How to Evaluate the Market Size for a New Biotech Company (and Build a Biotech TAM You Can Defend)

When launching a new biotech company, one of the most vital steps you will take is evaluating the market size for your product, drug, or technology. When done correctly, this process clearly and effectively communicates your company’s commercial potential to investors, regulators, and partners—a crucial step in getting the funding you need to move forward.

“Biotech presents, in my opinion, one of the highest, if not the highest, risk reward balances in all of investing,” said Joseph Tucker, PhD, the CEO of Enveric Biosciences Inc. (Nasdaq: ENVB), who has built several publicly traded biotech companies. “Due to the incredibly high regulatory hurdles that must be overcome in the development of a new drug, the amount of upfront investment, skill, and time required are staggering.”

To put this into perspective, Dr. Tucker said most drugs being developed—at least in the earliest and riskiest stages of the process—are being advanced by biotech companies with no revenues. Consequently, they often need to fund the development entirely through investors. And, to get them on board, they need to be able to demonstrate that they will receive a return on their investment, he said.

“[Investors] seek a reward that compensates them for the tremendous risk they are accepting, not to mention the time value of money,” said Dr. Tucker. “To have even a hope of achieving that kind of return, the market for the approved product must be large.”

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Why Market Size Matters in Biotech (and for Your TAM)

Evaluating the market size for your new biotech company is as much for your benefit as it is for your potential investors and partners. Not only are you setting the stage for the direction of your technology, product, or drug, but you’re also defining the segment you’re going after and testing feasibility.

You also will use this information to develop your long-range financials and ultimately use it as the basis for an investment thesis, said Susan Tousi, CEO of Delphi Diagnostics, who has extensive experience in both R&D as well as in spearheading commercial strategies. “This process is also important for regulators, especially if you want to get your product approved by the FDA or covered through CMS, or other governing coverage bodies. It helps you demonstrate that you're having an impact on a substantial patient population or a rare disease.”

How Market Sizing Supports Investor Discussions and Strategy

Market size analysis is the backbone of meaningful investor discussions. It also serves as a tool for long-term strategic planning. When you talk with investors, they want the dialogue to cover more than just your invention or proposed drug. They want evidence that your biotech company addresses a sizable, well-defined market with room for growth and differentiation.

That’s why you need to prioritize evaluating your company’s market size and potential from the start. This process helps you craft a compelling story about your company’s invention that resonates with potential investors and strategic stakeholders and ensures the idea is worth pursuing. This means not rushing through this step, but instead realistically digging into the data.

“The majority of biotech companies developing drugs are working on their first drug, [so] bringing in capital to fund the work is really job one, two, and three,” said Dr. Tucker. “Without that capital, the company literally goes nowhere.”

Market sizing also allows investors to understand and visualize the different possibilities that your company offers, added Tousi. Ultimately, investors want to know how you are going to penetrate that market. By doing a thorough analysis of the market size, she said you will be able to answer questions like: What are your assumed shares? Who are the competitors? How will you differentiate and capture the total addressable market? What is the serviceable market you can actually go after?

Tools to Size the Market for a New Biotech Company

To effectively evaluate your company’s market size you’re going to need a variety of data points and inputs in order to craft a realistic picture. But, if you are like many new biotech founders, you may not know exactly where to begin when it comes to evaluating your company’s market size. Fortunately, there are a number of resources at your disposal that can help you build a complete—and pragmatic—picture of your company’s potential market size.

According to Dr. Tucker, there are numerous industry reports available that measure market size through a variety of means. You can also utilize physician interviews, pharmacy sales, and other publicly available information that provides details on competitive products and companies, he said.

“Public data and competitor analysis can help a biotech build a narrative on what makes them differentiated and having a unique advantage for the purpose of enticing investment,” said Dr. Tucker. “KOLs (key opinion leaders) can provide useful perspectives on actual practice when it comes to utilization of approved products.”

From an investor perspective, Tousi said it’s important that market opportunity and adoption assumptions are credible, evidence-based, and tied to real-world analogs, such as how quickly similar products or drugs have been adopted historically. She recommended basing adoption forecasts on public data from comparable companies, which makes projections more believable to investors. Also, if you claim faster adoption or higher penetration than precedents, she said you need to justify it with clear reasons such as better performance, lower cost, or a strong unmet need.

Finally, this is not a one-and-done process. Both Dr. Tucker and Tousi emphasized that your biotech company’s team needs to be constantly monitoring the ever-changing market dynamics and adjusting as new information comes in. “New scientific innovations, which could enable your product over all others, or result in your opportunity being completely eliminated, are constantly being introduced,” said Dr. Tucker.

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Top-Down vs. Bottom-Up Market Sizing for Biotech TAM

Typically, there are two ways to evaluate market size. These include a top-down approach and a bottom-up approach. Both are effective methods, so deciding which approach to take often depends on your preference, the type of data you have access to, or where you are in your company’s development. Here’s a closer look at both options.

