Defining the Addressable Market: The Foundation for a Credible Market Model

Accurately determining the addressable market for life sciences innovations is a foundational exercise, critical for strategic planning, resource allocation, and investment attraction. The addressable market is the population that is eligible to adopt a given technology.  It establishes the population for whom individual life science companies will compete for share.

I’ve seen many pitch decks in my career.  It’s surprising how many times I see grossly misstated addressable market figures, especially with the influence “getting it wrong here” has on the credibility of the rest of a population-based market model.  While there have been cases where I’ve seen the target market completely mis-identified, it is far more often the case that various “filters” to the population are neither identified nor applied to the calculations.

Let’s take as an extreme example a novel prescription drug for a very common medical disorder: chronic rhinosinusitis (CRS).  It is tempting to define the addressable market as:

Population (000’s):	338,016
Prevalence of CRS:	12.3%
Individuals with CRS (000’s):	41,576

This example produces an addressable population of 41,576 (000’s).  Let’s translate this into expected revenue based on market share, average units per patient year and price per unit:

Market share, 1% (000’s)	415.76
Average units prescribed per patient year:	12
Drug price per unit:	$225
Expected revenue ($000’s):	$1,122,552

This type of structure leads inevitably to the dreaded (by investors) “Even if we only get 1% of this huge market…”.  CREDIBILITY GONE.  Let’s look at a more appropriate addressable market definition:

Population (000’s):	338,016
Prevalence of CRS:	12.3%
Individuals with CRS (000’s):	41,576
Percent moderate:	30%
Percent severe:	10%
Individuals with CRS by severity (000’s)
Moderate:	12,473
Severe:	4,158
Percent seeking medical care
Moderate:	5%
Severe:	10%
Individuals with CRS seeking medical care (000’s)
Moderate:	624
Severe:	416
Percent receiving a prescription CRS medication
Moderate:	75%
Severe:	90%
Patients receiving Rx for CRS medication (000’s)
Moderate:	468
Severe:	374
Percent of patients filling the prescription
Moderate:	60%
Severe:	80%
Patients filling a prescription for CRS (000’s)
Moderate:	281
Severe:	299

Now, we have credibly defined the market opportunity, with transparent assumptions that are able to be challenged or debated.  Note that we have described in more detail and by subsegment (severity level) the likelihood of seeking medical care, receiving a prescription medication, and compliance and adherence.  Once these variables are accounted for, we have a very different expected revenue at the same assumed market share:

Market share, 1% (000’s)
Moderate:	2.81
Severe:	2.99
Adherence
Moderate:	70%
Severe:	85%
Average units prescribed per patient year:	12
Drug price per unit:	$225
Expected revenue ($000’s):
Moderate:	$5,311
Severe:	$6,862
Total:	$12,173

Now the problem is, we need to establish a more realistic expectation for market share.  For commercial viability in this market, we would expect at least 15%:

Market share, 15% (000’s)
Moderate:	42.15
Severe:	44.85
Adherence
Moderate:	70%
Severe:	85%
Average units prescribed per patient year:	12
Drug price per unit:	$225
Expected revenue ($000’s):
Moderate:	$79,664
Severe:	$6,862
Total:	$102,931

While this is quite different from our initial estimate of $1,122,552 ($000’s) at 1% market share, our approach provides a defensible market size, commands a more realistic expectation for market share, and produces a realistic expectation of revenue.  Credibility maintained.

Michael Kubica is President of Applied Data Sciences, Inc. He is a specialist in strategic planning, risk analysis, market modeling and valuation for novel medical technologies. He has over 20 years experience in helping organizations set strategy, articulate value and get funded. Feel free to connect for more content like this article: linkedin.com/in/makubica