Pharma should make some bold moves in Digital Health
Digital health has become a major growth sector with annually 10+b of investments and market size forecasts of up to 400b over the next years. At the same time changes in the healthcare ecosystem are putting stress on traditional pharma business models, pushing firms to act. Consequently, almost all big players are already investing in, partnering, and developing products in digital health. Opportunities can be found in building patient- / consumer-oriented services, creating improvements along the value chain, and from generating new insights. Despite successful first steps, adapting to a new culture and moving experiments into industrialization remain challenging. With everyone moving in the same direction though, winning requires to move more boldly.
Why is it relevant now?
Over the past years, activities in digital health have been increasing significantly.
It started out as digital medicines; in his 2011 book “The Creative Destruction of Medicine”, Eric Topol referred to it as such, describing how digital technologies and its applications are converging to creatively destroy medicine as we know it. Over the recent years, the focus has become broader to include not just healthcare (with emphasis on “care”), but also other aspects of health; the term digital health was coined.
It considers all applications along the patient journey including prevention and patient engagement in scope, and also looks at the healthcare related aspects in connected industries’ value chains such as drug R&D in pharma, clinical care for providers, and population management for payers.
Latest forecasts for 2017 digital health startup funding vary between 6.3b (RockHealth), 6.6b (Mercom), 10.4b (CBInsights), and 13b (StartupHealth); the spread can be explained by their different inclusion criteria.
What is common across all forecasts is that 2017 is going to be a new record year for digital health startup funding. It has become a significant venture investment category with somewhere between 4.3 and 8.9% of total global VC investments this year.
The attention by established industry players is equally high. Reviewing the last 18 months of media coverage and counting individual announcements, most activity can be attributed to technology and pharma companies making up >80% together and with technology clearly in the lead. Across all categories the firms with most activity are Apple (21), Google (15), Accenture, IBM (13 each), Philips, and Amazon (12 each).
It is easy to understand that technology firms want to invest heavily into digital health. It is an area that will allow them gain access to a 7.5t global market, and it’ll allow them to leverage their competencies in big data & analytics, software development, or user experience design to do so.
The fact that pharma is following fast on a 2nd place can be understood when looking at two key reasons:
- Digital health is getting to relevant market size by itself
- Their traditional business model is being challenged
Market size
There has been significant progress in what digital technology can achieve over the past few year enabling new and better ways to build digital health solutions, e.g. more data is available as the cost of sequencing a genome dropped from 10m in 2008 to 1k USD today, AI success stories are challenging the future of certain medical professions, sensors become ubiquitous with 300+m wearables shipped this year.
At the same time both patient and healthcare professional adoption rates of technology make it a lot easier to introduce new solutions, e.g. 46% of consumers are now considered active digital health adopters, and EHR adoption has risen from 20% in 2004 to nearly 90% today.
Together that is leading to the digital health market being forecasted to grow from 60–80b today to 300–400b over the next 5–7 years. The big categories are expected to be mHealth with 200b market, Electronic Health Records with 110b, and patient engagement with 40b. To put that into perspective: The global pharma market is just somewhere close above 1t.
Business model challenges
The healthcare ecosystem is changing in ways that puts stress on the traditional pharma business model, cutting into profit margins and challenging ways how it is operated today:
- Regulation is tightening: New regulation is being introduced that create additional cost burden, e.g. from drug identification requirements (IDMP), drug serialization requirements, or the EU data privacy law (GDPR) with its impact on patient data in clinical trials.
- Payers are cutting costs: With an expected 117% increase in health spending over the next decade, everyone is trying to cut cost. Prices are being challenged reducing profits, and prevention and alternative treatment options are evaluated reducing addressable market.
- Reimbursement models are changing: To create shared incentives with pharma and medtech firms, payers are increasingly interested in outcome-based reimbursement models creating new financial and operational challenges.
- Pharma sales model is being challenged: The traditional sales rep / HCP sales model is being challenged. Patient become more empowered to join in the decision making and HCPs less so as rule-based, protocol-driven care becomes ascendant.
- Traditional R&D is becoming more difficult: R&D productivity is declining as the research part becomes increasingly more complex and therefore expensive, while trends such as personalized medicine lower the market potential of new compounds.
What has Pharma been doing so far?
Pharma companies have been investing in and acquiring digital health startups, building partnerships and working on their own digital health solutions.
Investments and Acquisitions
CBInsights did an analysis of pharma investments and acquisitions in digital health startups. 13 out of the top 20 pharma firms have a dedicated venture arm (albeit investing not only in digital health). After first digital health investments in 2009, activity has significantly increased in 2015 and 2016, covering the same amount of deals as in the 5 years before combined. The top three most active investors in digital health since 2009 are Merck, GlaxoSmithKline, and Johnson & Johnson.
Partnerships, Products, and Initiatives
Over the course of the last 18 months, ~40 announcements related to digital health have been made by 15 different pharma companies. The top 5 companies with most published activities announced the following:
- Novartis (6): Their activities comprise testing app-based coaching for study protocol adherence, and the launch of a digital health program in Nigeria to support healthcare management in remote regions. They build a lot of new partnerships: With Qualcomm on a connected inhaler for COPD patients, with IBM Watson to use analytics to optimize cancer care outcomes, with oncology analytics startup COTA in the area of breast cancer, and with respiratory health startup Propeller Health to develop an add-on for their Breezhaler device.
