Inspiration of "Subversion Theory" to the Investment Strategy of the Medical Industry

Inspiration of “Subversion Theory” to the Investment Strategy of the Medical Industry

#Inspiration #Subversion #Theory #Investment #Strategy #Medical #Industry

Author: Hang solid information management researcher Zhu Yan (micro letter: Zhiyan_Zhu)

Editor: Dun Yuting

The subversion theory has a strong guiding significance for medical investment: 

  • First, in terms of investment direction, it is necessary to identify disruptive innovations in terms of demand and technical characteristics. On the demand side, people’s ultimate need for life and health is to improve the quality of life and prolong life. If divided into two dimensions, namely diagnosis and treatment. The ultimate needs of diagnosis are accuracy, convenience, and early stage; the ultimate needs of treatment are convenient medical treatment, less damage, and low price. In terms of technology, it is a new way, can reduce industry costs in the long term, can achieve mass applications, can destroy many existing industries, and create new industries. Based on these characteristics, the author believes that genetic technology, portable diagnostic equipment, electronic consultation, AI medical decision-making, and surgical robots are the five potential disruptors in the medical industry. 

  • Second, in terms of investment timing, we must pay attention to the phased issues of disruptive innovation. In the early stages of development, due to the ecological inertia of traditional industries, disruptive products tend to grow slowly and market controversies are large—testing investors’ professionalism and anti-risk capabilities; in the deep pit of the market, revenue from disruptive products is prone to cyclical declines, and the market It tends to overestimate the short-term impact and underestimate the long-term value—testing investors’ ability to withstand external pressures; when they enter the mainstream market, their income will rise explosively—testing investors’ judgment on the ceiling; finally, the product Will enter the mass market until new disruption occurs. 

  • Third, in terms of investment layout, try to achieve a virtuous circle of disruptive innovation, continuous innovation, and efficiency innovation as much as possible. Investing in disruptive innovation needs to focus on the ultimate demand. It is recommended to invest across industries according to themes to capture the source of change to the greatest extent; to invest in continuous innovation, although companies continue to raise competition barriers, they must pay attention to its market compatibility and potential disruptors; investment efficiency Type innovation, although it can maximize the cash flow of an enterprise, it must pay attention to the growth of its long-term value.

1. Christensen Subversion Theory

1.1 Theoretical background: 20 years of research results of Harvard Business School, cross-industry common thinking framework

Harvard Business School professor Clayton M. Christensen is known as the “father of subversion theory” and “an expert in the field of innovation.” He first proposed “subversive innovation” in 1995, and has continuously revised and improved the “subversive theory” for more than 20 years. 

With an excellent theoretical framework and strong theoretical guiding significance, Christensen was also ranked first in the world’s 50 most influential business thinkers in 2011 and 2013. “Subversion theory” is effectively used in the defense, automotive, finance, telecommunications, computer hardware and software industries; it has a significant impact on top business leaders such as Jobs, Bill Gates, and Andy Grove; at the same time, the United States, Japan, Europe, Russia and other countries have successively introduced policies and established specialized agencies to promote the development of disruptive technologies.

Picture 1

1.2 The concept of subversion: new technologies or new business models based on ultimate needs, breaking the old ecology, and rebuilding the new ecology

Nowadays, the term “disruptive innovation” is often abused by business circles. In fact, it has a strict definition. First, it is based on the relatively constant needs of people themselves. The means of transportation are constantly changing, from horse-drawn carriages, bicycles to automobiles, what has not changed is people’s demand for transportation itself.

Second, its technical route is a different approach-not necessarily how advanced, and it is easy to be ignored by the mainstream market. Roadside retail physical stores never expected competitors to come from the Internet.

Third, once it matures, the industry will go from concentration to decentralization, and products will go from expensive to cheap. Communication has experienced the development from radio, fixed telephone, mobile phone, to the Internet-to achieve low-cost popularization. Fourth, the entire process is very long, often starting from low-end markets or new markets. Fifth, in terms of effect, it will irreversibly destroy the old business ecology and rebuild the new ecology.

