April 2018 | Q&A Spotlight

Where is the digital health sector going? An investor perspective

Where is the digital health sector going? An investor perspective

The market for “Digital Health” technology should reach $400 Billion by 2024, according to Global Markets Insights. A convergence of factors is driving this growth, with technology the biggest single factor. Though the outpour of investment in digital health startups over the past few years has been significant, we have yet to see a major shift in the way healthcare is being delivered.

To help gain some insight to what might be happening in the sector and understand where market makers are placing their bets in the digital health space, we spoke to Kimberly Ha, digital health advisor and limited partner at Array Ventures, and founder of life sciences advisory firm KKH Advisors,to gain more insight in the digital health market, trends, and future outlook.

What trends have you noticed in the digital health market?

In the last few years, there has been increased adoption and appreciation of digital health by pharma. Roche recently acquired two digital health companies, a diabetes management business MySugr and a $1.9B purchase of Flatiron Health, a developer of oncology-focused electronic health record software. There has been a surge in interest from corporate pharma VCs, such as Pfizer Venture Investments, the investment arm of Pfizer, to invest in digital health, who also launched Pfizer Healthcare Hub in 2017, to invest in startups in the health tech space. Several large payers and providers such as Aetna and Humana also have their own VC arm that invest in promising digital health startups, to gain access to cutting-edge technology and hopefully become an early adopter.  This is accelerating the digital health industry as whole, and we’re finally starting to see the digital health market mature with sizeable exit valuations above the $1B mark, which is attracting more investment in the sector.

One advantage of taking pharma VC funding is that startups can hopefully pilot some of their products and platforms in clinical trials (most likely post-marketing studies) for validation. Despite the M&A frenzy and activity, there hasn’t been many successful digital health IPOs. Despite the large number of digital health companies, there just aren’t a lot of companies that are in the $100M recurring revenue mark, and predictable sales. ZocDoc, Doximity and Oscar Health have been rumored IPO targets by the media for awhile, and are among some of the larger digital health companies.

So, rather than taking the IPO route, that’s why you’ve seen more companies go the M&A exit route for digital health.

Roche’s recent acquisition of Flatiron Health is a good example of why it makes sense, and how the industry is blurring and merging with each other for the better. I am especially excited about this deal, as how Roche will now have access to Flatiron’s patient data about how oncology drugs impact patients over time in the real world. This is huge because it will help optimize Roche’s oncology clinical trials, study design, and hopefully identify useful correlations between certain patient sub-populations they would have passed over if not for the rich dataset.

When you conduct an investment thesis due diligence of a digital health startup, what do you look for to as a good opportunity?

I first look for companies that have a strong data strategy. For example, at Array Ventures, we are focused on solving impactful problems using revolutionary technology. Often that means category-leading startups that take advantage of data, analytics, workflows, and new platforms to change the way an industry works. We focus on companies that collect data and have a plan for turning data into action, not just collecting data for the sake of collecting data. From there, I look to see if the company has run a pilot study in a hospital, does it integrate properly in the hospital system or physician office, how are they going to increase traction, is it a viable business model, have they thought out how physicians, or end users, will utilize the product in a real-world setting. It’s a tough screening process and a lot of noise since there are now so many startups that claim to have AI, machine-learning capabilities in healthcare. Actionable items for startups:

  • Alleviate overall cost to the medical system

  • Enable better transparency

  • Relieve bottlenecks/inefficiency

  • Help patients make more informed decisions

  • Improve integration of data in hospitals

There are companies which only monetize data as part of their business strategy, but I think the best startups are focused on trying to solve one or more of the above items.

What are your thoughts on Digital Health's future?

Disruption. We’re finally at a point where we’re seeing integration between pharma, providers and digital health companies at a large scale. From innovative products such as wearables, telehealth, robotics, apps, to cloud-based platforms – I think we’ll continue to see a growing demand in healthcare for digital health tools, and startups in the space have been rapidly catching up to meet the needs to create better apps and user experiences to provide real-time feedback for consumers, patients and providers.

AI and Data Analytics: There are some people that think algorithms, AI and robots will replace doctors, but I think there’s no way AI will replace human judgment and instinct. A medical diagnosis is based on years of experience and training, it’s more of an art form, and part of the diagnosis is evaluating the person as a whole, including their emotions. I don’t think we’ll ever get to a point where robots will replace doctors. However, AI can be an assistive tool for physicians, to help guide to a treatment process, and bridge the knowledge gap, as there are so many new medical advancements and clinical papers that get published – it’s impossible for anyone to read all of them.

Telehealth: The telehealth market has been growing due to consumer/patients wanting to save time. However, it comes down to quality of care, and if a company can help save consumer/patients time while providing the same quality of care for medical advice, this is where telehealth can alleviate the bottleneck in the healthcare system.

Provider/Patient Admin and Health Consumer Engagement:The electronic health record (EHR) market is mature, however centralizing health information for convenient tracking and providing different communication platforms within EHR systems that provide a secure quick and convenient route to decrease the amount of time of communication, are interesting.

Wearables:An increasing number of pharma companies are now incorporating wearables in clinical trials to track additional data points. More than 75 million Americans will use a wearable by 2021, but only 15% of patients say they’ve discussed wearables or health apps with patients. Wearables could be incorporated with the EHR for physician analysis, and especially for chronic diseases such as diabetes or heart disease, the data gathered from a wearable device such as heart rate, sleep, glucose levels, etc. could be really valuable to help doctors tailor treatment plans.

What are your recommendations for navigating the next 12-18 months?

The next year to year and half will be interesting. We’ve seen a lot of these trends become well established and more investors in the space. It feels like now we’re in this assessment period of trying to gauge the speed, pace, of transformation Digital Health is causing. For the investment community, this is especially exciting and potentially lucrative window.

I look for the following elements of value across the different sectors of Healthcare:

  • Understand how the data will generate actionable insights to alleviate cost and time, allow patients and physicians to make better decisions, or provide transparency will allow companies to succeed.

  • Understand how digital health technology will be incorporated into the existing system for healthcare providers to adopt, adapt and drive change within the organization.

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