- Bayer (5): They got FDA clearance for an app-connected injector for MS medication, started a strategic project to automate the drug development process, and are heavily investing in startups. They established the LifeScience iHub and the Grants4apps accelerator program that is funding digitalhealth startups and which recently expanded into Silicon Valley with a new focus on self-care markets.
- Sanofi (4): They are experimenting with wearables to evaluate allergy impact on quality of life and partner with consulting firm Parexel to study wearables use in clinical trials. Their other partnerships comprise Evidation with which they study health outcomes based on real world evidence, and Science 37, with which they want to launch virtual clinical trials.
- Roche (4): Their digital health focus is clearly in diabetes care. After investing in 2015, initially partnering in 2016, and expanding their partnership with diabetes management startup MySugr earlier this year, they acquired the startup and started integrating them as a component of their diabetes care ecosystem. They partner with Accenture to build an analytics platform for digital diabetes ecosystem, and got FDA clearance for their insulin dose calculator app.
- GSK (4): They are investing in solutions along the whole value chain. They initiated a partnership with Exsciential on AI-driven drug discovery, and built a joint venture with Google to develop medical implants. In addition, they partner with Propeller Health on digital solutions for COPD & asthma, and released a flu tracking app together with the Weather Channel and Sickweather.
Where should Pharma invest (more)?
Looking into where pharma companies invest today, and the broader potential of how they could benefit from further digital health solutions, opportunities in 3 categories can be identified:
- Building patient- / consumer-oriented services
- Creating improvements along the value chain
- Generating new insights
When reviewing the opportunities for their potential impact and the time horizon that it will likely take to reach an impactful level of maturity, a few stand out in particular.
In the short-term, biggest potential is probably in building patient services and collecting real-world data to optimize patient and HCP engagement. Providing means of access via e.g. self-diagnostics and telehealth to underserved, un-, or under-diagnosed patient populations can drive revenues. And better understanding brand and treatment decisions and using patient services to position their brand in a positively differentiated way can improve market shares.
In the mid-term, medication adherence, setting a stronger focus on R&D, and developing population health offerings look most promising. Medication adherence is an annual 637b value opportunity, so better understanding why and how patients are getting on the right medication, using it, and staying on it will help further optimize the outcomes from short-term activities. Maturing solutions for life sciences R&D can significantly increase throughput and reduce costs by accelerating the discovery of new compounds, identification of new indications for shelved assets, and using real-world data on patient outcomes can create a stronger feedback loop. Shifting the business from units- to outcomes-focus will allow to engage with payers in new types of commercial agreements that are based on a population health model.
What works well, what doesn’t?
On average, pharma companies are already quite good at experimenting with new technologies. An industry survey showed that about 60% have already used digital health technologies in clinical trials, and almost all expect to increase their use within the next 5 years, e.g. there are almost 300 trials already that make use of wearables in one form or another.
And they are set up well to partner with and eventually acquire startups. Pharma companies are typically cash-rich, margin-rich, and have strong and experienced M&A teams. They are used to going out and acquiring or licensing portfolio companies; e.g. the Roche / mySugr acquisition was the result of many years of partnering with and investing in the startup.
However, they need to make a significant culture shift to be successful in digital health ventures. Unlike the strictly regulated medication approval process that dominates how innovation is handled in the pharma industry, digital technology needs much faster innovation cycles and iterative, lean, trial-and-error approaches. There needs to be a shift from selling volume to providing better value, e.g. adherence solutions need to be vendor-agnostic so they can manage all a patient’s medication. And there needs to be a shift in focus from not just HCPs to include patients, what they need, and what is meaningful to them.
Lastly, pharma companies need to move digital health activities out of the lab. Single point solutions that are isolated from others and not embedded in the ecosystem can only deliver limited value. There need to be shared platforms for solutions that are integrated with the health IT ecosystem; only then will they be able to industrialize any initial success.
How does the way forward look like?
The need for pharma companies to invest in digital health is somewhat obvious. They need to make sure to keep up with market and consumer demand, stay competitive against new entrants, especially tech firms, while at the same time improving their own value generation to stay ahead of competition. Everyone will be going to move in that direction, so to end up the winner, a pharma firm will have to be more bold than the others:
- Build a digital division: Start leveraging technologies to optimize traditional therapies by digital health solutions, build an ecosystems of partners and collaborators around patient pathways, and collaborate with payers and regulators to identify cases for risk sharing deals. But avoid the innovator’s dilemma, and build a separate business that starts to integrate traditional products with new solutions, and start rotating the core of the business to the new model over time.
- Buy a tech company: Don’t underestimate the advantage that pharma firms have over tech companies from having the knowhow and experience how to bring medical products to market; it’s a lot more difficult to build that then building a tech firm. Go buy a tech firm to acquire the skills and agile organization needed for tech development. Then leverage pharma development excellence to get health authority approvals, proof of efficacy, and reimbursement for new digital solutions, and start to digitize your value chain.
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