Picture 2

1.3 Examples of disruptive innovation

Specifically, online car-hailing is the disruptor of cruise taxis. In 2012, online car-hailing emerged and developed rapidly. In 2015, Didi and Kuaidi merged, and online car-hailing began to be widely used. From 2012 to 2014, the year-on-year growth rate of cruise taxi passenger traffic slowed down; after 2014, cruise taxi continued to grow negatively. On the contrary, the utilization rate of online car-hailing has increased from 27% in 2016 to 39% in 2019. The share price of a leading cruise taxi has fallen by about 80% since its peak in 2015-partly affected by the broader market, mainly due to fundamental changes. 

In addition, the invention of electric energy is also a subversive innovation. This is because as demand grows and output increases, the cost of electricity continues to fall, enabling popular applications; in addition, since the emergence of electric energy in the 80th century, it has penetrated (“destroyed”) multiple industries, fissioned into more industries, and inspired new innovations. 

Picture 3

1.4 Successful Application: ARK Fund-Focusing on the ultimate demand, discovering new technologies and new business models

ARK Fund is a typical case of successful application of “subversion theory” in investment. It focuses on investing in subversive innovation fields, focusing on ultimate needs, and discovering new technologies and new business models. ARK Fund was established in 2014. Its five major funds all invest across industries and focus on disruptive innovation opportunities in the fields of integration, new industries, next-generation Internet, genetic technology, and financial technology.

Take the disruptive innovation opportunities covered by its comprehensive fund ARKK as examples, covering cloud computing, e-commerce, molecular diagnostics, gene therapy, and big data learning. ARKK’s historical annualized rate of return reached 36%, higher than Buffett’s 20%. ARKK’s rate of return in 2020 is as high as 153%. 

Picture 4

2. Application of Subversion Theory in Medical Investment

Subversion theory also has strong guiding significance for medical investment. First of all, in the direction of investment, it is necessary to identify disruptive innovations. It can be judged from two aspects: demand characteristics and technical characteristics.

2.1 Judging disruptiveness based on demand characteristics

Human’s ultimate need for life and health is to improve the quality of life and prolong life. If divided into two dimensions, namely diagnosis and treatment.

  • 2.1.1 The ultimate demand for diagnosis: precise, convenient, and early

The need for diagnosis is accurate, convenient, and early. 

In vitro diagnostic tools have a trend of miniaturization and portability. At present, the industry mainly stays in the first stage-hospital laboratories or third-party inspection centers focus on testing with high-speed multi-guide instruments. At the same time, smaller and lighter point-of-care POCT is also booming. 

The evolution of biomedical imaging technology can also support people’s ultimate needs for diagnosis. The cross-scale, multi-modal, and spatial resolution continue to improve. For a century, the mainstream of diagnosis is still dominated by morphology: imaging methods have undergone CT, MRI, PET, optical microscope, electron microscope, etc.; imaging objects range from living organisms, tissue cells to sub-cells. Gene sequencing can go deep into the nucleus to observe DNA and small molecules. With the development and popularization of gene sequencing, the diagnosis of diseases caused by genetic problems will undergo a qualitative change-the answer will vary from “where is the disease” to “what is the disease”. 

Picture 5

  • 2.1.2 The ultimate demand for treatment: convenient medical treatment, less damage, and low price

The demand for treatment is convenient medical treatment, less damage, and low price. 

The medical convenience companion will gradually proceed with the commercialization of medical expertise. Taking the treatment of renal failure as an example, the current mainstream is the use of large-scale dialysis equipment and concentrated hospitalization. Local small dialysis centers are more common in the United States, but rare in China-individual communities in Harbin and Wuhan have tried them. In the future, there may be dialysis equipment that is more portable and closer to the patient. Of course, medicine is the largest dispersion of medical expertise after commercialization. 

Surgery has gone from traditional surgery, minimally invasive surgery to robotic surgery. Precision medicine represents its development direction-less damage to normal tissues. Take myopia surgery as an example. In the 1970s, RK radial keratotomy was mainly used for myopia patients-very dependent on the experience of the surgeon. Because the mechanical cutting is used, the cutting is more and less, and the depth and shallowness of the cut lack corresponding standards. In the 1990s, LASIK came out, the excimer laser replaced the corneal lamellar, and myopia surgery entered the era of laser ablation from the era of mechanical incision. 