Top-Down Market Sizing for Biotech

When using a top-down approach, you begin by analyzing the overall market and then narrowing it down to a specific segment that is relevant to your biotech company, said Tousi. With this method, you will use data like total healthcare spending or global market size for your therapeutic area and apply filters like disease prevalence or geographic focus to estimate potential revenue, she said.

“In our case, it's a patient population of 15 to 20 million depending on which guideline you use and if you're now trying to turn that into numbers of what's the potential revenue opportunity here, then you might say, okay, so if I had a 15 million patient population, and I think I can penetrate 10% and the cost of my test is $300, that's a $450 million revenue opportunity. So, that would be more top-down from the available numbers.”

According to Tousi, a top-down approach provides a high-level view of the opportunity and helps investors quickly gauge whether the market is large enough to justify investment. It is also useful in the early stages of strategic planning or when comparing multiple opportunities across sectors. Choose a top-down approach when you have access to reliable industry data and you want to communicate your biotech’s market potential in a clear, concise, and data-driven way.

Bottom-Up Market Sizing for Biotech

When using the bottom-up approach, you often start with your biotech company’s capabilities and assumptions like product pricing, expected adoption rates, and addressable patient populations and build your market size from the ground up, said Tousi. Consequently, this approach may give you a more pragmatic estimate that sometimes reflects operational requirements and constraints as well as your go-to-market strategies.

Using the same example as above, Tousi indicated that with a bottom-up approach, you are telling investors how you are pragmatically going to penetrate 10 percent of the serviceable market. So, it would include answering questions like how many health systems need to adopt the test, how much revenue that would bring in, what the cost of acquiring those customers would be, how many reps you need on the street, and so on, she said.

This approach captures the nuances of your biotech company’s specific value proposition as well as unique clinical advantages or cost efficiencies. It is especially helpful to use this approach when you have strong data on your product’s performance and distribution potential, said Tousi. This approach is also useful when developing financial forecasts, pricing models, or business plans.

“Sometimes a top-down approach is going to be the most exciting, but as a company gets to where they need to really show what they’re going to do, a bottom-up approach may be more effective,” said Tousi. “You want to know that the ability to actually penetrate these numbers is practical and affordable and achievable, and I think that's where the bottom-up becomes important.”

Dr. Tucker said that he tends to “back-of-the-envelope calculate market size in the bottom-up fashion” and that he draws inputs for the most critical variables from KOLs. “Because of the constantly changing dynamic of the market and science and competition and revenues, I take it all with a grain of salt. The investors that biotech CEOs are speaking to are either saying this is massive enough to take on the risk, or they are saying it isn’t. They don’t get caught up in whether it is $1 billion or $2 billion per year, it is more like, is this a zero or a hero?”

How to Define Biotech Market Size With TAM/SAM/SOM

Getting to the size of your biotech’s commercial market potential can be done using the TAM/SAM/SOM calculation. These metrics help you understand the potential size of your market and set realistic goals for growth. They also help you paint a better, more accurate picture of your biotech company’s potential for investors.

For this reason, it is important to understand the differences between TAM, SAM, and SOM and how they are derived. Here is what you need to know about each.

TAM, which stands for total addressable market, is the entire revenue opportunity for a product or service. So, if you are developing a new diagnostic tool for a specific type of cancer, TAM would be the total global market for all diagnostic tests for cancer including your competitors.

SAM, which stands for serviceable available market, is the market segment of TAM that your biotech company could realistically reach. When determining SAM, you would narrow the focus to a subset of the market like a specific geographic region.

SOM, or serviceable obtainable market, is the portion of SAM that your biotech company can realistically capture based on your product’s unique capabilities and how it is different from your competitors.

Here is a fictional example of what that might look like. Let’s assume you created a drug that will eradicate kidney disease. The TAM for your drug is all of the people in the world who have kidney disease. But, you decide that the first market you’re going to go after is the United States because your research and trials are conducted there. This is your SAM. Then, you might narrow your focus to the top ten university-based medical centers in the Midwest that specialize in treating kidney disease. This would be your SOM.

Then, based on your research, for illustrative purposes only, you find that the TAM is $5 billion worldwide. The SAM, or the addressable market in the U.S.—the geographic area you decided to focus on—is $1 billion. If your company has the capacity to achieve 10 percent market share, the resulting SOM would be $100 million.

All in all, TAM/SAM/SOM provides a picture of your company’s possible market size. Including it in a business plan or pitch deck shows that you understand the realistic potential of your market opportunity and helps potential investors evaluate the practicality of your approach. Putting together a clear TAM/SAM/SOM analysis also reduces perceived risk, lets investors know that you’ve done your homework, and demonstrates that you have a solid plan going forward.