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Understanding Healthcare Market Sizing: Methods, Filters, & Key Considerations
1/14/20257 min read
Understanding the market size is a critical component of strategic decision-making for businesses and investors. Here’s a few key reasons why it matters:
Top-Down Valuation: When valuing a healthcare company, market sizing plays a crucial role in determining the Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) for a specific healthcare product. By analysing these layers, businesses can better estimate achievable revenue and profitability. Once achievable revenue and EBITDA are determined, various valuation techniques can be applied to estimate the company’s intrinsic value.
Market Share Analysis (a comprehensive topic on its own): Market sizing forms the foundation of market share analysis. Once we have estimated the market size & gathered data on the market share of major players (e.g., standard-of-care drugs), we can identify opportunities for smaller competitors (or gaps) and evaluate the feasibility of achieving and sustaining a targeted market share. In the healthcare space, market share analysis can reveal gaps in treatment options, underserved patient populations, or emerging technologies that new entrants could capitalize on. For example, if a particular type of cancer treatment only has one dominant player with limited patient coverage, this signals an opportunity for innovation.
Scalability and Profitability Challenges: For instance, if a company develops a treatment for a disease, understanding the total patient population is crucial in evaluating whether the product can be scaled to meet demand. However, in the case of rare diseases, the patient pool may be so limited, coupled with pricing challenges, that sustaining the product or achieving profitability could prove difficult for the company.
Strategic Resource Allocation: Market sizing guides businesses in directing resources toward high-potential opportunities, ensuring better returns on investment. For example, identifying high-prevalence diseases or underserved patient populations can guide decisions on where to focus efforts.
Due to the intricacies of healthcare systems, diverse patient populations, and stringent regulations, market sizing in this sector demands a well-structured and detailed approach. A step-by-step methodology is essential when evaluating the market for companies involved in medical devices, pharmaceuticals, diagnostic tools, and similar products.
In healthcare, accurate market sizing begins by defining key focus areas such as therapeutic areas, product types, and geographic regions, followed by assessing the patient pool, treatment rates, and cost considerations.
DEFINE THE MARKET:
Therapeutic area and Product Type - A Connected Framework
Identify the therapeutic area the product serves such as oncology, cardiology, or another specialty. Different therapeutic areas have distinct market dynamics, approval rates, and regulatory hurdles. For example, oncology drugs typically face higher approval challenges due to complex clinical trials and stringent efficacy requirements. Therefore, defining the therapeutic area provides not only the market's size but also the likelihood of regulatory success and potential competition.
Understand what the company is producing or will be producing:
A drug (e.g., a cancer immunotherapy drug)
A medical device (e.g., minimally invasive tumour treatment device)
A diagnostic tool or equipment (e.g., breast cancer screening devices)
Each product type operates in different sub-markets with unique growth drivers, pricing models, and adoption rates. This classification helps gauge the product's competitive positioning and scalability within the market.
Targeted Geographies: Determine the geographical focus of the product or company:
Global: Ideal for established players exploring new product categories (diversification or vertical integration) or expansion across multiple economies.
Regional or Specific Countries: More common for newer companies, early-stage products, start-ups or companies focused on scaling in their home country or a specific region.
Different geographies have varying regulatory requirements, which can influence market accessibility and size.
PREVALENCE AND INCIDENCE: In healthcare, prevalence and incidence are essential metrics for estimating the target patient pool and ultimately the market size of a specific therapeutic area or healthcare product (drug, device, or service).
Prevalence means the total number of existing cases of a disease or condition in a population at a given time. It allows estimation of the current patient base. Example: In a city of 100,000 people, if 5,000 individuals have diabetes at a given time, the prevalence of diabetes is 5%.
Incidence means the number of newly diagnosed cases of a disease or condition within a specified time period. It helps in forecasting future market demand based on the emergence of new cases. Example: In the same city, if 500 new cases of diabetes are diagnosed in a year, the incidence 0.5% annually.
In healthcare market, the prevalence and incidence of a disease form the foundation for market size estimation by providing data about the current patient pool and future growth trends.
KEY FILTERS FOR ESTIMATING THE TARGET PATIENT POOL: To accurately define and estimate the target patient pool, consider the following critical factors:
Age-Specific: For instance, the Dry Age-Related Macular Degeneration (Dry AMD) market primarily targets individuals aged 60 and above, as the onset typically occurs in older adults.
Indication Stage: The patient pool varies significantly based on the stage of the condition. Early-stage focus on screening, prevention, or initial treatments. Late-stage patients generally require advanced or specialized therapies.
Gender-Specific: For instance, the breast cancer screening market predominantly targets women, particularly those aged 40 and above, based on population guidelines, screening recommendations, adherence rates and risk factors.
Country/Region-Specific Demographics: A country with an aging population (e.g., Japan or Germany) may have a larger target pool for age-related diseases compared to younger populations.
Line of Treatment: Estimation of the target pool depends on whether the product is first line or second line therapy.
First-Line Treatments typically have a broad reach, such as metformin for newly diagnosed Type 2 Diabetes patients.
Second-Line or Advanced Therapies target a narrower audience, often focusing on patients who have not responded to the first-line treatments. These include biologics, specialized devices (e.g., insulin pumps), or late-stage interventions.
Well-Served vs. Underserved Markets: Consider the level of market saturation and unmet needs.
