some key considerations on how they affect evidence generation and commercialization.

1.3.2.1     Effect on evidence generation

Advantageous: One of the MedTech startups articulated how their choice of indication selection was heavily influenced by considerations of regulatory pathways and the consequence on the evidence generation both in terms of time and resources required. Namely, they highlighted the comparative difficulty of pursuing regulatory approval for their device in neuroscience vs. in oncology. Their understanding of the more conservative nature of the approvals processes within the FDA for neuroscience would have resulted in longer timelines which the venture was keen to avoid if possible.

Disadvantageous: Regulations have traditionally been created to expect that the approved product will not face huge iteration or evolution. But in the space of innovation and changing customer expectations and needs, this is seldom the case. Therefore, questions arise as to how do you manage the more static nature of device classifications and approvals without being re-subjected to long lead times? This question is especially difficult to solve in Digital Health where the algorithms based on AI or ML are made to evolve by nature.

1.3.2.2     Effect on commercialisation

Advantageous and Disadvantageous:One MedTech startup followed an approach to prototype development with their first iteration available for testing by partners. The latter can perhaps be considered a ‘lite’ version owing to the influence of regulatory activities. They tactically pursued “Class I” classification in order to allow their product to launch in the market and collect the relevant economic and clinical evidence to facilitate classification and scaling as a rehabilitation device in a second stage.

1.3.3      Reimbursement activities

Reimbursement typically has a significant influence on the market in which new ventures enter and on their ability to scale. Here are some key considerations for each sector.

1.3.3.1     MedTech

Historically, some companies tried to enter the market with totally new and innovative products but most failed because no countries had a reimbursement code for these innovations. This is the reason why the innovation in MedTech has recently changed from being a technology-driven model to one where new ventures focus on creating value for hospitals and other healthcare providers. These ventures typically focus on hospital and systemic inefficiencies and sometimes do not even need to apply for reimbursement as they are already cost-effective.

For startups applying for reimbursement, the larger and most attractive market for MedTech startups is recognized as the US for most products and services. Therefore, many startups partly move to the US to do their phase II clinical trials. Two startups we met started their clinical trials in France, leveraging close contacts with the local hospitals but are planning to do the next clinical trial phases in the US to generate local data that will support their regulatory approval by the FDA and reimbursement and market entry there.

1.3.3.2     Digital Health

Reimbursement is only one of the three main monetarization models that entrepreneurs in the Digital Health space are currently considering alongside direct payment from patients (i.e., out-of-pocket) and monetization of data (e.g., by selling it to biopharma companies). For example, one Swiss startup we met is progressing on the three fronts to keep all monetisation options open depending on how the Digital Health market evolves.

When it comes to reimbursement specifically, Germany is currently the most advanced market for Digital Health solutions. In September 2020, the first prescriptions of Digital Health applications (called DiGA) were approved for reimbursement by the Federal Institute for Drugs and Medical Devices. Since then, more than 10 DiGAs have been reimbursed for use in a wide range of conditions. Other countries are considering Digital Health applications reimbursement but still need to adapt their regulatory frameworks.

Similarly, to MedTech ventures, some Digital Health startups do not require reimbursement as they focus on hospital and other healthcare system inefficiencies. For example, some of them are bought directly by the hospitals as their products and services are cost-effective. Others are paid directly by healthcare professionals who gain time and revenue by using their services.

1.3.3.3     BioTech

Companies tend to enter first in the US as the reimbursement is typically easier to get than in other developed countries such as in Europe. With the rise of the HTAs in the last decades, some drugs manage to obtain regulatory approval but fail to get reimbursement in specific markets.

Each country has a different payer structure (e.g., Private insurance in the US, State in France) and procedures and metrics to decide reimbursement. Therefore, some drugs have much more chance to achieve reimbursement in certain countries than others.

Another key element to consider about reimbursement is the number of patients that would benefit from the drug. For example, a drug for a rare disease not only profits from an accelerated regulatory approval but also has more chance to get reimbursed as the total budget impact for payers is typically lower due to a relatively low number of patients.

From a reimbursement standpoint, every startup, independently of the sector, should think hard about the best market to get reimbursed in instead of trying to enter the market that the founders know best or on which their operations are based. The specifics of each healthcare system have a significant influence on whether startups can unlock reimbursement. The first market entry allows new ventures to generate data that is then used to unlock reimbursement in other markets. Based on this, we understand that reimbursement schemes and market entry sequence have a significant influence on the scaling of startups.

In summary of this validation chapter, based on the sector, we have observed different practices for gathering feedback mechanisms towards discovery, development and commercialization. However, the following overarching observations are visible: Firstly, validation is a constant feedback loop between various dimensions and activities – it is not a linear process of moving through the product lifecycle from the earliest stages of research and discovery, through to commercialization. Commercialization efforts, including regulatory approvals and reimbursement mechanics, can have a marked upstream effect on innovations and technology development. Secondly, whilst traditional stories of successful innovation emphasize a technology and patient/ need centred idea development, this is not necessarily the primary guiding compass for these new ventures. Often the less fashionable dimensions of regulatory and reimbursement approvals – can redefine the initial product brought to market such that it does not necessarily meet the ideal needs of the customer or end-user in its first iteration.