A decade ago digital health was a relatively new term, largely without name recognition. Today, the venture dollars tell a new story, with $8.1 billion poured into the space in 2018 alone, according to a Rock Health report. Still, most healthcare stakeholders agree digital health is still in its early days and is grappling with questions about its place in the health ecosystem.
Founded in 2010, Rock Health, a research and venture firm, has taken the pulse of the industry for a good chunk of its life. MobiHealthNews sat down with Rock Health to talk digital validation, market placement, exit strategies and the future of the digital therapeutics subset.
Evidence for every stakeholder
Validation has been a key topic of debate in the digital health world. While many companies have taken a proactive approach to validation, plenty of studies questioning digital tools are also on the books. For example, last year Nature published new research about digital mental health apps, which found only two out of the 73 apps studied provided evidence from a study using the app.
As a result, the Rock Health team said it sees validation as an important component to determining whether future companies will flourish.
“We want to see evidence because there are real lives at stake, and how are you proving this value?” Danielle McGuinness, marketing manager at Rock Health, told MobiHealthNews. “You look at the Theranos' and the Ubiomes. If it is on fluff science or no science at all, it really poses a risk and is not something to be invested in. I think more and more people are talking about that and it is really being put in the forefront of these 'early failures' and very public failures. I think we will be seeing a lot more push for that from the investors and the other players in the space as it enters the dialog.”
However, different stakeholders focus their lenses on different metrics, creating prioritization challenges for young startups.
“We talk to a bunch of early stage companies and we sympathize so much with the challenge of prioritization and where to put those resources early on,” Chipper Stotz, part of the venture team at Rock Health, told MobiHealthNews. “Whether that is a [randomized controlled trial] of a couple hundred patients with very clear clinical efficacy that is going to get a provider excited in the case of prescription digital therapeutics. ... That is pretty different from what we have heard from payers on that front.”
Meanwhile, insurers are looking for cost savings studies. Even more specifically, payers often want insights into how the product would work within their specific system.
“So, it is a battle that you have to pick and choose where to do the efficacy and validation with both being important just at different points in their life span,” Stotz said.
B2B versus D2C
Startups are also making decisions about their business models of choice. Traditionally digital health companies have worked with payers and providers to bring their product onto the market. However, with the growing trend of the consumerization within healthcare , some are looking to market directly to patients.
“Now it is mainly B2B, but in the past few years there has been this resurgence in certain pockets where direct-to-consumer seems to be taking off a bit,” Sean Day, a research analyst at Rock Health, told MobiHealthNews. “I think a good example are these startup consumer pharmacies, the Hims and the Romans, which have their own questions around them: are they just driving up utilization or are they contributing to improved access? That is a debate that will be resolved in the next decade, but at the moment those are some of the really highly capitalized [companies in the] direct-to-consumer space. I think some of the other spaces that are really interesting are the 23andMe model because they are direct-to-consumer at one end of the business, and then they are selling [data] to enterprise ... on the other end of the business.”
So far, the industry has seen multiple models for direct-to-consumer businesses, Day said. One is working within a vertical, such as men’s health, where users can access virtual care and medication.
“The other one is direct-to-consumer, 'get all the data, sell the data to someone else.' Those two types of models might work. There have been questions on both of them,” he said.
But catching a consumer’s eye can be expensive and time consuming.
“The models of direct consumer are also pretty capital intensive, right,” Stotz said. “To run direct-to-consumer marketing. Calm is a unicorn in part because they have had to raise so much money to market to consumers.”
While Stotz said that it’s doubtful there will be many companies that are strictly direct-to-consumer in the future, he said he could see some dipping into both markets — in particular, areas in which patients are already paying out of pocket for care, including smoking cessation and fertility products.
Whether it be a direct-to-consumer product or business-to-business, investors are concerned with exit models. Digital health companies have a long history in the M&A space (MobiHealthNews counted 56 digital health M&A in 2018 alone).
“With pretty much all venture-backed industries, M&A is going to continue to be the main path of exit,” Day said. “Just by the numbers that is how most companies will exit, and we continue to see a strong demand for digital health companies.”
However, 2019 has seen a slew of digital health companies go public including Livongo, Peloton and Phreesia. Since entering the public markets these companies have had their ups and downs. Since entering the public markets these companies have had their ups and downs, something attributable to a few different factors. Day noted the recent volatility in the market, as well as the uncertainty that's always inherent in entering the public arena with a unique product.
“Once you go public you are in it for the long haul,” Day said. “I think the interesting questions are around how will public investors value these companies. At the moment a company like Livongo, they’re not a pure software company, they’re not a pure healthcare company. They’re an interesting new blend of scaling human providers and coaches to deliver care with technology.”
More digital health companies, such as hybrid primary care startup One Medical, are also rumored to be eyeing a public exit. This could help position digital health on the markets, but Stotz noted each company has so far targeted separate slices of the healthcare ecosystem with their business models. For example, One Medical has a brick and mortar component, whereas others like Livongo are purely virtual.
“[If I'm a] public investor I’m going to go and look at their metrics, and value them, then buy and sell shares based on that,” Day said. “I have to decide what metrics I’ll use to value them and those metrics are different. You use one set of metrics for a software like Facebook and you use one set of metrics for Home Depot. Where does Livongo fall? We don’t know the metrics yet because this is a new thing.”
The future of digital therapeutics
Digital therapeutics are a hot topic in the healthcare space, catching the attention of major pharma companies including Novartis and Sanofi. Recently Rock Health published a report on the future of the technology and relationship between digital therapeutic and pharma industry.
“It was really interesting breaking the digital therapeutic space into 'Is this a standalone, pure therapy app like an Akili where the software itself is going to deliver the therapeutic effect? Or are we talking about wrap arounds where you have some app that is going to help drive adherence for a molecule itself?'” Day said.
But stakeholders and industries remain divided on the definition of a digital therapeutic.
“It was interesting and kind of refreshing was when we did that report pretty much all of pharma executives talked about both kinds of therapeutics … like standalone pure app [therapies] and wraparound products,” Stotz, who led the pharma report, said.
However, Stotz said this was not always the case when talking to health plan leaders.
“I think there is a disconnect there too, and it goes back to the reimbursement question. If we can’t even begin on the same definition of what it is and the shared opportunities that it affords, how can we think through what the margins should be and how much should we be reimbursing for?” Stotz said.
While digital therapeutics may be sparking a lot of interest from pharma players, there are a lot of differences between software and drugs. For starters, patents are key to protecting drug formulas.
“From an investor's point of view, that is why we are going to invest in you: because you have a defensible IP and you can invest in that and get a monopoly in that for 20 years, because that is what a patent is,” Day said. “For software it's different because in general software patenting is a fuzzy gray area: is it a patent? Is it a copyright? Can we patent software, software changes? Software generally don’t use patents the same way pharma companies do. ...competitive dynamics are different in software than they are in [traditional pharma.]”
With this in mind, Day said one way for digital health companies to compete is by being the first mover in a space and collecting the most data in order to have the highest quality offering.
An open book
At the end of the day there are still a lot of questions when it comes to the future of validation, exits and digital therapeutics. However, the Rock Health teamed noted that investors are still coming back to the space and guiding new companies through many of these questions.
“I think we are encouraged by repeat investors in digital health,” Day said. “There are people investing and coming back. When you have experienced investors who have been through the cycle, they can actually give more value for new investments than just the capital they are giving them. They can bring the experience and the guidance, and understand the importance of things like validation. I think that is a really healthy sign in the industry that we are encouraged by.”
Editor's note: This article has been updated to put quotes in context and for clarity.