Specialist Series: Defining Your Market 

Contributed by John Randle, Phd


As you prepare to move your technology or product out of the academic setting towards commercial development, a key step is to define the market potential for your technology/product.  Prospective investors will assess the opportunity in terms of the potential return on their investment, determined by sales and profit potential.

Two approaches should be considered, depending on the data available to support your assessment: “top-down” and “bottom-up”.

A “top-down” analysis is based on current technologies or products that address the medical need your technology/product is intended to address, and the market defined by their sales figures.  This information is frequently found in published market studies and/or annual reports from public companies in the serving the market.  This approach requires a fairly well-established marketplace defined on this basis.  It may be projected to grow during the time your technology/product is in development, based on demographic changes, increased adoption or other factors.  It may also be projected to decline, notably because of expiry of patent or other exclusivity factors.  If this is the case, it is very important to take this into account in your market projection.  From this “dollars” definition of the market, you may be able to estimate the share of the overall market your product can reasonably be projected to take.  This may be based on the differentiation and/or superiority you expect your new product/technology to exhibit relative to the established (and/or other new) products.

In many cases, a “bottom-up” analysis may provide a more useful estimate of the market potential of your technology/product.  This is particularly true for a medical need that is addressed poorly by current technologies/products, so the market defined by current sales of these products may dramatically underestimate the potential of a new, improved technology/product having the potential to change the standard of care and expand the market.

The bottom-up analysis starts with identification and enumeration of the specific target patient population your technology/product will address.  Epidemiological information on disease incidence and/or prevalence may be a good start, including published data available from a variety of sources.  What is the patient population and what are the trends projected over the development of your product and its lifetime on the market?

It is often critical to define one or more subsets of patients that should benefit most from your technology/product.  Because these patients benefit most, they can be expected to adopt it rapidly and at a high rate.  Furthermore, because of the great benefit, it may be possible to price a pharmaceutical product more aggressively and, thereby, increase profit potential and the strength of the market forecast and investment hypothesis. (The ability to do this for medical devices may be limited by reimbursement considerations.) These subsets of patients may be defined by conventional clinical diagnostic criteria, such as disease severity, stage, localization or treatment history.  Increasingly, patient populations for targeted pharmaceuticals are defined by specific biomarkers that identify patients more likely to respond to a specific drug.   When you have estimated a patient population, you should generally make an explicit assumption about the percentage of the target patient population likely to actually be treated at the peak of adoption of your technology/product.

Once you have estimated the number of patients who are candidates for your technology/product, the next step is to estimate a target price or cost (although according to classic economic rules, these variables are not necessarily independent).  In an established market, the price may be determined largely relative to prices of existing products.  New pharmaceutical products may be priced at a premium if they offer substantial benefit over existing technologies/products, particularly in patient subsets (this option may not be possible for devices).  Alternatively, prices may be set at a discount, to encourage rapid and extensive adoption of a new technology/product in an established market.  It is important in the pricing decision to consider who your customers and decision-makers will be – end-user patient, treating physician, clinic or hospital administrator, health insurer, etc.  Each of these stakeholders may value your technology/product differently, so their roles and opinions will have to be factored into the pricing projection.  Your sales and distribution model, including account size, may also affect your pricing freedom.

Cost of Goods Sold (CoGS): The cost of manufacturing, packaging and distributing products is often difficult to project accurately early in development.  Nevertheless, it is important to anticipate, because it will affect the profitability of your technology/product.  Note that for some products, CoGS will be a key factor in development decision-making, with low-cost choices made to limit CoGS.  In the medical device field, the price typically needs to be four times CoGS to generate reasonable profit.  CoGS may be a lesser factor for most small-molecule and antibody pharmaceuticals, but for complex biologicals may become a much more important factor to consider.

Peak revenue and profit forecast:  When you have an estimate of target patient numbers, price, and CoGS, you can do some simple math to get a revenue and profit forecast.

It is important to recognize that early in the discovery/development process, market evaluation is usually a semi-quantitative exercise with wide margins of error.  Nevertheless, it provides an essential element of the investment hypothesis needed by your investors.  Providing an explicit set of assumptions and calculations will provide a sound basis for discussion.

* This is Part 5 in our B-BIC Proposal / Business Plan series.  Click Here to see all articles in this series.