About the Author: @JohnGardner_VC has led and managed investments in companies across the information technology spectrum. He came to NGP Capital from BlueRun Ventures, where he was one of the founding partners. Prior to that, Gardner held a senior business development role at Nokia and has over 20 years of experience advising and working with start-up and emerging businesses. Gardner holds an MBA from the University of Chicago and a law degree from the University of Cincinnati College of Law.
The close of 2017 saw a surge in deal activity illustrative of the changing healthcare landscape: In December alone, Humana announced an agreement to purchase 40 percent of home care business Kindred, while CVS Health acquired insurer Aetna for a whopping $69 billion. The CVS-Aetna deal, especially, deviates from the business-as-usual norm of healthcare megamergers.
Yet another transformative change seen in healthcare recently has been increased activity from big tech players such as Amazon, Apple, and Google. The threat of competing with these consumer-driven giants has spurred incumbents to hasten their digital transformations and patient experience strategies in an effort to create an ecosystem of vertically integrated offerings. This is driven by the fear of being relegated to point-solution player status in an swarm of one-stop shops.
Against this backdrop, it is no surprise that the 36th annual J.P. Morgan Healthcare Conference hosted an array of health players concerned about how they will compete in this ever-changing marketplace. The conference radiated common themes regarding what’s currently hot in healthcare (M&A, social determinants of health, America’s opioid epidemic, big tech’s entrance, blockchain, and artificial intelligence for back-office functions) and what’s not (IPOs, point solutions, and the belief that AI will solve all issues by 2020).
Another key theme of the JPM Conference was the evolving digital health industry (digital health/therapeutics even made it into the formal JPMorgan agenda this year!). According to a recent report by Startup Health, 2017 was a record year for funding, with $11.5 billion of capital invested globally. Though the industry has aged (this year saw the highest median Series B deal value and count at $15 million and 94, respectively), early-stage deal counts remain high, signaling that investment activity for younger companies is still strong. There was much handwringing among investors about the lack of consistent large exits, and digital health still has a great deal of growing up to do, but the tone this year in digital health was meaningfully more pragmatic (and respectful of the unique challenges in healthcare) than it was five years ago. Through our conversations with entrepreneurs, payers, providers, and other investors, our team identified the following key trends:
• Clinical data interoperability is critically important — Players that focus on seamless data integration and communication between players (especially between new entrants and traditional healthcare incumbents) and handle seemingly mundane regulatory, operational, and reimbursement-oriented tasks offer a much-needed value. They link consumer-driven digital health companies into the complicated healthcare system to create a more seamless experience for users.
Today, though, clinical data from EHRs, labs, pharmacies, and wearables are largely in different shapes and forms, and are not talking to each other. A number of challengers are looking to solve this problem. NGP has evaluated several companies in the data interoperability space, including Diameter Health, Health Gorilla, HumanAPI, Redox, and Sansoro. Data interoperability challenges, and the lack of IT budgets to address them, will continue to act as a drag on the ability of US healthcare systems to realize a return on the digital transformation investments of the past 10 years. However, 2018 will see headway made in some pockets and among leading-edge institutions.
• Reimbursements are key, and digital therapeutics for chronic conditions are poised for success — New entrants with reimbursable offerings differentiate themselves from health and wellness offerings that offer no form of repayment for patients or providers. In other words, despite the consumerization of healthcare that has occurred over the past years, the traditional mindset that health services are paid for by payers or employers still drives patient/consumer decision making. Ensuring properly established reimbursement models will help accelerate growth for companies providing digital therapeutics in the chronic care management space.
Partnering with pharmaceutical companies has also been an effective growth strategy for some companies (e.g., Glooko-Novo in diabetes and Propeller-Novartis in asthma). Pear Therapeutics is another interesting company in this space, going through the clinical trial process to receive the first FDA-approved prescription digital therapeutics for substance abuse disorder. Carrot has also obtained FDA approval for a smoking cessation system. Xealth, while not a digital therapeutics provider, is an aggregator platform that connects with EHRs to allow physicians to prescribe various digital therapeutics. Solera has a similar platform that ensures reimbursement from payers for digital therapeutics delivered through community health organizations.
This area is also favorable from a regulatory standpoint; although CMS has been slow to act on reimbursing for remote patient monitoring, it has unbundled CPT codes that allow for payment to physicians who leverage remote monitoring tools and use patient-generated data. This trend will continue, fostering substantial growth for platform and technology companies in the chronic care management space.
• There is a pivot toward B2B2C business models and enterprise customers — In line with the prior point, providing digital therapeutics for chronic care management is difficult to execute in a pure B2C model. Many of the players who started at the dawn of the digital health revolution targeting the consumer as their primary buyer have shifted their business model so that employers, payers, and providers are a larger focus of their revenue streams and growth. Self-insured employers, as a sample customer segment, are increasingly looking for solutions to lower medical costs (one of top cost drivers for corporates), and funding for benefits management is still rich. Benefits hub aggregators (e.g., Castlight/Jiff, Limeade, and Welltok) will continue to gain traction, but it will also be difficult to completely displace benefits consultants (e.g., Mercer and Willis Towers Watson). NGP is tracking several up-and-comers in this space, including Artemis Health and Nuna Health.
• Personalized medicine’s impact on wellness is growing — Precision medicine is becoming personalized medicine and is going mainstream. No longer limited to clinical trials and oncology/pharma, we are seeing the emergence of real, scientific wellness companies that combine genomic/biometric screening with rigorous population analysis and coaching support. The result is that this sector has grown notably in the past year. Players like 23andMe, Arivale, Color, Habit, and uBiome are examples of companies that expanded their customer bases throughout 2017. Consumer-driven business models, with consumer price points, are emerging.
• Behavior change is multifaceted — Behavior change is at the core of almost all efforts to bend the curves on cost and impact in those areas of chronic disease management that create the biggest burden on the healthcare system. Offerings that are one-dimensional in their behavior-change intent are being beaten by comprehensive platforms that leverage a combination of coaching, social networks, automated “nudging”, and other incentive tactics as a means to cultivate and sustain engagement. Engagement is no longer a differentiator — it is table stakes. Consumer-focused players should not forget the importance of behavior change at any point during their journey, and can draw on companies such as coaching platform Vida Health, nutritional health company Lifesum, diabetes management upstart Virta, mental health app Sibly, and fun-driven Dacadoo as examples of players with engagement as their central focus.
All in all, the conference reaffirmed our belief that 2018 is bound to be an exciting year for digital health. Between the predicted M&A activity, more focused players, and enhanced understanding of what drives engagement (and ultimately success) for healthcare startups, we think the new year has potential for genuine success and transformation for players that learn from the lessons of years past.