Picture 6

2.2 Judging disruptiveness based on technical characteristics

The technical characteristics of disruptive innovation include: a new path, long-term reduction of industry costs, realization of mass applications, destruction of multiple existing industries, and creation of new industries. Based on these characteristics, the author believes that genetic technology, portable diagnostic equipment, electronic consultation, AI medical decision-making, and surgical robots are the five potential disruptors in the medical industry. Due to space limitations, the following will focus on the subversive nature of genetic technology. 

Picture 7

  • 2.2.1 The disruptive nature of gene technology: more precise, universal standard treatment, cost reduction, cross-industry disruption

Genetic technology is a disruptive innovation.

First, it is precise diagnosis and treatment at the molecular level.The development of medicine has experienced intuitive medicine, empirical medicine, and precision medicine. Intuitive medicine only relies on symptom diagnosis, with uncertain efficacy and highly dependent on doctors’ experience; empirical medicine is based on the data generated by intuitional medicine, which can predict the probability of cure; precision medicine is based on precise diagnosis of diseases, with standard treatments, and easy to achieve the expected effect. At present, the mainstream of medicine is still based on intuitive medicine and empirical medicine. Genetic technology is an important driving force for the development of precision medicine, which is conducive to the precision and standardization of diagnosis and treatment of diseases caused by genetic problems. 

Second, gene technology is conducive to the popularization of standard therapies.In the past, HER2-positive breast cancer was the subtype with the highest degree of malignancy and the worst treatment effect. Less than 30% of patients survived more than 5 years. However, due to the advancement of genetic technology for accurate diagnosis, it provides a basis for the development of targeted drugs. In the past 20 years, a number of new targeted drugs targeting HER2 have been on the market, especially the emergence of trastuzumab (trade name: Herceptin), which has given this type of breast cancer a standard treatment and has become the most effective treatment one type.

Picture 8

Third, the cost of gene sequencing continues to decline.The reason is, on the one hand, technological advancement. In the early 2000s, the cost of sequencing each human genome was in the tens of millions of dollars. In the late 2000s, the rapid development of second-generation gene sequencing led to continuous decline in sequencing costs. In January 2020, the cost of sequencing has dropped to approximately US$680 per group.At the same time, nanopore sequencing is also being rapidly developed, which has the advantages of low cost, high throughput, and non-labeling-however, it is not yet mature and commercialization will take some time.

On the other hand, demand growth brings economies of scale. From 2001 to 2013, the number of human genome sequenced totaled 40,000, and reached 600,000 in a single year in 2015-an estimated compound annual growth rate of 200%.

Picture 9

Fourth, genetic technology has cross-industry penetration (destructive power). Taking the pharmaceutical industry as an example, it can fundamentally improve the efficiency of drug research and development and reduce the cost of new drugs.

The biggest pain point of current pharmaceutical research and development is the difficulty of research and development, which is expensive. It takes 10-15 years for the drug to be explored to market. The global average R&D cost of each new drug has increased from US$1.19 billion in 2010 to US$1.98 billion in 2019, an increase of 67%. At the same time, the global clinical success rate of new drug research and development has dropped from 22% to 10%.

According to statistics, 52% of the drugs that failed in clinical phase II and phase III trials were due to effectiveness issues and 24% were safety issues-highlighting the scientific lack of understanding of disease mechanisms, drug effects, and grouping of subjects. 

Genentech’s Herceptin test uses genetic technology to screen out patients with overexpression of the HER2 protein from breast cancer patients, and conduct precise test groups. The number of volunteers was reduced from 2,200 to 450, and the trial time was reduced from 5-10 years to 2 years. The research and development cost is greatly reduced and the research and development efficiency is improved.

Picture 10

  •  2.2.2 The subversive nature of portable diagnostic equipment: popular applications-simple operation, convenient and timely

The subversive nature of the portable diagnostic equipment is reflected in its popular application, simple operation, convenient and timely. 

Judging from the status quo of medical equipment, some of them have been dispersed and entered households, such as oxygen generators, ventilators, nebulizers, sphygmomanometers, and oximeters. The overall proportion of the household appliance market has increased from 28% in 2015 to 34% in 2020, and the market scale has grown at a rate of 25%-30% in recent years. 