Well-served markets have broad range of treatment options available, with relatively low unmet needs. An example is Type 2 Diabetes, which has numerous treatment options ranging from oral medications to injectables.
In contrast, underserved markets face significant gaps in available treatments. Type 1 Diabetes serves as an example, where innovation is limited to insulin-based therapies, leaving significant gaps in disease management.
By integrating these filters, we can better estimate the addressable patient pool and identify opportunities for market entry or expansion.
TREATMENT RATES/ADOPTION RATES:
Diagnosed vs. Actually, seeking treatment: Many individuals, especially in developing and underdeveloped countries, may not seek treatment despite being diagnosed. This is particularly relevant for areas where a gap exists between diagnosis and treatment such as in mental health. Example: A large number of Chinese suffer from common mental disorders (e.g., depression, anxiety, stress, and post-traumatic stress disorder), but treatment seeking is typically low in this population.
Recommended vs. Adherence Rate: In markets like Breast Cancer screening, the gap between recommended screenings and adherence rates can influence the potential demand for diagnostic solutions. Example: In some countries, breast cancer screening adherence may be low due to factors like awareness, access, and socioeconomic barriers.
Frequency of Treatment/Screening: Understanding how often patients need to be treated or screened (e.g., every 2 years for screenings, quarterly visits for chronic conditions) helps estimate market opportunities for products or services. Example: Colon cancer screenings are recommended every 10 years for average-risk individuals, while chronic disease treatments like diabetes management may require frequent monitoring.
FACTORS INFLUENCING THE COST OF CARE (PER PATIENT): To estimate the cost of care per patient, the following critical considerations come into play:
Frequency of Treatment: The number of times a treatment is administered over a specific period (e.g., daily, weekly, or annually). Higher treatment frequency directly increases the overall cost of care.
Approved drug scenarios: When a new drug demonstrates substantial efficacy or safety improvements over existing treatments, it often justifies a higher price point. Drugs with marginal improvements but better tolerability, convenience, or fewer side effects may also gain traction, often priced at a slight premium.
Regional Adjustments: In developed markets with strong insurance coverage, the drug may be priced at parity. In emerging markets, pricing could be slightly lower to encourage accessibility and uptake.
Line of treatment: First Line treatments are priced more competitively due to larger target populations and wider usage. Second Line or Advanced Therapies have higher costs due to smaller patient pools, greater innovation, or limited alternatives.
Pricing Strategy for Market Share: Company can set a high initial price for a new, innovative product to maximize revenue from early adopters willing to pay a premium. Example: Da Vinci Surgical System (Intuitive Surgical). A pricing strategy with a low initial price to quickly capture market share and encourage widespread adoption can also be followed. Example: Philips' Affordable Ultrasound Devices.
GATHER DATA: Gather comprehensive data, focusing on aspects like population statistics (total population, demographics (age, gender, etc.), growth rate, etc.), prevalence & incidence rates of specific indication, treatment rates & annual cost of care.
Sources like WHO, CDC, and regional health agencies can provide valuable information on prevalence, incidence, and treatment rates across various diseases.
Companies like IQVIA and Frost & Sullivan offer industry reports on market size, disease burden, and treatment gaps.
Peer-reviewed journals and clinical studies from platforms like PubMed and Google Scholar offer insights into treatment efficacy, adherence rates, and regional healthcare access.
These sources help in understanding the target patient pool, market dynamics, and treatment trends in specific therapeutic areas.
KEY METHODS FOR ESTIMATING TARGET PATIENT POOLS IN HEALTHCARE:
METHOD 1:
Opening Prevalence (Existing Cases) + Incidence (New Cases) – Mortality Rate (Deaths) = Closing Prevalence
METHOD 2: WATERFALL METHOD
Year 1: Population* Prevalence Rate#
#This can be kept constant or adjusted based on factors like the type of indication, available treatments, and the availability of such data.
Year 2: (Year 1 Population* Prevalence Rate) *Percentage of patients who survive the first year POST-DIAGNOSIS + Year 2 New Cases (Annual Incidence)
Year 3: (Year 1 Population Prevalence Rate) Percentage of patients who survive the second year POST-DIAGNOSIS) + (Year 2 Annual Incidence Percentage of patients who survive the first year POST-DIAGNOSIS) + Year 3 New Cases (Annual Incidence)
Year 4, Year 5, & SO ON.
METHOD 3: FILTERED POPULATION ESTIMATION
It involves starting with the target region's population and applying various filters, which can vary depending on the region, indication, and other factors. For example:
The age filter can consider the percentage of the population aged 60 or above, but this will change based on the specific disease or region being analysed.
The urban vs. rural filter can consider the difference in internet access and usage between rural and urban populations, which can differ from one country to another.
The gender filter may focus on the female population, particularly in markets like breast cancer screening.
Similarly, the stage-wise diagnosis filter can target specific patient groups, such as advanced-stage patients, which may represent only a fraction of the overall cases.
These filters are flexible and can be adjusted based on the specific market and indication being studied. This method can be cross verified with reported cases of the target indication for a specific year, adjusting your estimates using step-up factors when your results are slightly lower than reported figures.
CALCULATE THE TARGET ADDRESSABLE MARKET (TAM):
TAM = Target Patient Population × (Price Per Patient × Treatment Frequency Per Year)
TAM = Target Patient Population × Annual Price Per Patient