Determining the appropriate addressable market is often one of the critical success factors in commercial due diligence, new product planning, and opportunity assessment for healthcare and life sciences businesses. At first glance, a large total market size with significant unmet needs seems highly attractive. However, it is vital to precisely identify the specific market segment where the asset will realistically compete, especially initially after launch.
Case Study 1: First-in-Class Asthma Drug
There was major enthusiasm for a first-in-class biologic therapy for asthma treatment. While there is a high unmet need and the overall asthma market size is substantial, research revealed the first-in-class biologic was unlikely to be the first-line asthma treatment, for two key reasons:
- The standard medical treatment algorithm calls for much simpler, cost-effective interventions as first-line options.
- Healthcare payers mandate more affordable therapies before approving newer premium-priced options.
So, in spite of the large total asthma population, the real initial addressable market for the novel biologic was significantly smaller as a later line of therapy.
Case Study 2: Novel Cancer Therapy
A groundbreaking cancer immunotherapy drug was positioned to treat metastatic prostate cancer, showing an immense addressable market for patients with advanced disease. However, upon conducting due diligence, it became clear the asset would only compete in the third-line setting. Though prostate cancer incidence is high, earlier lines of proven therapy limit the drug’s addressable market. Additionally:
- Only a subset of metastatic patients receive third-line treatment.
- The asset was not evaluated in early-stage lower-risk patients.
- Its novel mechanism of action carries more safety risks than existing options.
So despite the high unmet need, the true initial addressable market for the cancer drug is only the smaller fraction of metastatic prostate cancer patients who have exhausted other therapies and are eligible for third-line immunotherapy.
Account for Treatment Guidelines
The clinical practice guidelines dictate acceptable first-line and later lines of therapy based on efficacy and safety data from clinical trials.
- The guidelines recommend therapies based on how well they work balanced with side effects and risks.
- New drugs may be positioned for use after older, more established options have failed.
- Over time, guidelines may be updated to recommend new therapies earlier in treatment if they demonstrate strong benefits.
Payer Perspectives Count
In addition to clinical guidelines, market access and reimbursement policies significantly impact the viable patient population. Payers limit usage to patients who meet certain criteria based on their priorities.
- Payers consider cost-effectiveness, budget impact, and availability of cheaper alternatives in determining coverage.
- Guidelines may recommend a drug but payers restrict which patients can receive it based on their assessments.
- Marketing data showing real-world benefits can expand payer coverage over time.
Right Addressable Market Matters
In summary, a recommended best practice is to precisely identify the appropriate market segment, estimate the total addressable market size within that segment, and then thoroughly evaluate the competitive landscape for that particular market segment in order to conduct rigorous and insightful commercial due diligence.
Carefully determining the total addressable market size and the resulting achievable market share directly impacts the asset valuation and its overall revenue contribution to the business, which are critical factors to consider. This is because it is highly likely that the investee company developing the asset would be actively pursuing a licensing agreement and strategic partnership deal as a next step for further commercialization of the asset. However, the primary valuation driver and key financial component of any such licensing deal, including the size of any upfront payment, emerges directly from the addressable market.
BiopharmaVantage specializes in providing commercial due diligence services to healthcare and life sciences investors. If you would like to explore how we can assist, then please contact us.