Biotech value is driven by clinical trials with low overall success rates and long timelines. Healthtech depends on proving clinical or economic value and securing payment from hospitals, insurers or health systems.
13 min read · Level 4
I think health is the sector where generalist confidence is most dangerous. Biotech outcomes depend on scientific and clinical judgement most investors do not have, and healthtech outcomes depend on payment systems that are opaque from outside. Recognising that and either getting specialist help or diversifying heavily is a sign of good judgement rather than a lack of conviction.
Biotech. A drug candidate usually passes through phases of clinical trials before approval. Each phase has a chance of failure, and those chances multiply. Using illustrative success rates:
Phase I to Phase II 60% Phase II to Phase III 35% Phase III to approval 60% Overall: 60% x 35% x 60% = 12.6%
Published industry analyses of clinical development success rates have reported low overall probabilities of approval from early trials, varying considerably by disease area. Outcomes are often binary: a trial result can multiply a company's value or erase most of it.
Biotech requires specialist scientific and clinical judgement, which is why many generalist investors rely on specialist funds or experts.
Healthtech. Digital health, diagnostics and health software face a different set of questions:
Question Why it matters Who pays patient, employer, insurer, hospital or government Reimbursement is there a payment route for the product Clinical validation evidence that it improves outcomes or reduces costs Sales cycle health systems often take a long time to buy Regulation medical device or data rules may apply
A product can be clinically useful and still fail if nobody has a clear reason and budget to pay for it.
Because generic startup evaluation misses the defining risks. A biotech company's revenue and team matter less than its trial data and probability of approval. A healthtech company's user growth matters less than whether a payer will fund it.
It also explains portfolio construction in the sector: binary outcomes require either specialist judgement or diversification across many programmes.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Expected value of a biotech position, illustrative. An investor considers 50,000 in a company with one drug entering Phase II.
Probability of reaching approval from Phase II: 35% x 60% = 21% If approved, position worth 500,000 If it fails, position worth 0 Expected value 21% x 500,000 = 105,000
The expected value is about twice the investment, but in 79% of cases the investment is lost. An investor holding one such company is making a single binary bet; holding many would spread the risk, though real probabilities are uncertain and correlated.
Evaluating biotech companies mainly on team or market size rather than clinical probability and trial data, or evaluating healthtech on user growth without a clear route to payment.
Identify the current trial phase, remaining phases and published success rates for similar programmes.
Multiply potential value by the probability of approval and compare with the investment.
Establish exactly who pays, why, and whether reimbursement exists.
Request data showing improved outcomes or reduced costs.
For scientific or clinical claims outside your expertise, rely on qualified experts or specialist investors.
When evaluating drug development, diagnostics, medical devices or digital health companies.
Do not invest in individual biotech programmes based on general enthusiasm without specialist evaluation; this is a clear case for staying within your circle of competence.
Analyses of clinical trial success rates, including a widely cited BIO, Informa Pharma Intelligence and QLS Advisors report covering drug development programmes from 2011 to 2020, found that only a small minority of programmes entering Phase I eventually achieved approval, with substantial variation by therapeutic area.
Start biotech analysis from published base rates for the relevant disease area, not from the company's own view of its chances.
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