Large-scale imaging equipment has also begun to show a trend of dispersion. For a long time, mainstream MRI has been concentrated in specialized areas of hospitals. During testing, there are high requirements on the environment and patients, and professionals are required to complete complex operations. At the beginning of 2020, the US FDA approved the world’s first portable MRI-Hyperfine mobile MRI. The cost is 1/20 of the traditional, and the weight is 1/10. It can move freely in the hospital without the need for professional technicians and radiation shielding facilities.

Picture 11

  • 2.2.3 The subversive nature of electronic consultation: popular application-see a doctor anywhere, buy medicine instantly

The subversive nature of electronic consultation is also reflected in its popular application, where you can see a doctor and purchase medicines instantly—especially for patients with mild and chronic diseases.

On the one hand, it can efficiently mobilize medical resources and time resources. Medical treatment is expensive and difficult in China. The distribution of medical resources is very unbalanced compared to developed countries such as Japan, the United Kingdom, and the United States. Beijing has a HAQ of 91 and Tibet has only 48. In addition, patients waste a lot of time in taking medicines and queuing, and often encounter problems such as no time to see a doctor during working days and fewer specialist outpatient clinics during holidays.

On the other hand, the public’s awareness of health management is constantly strengthening. According to statistics, 72% of Internet users have searched for health consultations. 

Electronic consultation is in the BC-end stage of two-way transmission in China, mainly online consultation, CDSS, and medical e-commerce. Since 2016, the average annual growth rate of the Internet hospital market in China has been 45%, and the market size is expected to reach 100 billion yuan in 2020-of which online consultation accounted for more than 47%. 

Picture 12

3. The Inspiration of Subversion Theory on Investment Strategy

In addition to being able to identify disruptive innovations, we must also pay attention to the phased issues of disruptive innovations. In addition, in terms of investment layout, try to achieve a virtuous circle of three growth models: disruptive innovation, continuous innovation, and efficiency innovation.

3.1 Investment layout: try to achieve a virtuous circle of three innovation models

The theory of subversion has been developing continuously for more than 20 years. On the basis of subversive innovation, Christensen also proposed continuous innovation and efficiency innovation. He believes that these three innovations are the main source of growth for enterprises. Continuous innovation is to make good products better-continuous improvements and upgrades within the old system, such as the iteration of smart phone models. Efficiency innovation is the use of fewer resources to create more returns, mainly the cost reduction and efficiency enhancement of production methods, such as the outsourcing of production by mobile phone manufacturers.

In terms of investment layout, try to achieve a virtuous circle of the three innovation models. Disruptive innovation can bring explosive opportunities, but the cycle is long and capital consumption is large; continuous innovation cannot be separated from the old system, but the cycle is relatively short, and barriers to competition will increase; efficiency innovation has a short cycle and maximizes cash flow, but Long-term value growth is not high. 

Picture 13

3.2 For disruptive innovation: focus on the ultimate needs, invest in cross-industry by theme, and pay attention to staged issues

For disruptive innovation, it is necessary to focus on the ultimate demand and cross-industry investment by theme to capture the source of change to the greatest extent. At the same time, pay attention to phased issues. 

Cross-industry investment by theme is more conducive to capturing the source of change and optimizing returns and risks. ARK fund research shows that from 2002 to 2015, the return of investment by theme is higher than investment by industry. In the Internet field, the return rates of investment by theme and investment by industry were 408% and 258%, respectively; in the field of life and health, the logarithmic values ​​were 577% and 242%. In addition, the Sharpe ratio is generally better than the index for the portfolio of life and health themes, innovation themes, and technology themes. 

In addition, the timing of investment needs to pay attention to the phased issues of disruptive innovation. In the early stages of development, due to the ecological inertia of traditional industries, disruptive products tend to grow slowly and market controversies are large—testing investors’ professionalism and anti-risk capabilities; in the deep pit of the market, revenue from disruptive products is prone to cyclical declines, and the market It tends to overestimate the short-term impact and underestimate the long-term value—testing investors’ ability to withstand external pressures; when they enter the mainstream market, their income will rise explosively—testing investors’ judgment on the ceiling; finally, the product Will enter the mass market until new disruption occurs. 

Picture 14

3.3 For continuous innovation: it can raise barriers to competition, but pay attention to market matching and potential disruptors

For continuous innovation, although the barriers to competition continue to rise, attention should be paid to market compatibility and potential disruptors. 

Mindray cuts from the low-end and seizes market compatibility. In the early 1990s, GE, Philips, and Siemens fully occupied the top three hospitals with high-priced, high-quality, and continuously iterative products-but they could not match the needs of county hospitals. Therefore, in the early days, Mindray used the cost-effective “first” stationed in county hospitals, and then gradually optimized its product line to become the leader of domestic medical equipment. 

Digestive endoscopy continues to be upgraded and may be overturned by capsule endoscopy for a long time. Digestive endoscopy continues to develop. Currently, electronic endoscopes are the mainstay. Manufacturers continue to optimize image resolution, operating habits, safety, and airtightness. The magnetically controlled capsule gastroscope is only the size of a pill, and patients do not need to experience the pain of traditional gastroscopy. The mainstream gastroscope may be subverted. 

Picture 15

3.4 For efficiency innovation: can maximize cash flow, but pay attention to the growth of long-term value

For efficiency innovation, cash flow can be maximized, but it may weaken the growth of its long-term value. 

Nowadays, pharmaceutical companies favor efficiency innovation driven by outsourcing, which greatly reduces costs and increases efficiency for themselves. Due to the long drug development cycle and low success rate, 64% of pharmaceutical companies choose to outsource, 41% of which focus on high-profit links such as marketing. As a result, it has also spawned and driven the CRO industry. According to statistics, after the use of CRO, the phase I clinical phase of drug development was shortened from 89 days to 66 days, the phase II clinical phase was shortened from 139 days to 81 days, and the phase III clinical phase was shortened from 140 days to 97 days.

On the other hand, CROs continue to accumulate experience in drug research and development. In order to improve their own profits, they are also more motivated to solve the pain points of key links in the industry-and this can better reflect the growth of long-term value. These pain points include low efficiency of drug discovery, high cost of clinical data management, unscientific clinical trial design, and unscientific group trials. Leading CROs such as WuXi AppTec, HLT&PPD, Tigermed, Quintiles, and Remote Medical, have made strategic arrangements to solve these pain points through mergers and acquisitions. 

Picture 16

Four: Summary and suggestions

Overall, the theory of subversion has a strong guiding significance for medical investment.

First, in terms of investment direction, it is necessary to identify disruptive innovations in terms of demand and technical characteristics.

On the demand side, people’s ultimate need for life and health is to improve the quality of life and prolong life. If divided into two dimensions, namely diagnosis and treatment.The ultimate needs of diagnosis are accuracy, convenience, and early stage; the ultimate needs of treatment are convenient medical treatment, less damage, and low price.

In terms of technology, it is a new way, can reduce industry costs in the long term, can achieve mass applications, can destroy many existing industries, and create new industries.Based on these characteristics, the author believesGenetic technology, portable diagnostic equipment, electronic consultation, AI medical decision-making, and surgical robots are the five potential disruptors in the medical industry. 

Second, in terms of investment timing, we must pay attention to the phased issues of disruptive innovation.

  • In the early stage of development, due to the ecological inertia of traditional industries, disruptive products tend to grow slowly, and the market is controversial-testing the professionalism and risk resistance of investors;

  • During the deep pit of the market, the revenue of disruptive products is prone to cyclical declines, and the market tends to overestimate short-term impact and underestimate long-term value—testing investors’ ability to withstand external pressures;

  • When it enters the mainstream market, its income will usher in an explosive rise-testing investors’ judgment on the ceiling;

  • Finally, the product will enter the mass market until a new disruption occurs.

Third, in terms of investment layout, try to achieve a virtuous circle of disruptive innovation, continuous innovation, and efficiency innovation as much as possible.Investing in disruptive innovation needs to focus on the ultimate demand. It is recommended to invest across industries according to themes to capture the source of change to the greatest extent; to invest in continuous innovation, although companies continue to raise competition barriers, they must pay attention to its market compatibility and potential disruptors; investment efficiency Type innovation, although it can maximize the cash flow of an enterprise, it must pay attention to the growth of its long-term value.

Picture 17

.


Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *