Applying Technology in Pharma (ATP): Assessment of Investment Trends in Digital Health

SUMMARY

  • VC investment in digital healthcare has been growing rapidly (+42% vs. 2017) as the potential of new technology to solve complex issues, ranging from providing healthcare services to managing chronic conditions, evolves
  • Most of these VC-backed digital healthcare companies aim to provide technology-enhanced solutions for providers and patients with fewer specifically focusing on biopharma marketing and sales operations
  • Clinical trial operations, despite being a significant unmet need in terms of overall efficiency and recruitment, have a lower start-up focus – likely driven by the limited appeal and low publicity that is associated with solving operational issues as opposed to drug discovery challenges
  • These investment patterns, although not accounting for actual dollars spent, may reflect the highly fragmented nature of the US healthcare industry, with VCs exploring several avenues of interaction with different healthcare stakeholders
  • As a follow-up to these preliminary findings, we will provide an in-depth assessment with an emphasis on the realistic impact of technology on healthcare in the next 5 to 10 years

 

INTRODUCTION                                                                    

While the use of technology in healthcare is not new, we have seen an increasing number of digital capabilities that promise to revolutionize how key stakeholders interact with the broader healthcare system. But it is challenging to separate true innovations from ‘hype’ and to identify the barriers to broader uptake and utilization. In an attempt to address these challenging questions, we have been exploring the potential impact of technology from patient, provider, commercial operations, and research & development (R&D) perspectives. In our assessment on the role of technology for each stakeholder, we have evaluated the healthcare venture capital (VC) space and used the resulting insights to prepare this article, which analyzes where the VC firms are investing and attempts to learn about the current state of digital health.

VC INVESTMENT TRENDS IN HEALTHCARE

A report by Rock Health shows that USD 8.1 billion has been invested in digital health companies throughout 2018, which represents a 42% growth relative to 2017, in the form of 368 deals (Rock Health, 2018). This trend was noted to be powered mainly by extremely large deals clustered around several companies, with a specific interest in on-demand healthcare services / digital diagnostic tools, the differentiating value of AI / machine learning (ML) technology, and the potential of digital tools to manage chronic conditions.

HEALTHCARE INVESTMENT BY SECTOR  

To examine the dynamics behind healthcare technology investment trends, CBPartners mapped early stage portfolios for 28 leading healthcare-focused VC firms and analyzed over 100 portfolio companies to compile a list of 39 unique, early stage, VC-backed healthcare technology companies that are focused on the patient, provider, commercial operations, and / or R&D. By categorizing each company into one or more relevant sector(s), we found that these companies are almost equally distributed (31% provider, 25% payer & biopharma commercial operations, 22% patient, and 22% R&D). With the complexity of healthcare, it is not surprising to see that many companies are attempting to monetize in different sectors and / or interact with multiple stakeholders – 31% of the analyzed start-ups operate in more than one focus area.

SECTOR TRENDS

  • As expected within RESEARCH AND DEVELOPMENT, most technology start-ups (55%) focus on target identification and validation as improving R&D ROI is likely one of the most significant challenges that bio-pharma is facing. Clinical trial operations, despite being a significant unmet need in terms of overall efficiency and recruitment, have a lower representation in our data – this is likely driven by the limited appeal and low publicity that is associated with solving operational issues as opposed to drug discovery challenges.

 

  • From the list of PROVIDER-FOCUSED companies in our analysis, most of them (50%) are developing technology to improve the efficiency of patient care management and coordination. With the rocky transition to universal adoption of electronic medical records (EMR), providers are struggling to keep up in the highly segmented US healthcare system that is applying incremental pressure on practices to become leaner and more financially efficient, these companies are attempting to provide technologically enabled efficiency to close the gap. Another large segment of provider-focused companies (31%) is developing technology to improve diagnostic workflows, mainly through genomics, AI / ML enhanced image analysis, and EMR. Interestingly, billing services (a significant unmet need for providers) is underrepresented.

 

  • Majority of PATIENT-FOCUSED start-ups (55%) are focusing on technology-enabled disease management (e.g., health logging and management solutions, etc.). This overwhelming focus is likely driven by the fact that patient-facing approaches tend to be the least capital-intensive (i.e., mobile apps), alongside the proliferation of smart devices and the wave of disruptions that have occurred in the broader technology space. But such a strategy can be hampered by traditional patient adoption barriers that have historically been the downfall of this sector. Many of these companies have begun to establish partnerships with pharma / payers in order to broaden business opportunities and help monetize their offering. Interacting with multiple stakeholders, however, can be challenging due to the potential misalignment of incentives.

 

  • Among companies that are focusing on PAYER COMMERCIAL OPERATIONS, there is a heavy emphasis on technology that can enable payers to drive patient outcomes (31%) and reduce costs (31%). The vast amount of health data available to payers will certainly be a key component of identifying high-risk members and preparing individualized disease management plans that can drive positive patient outcomes and reduce overall spend. In contrast to payer-targeting companies, BIOPHARMA COMMERCIAL OPERATIONS companies are limited in our analysis. Strict regulations around pharmaceutical manufacturers, industry payments, and health data privacy likely make technology and data innovation challenging to utilize for commercial purposes. There are, however, a few start-up entities that may provide significant value to biopharma in terms of marketing and sales force optimization.

 

CONCLUSION

Having looked into these high-level trends, we will continue our analysis with an in-depth assessment regarding the role of technology for each stakeholder type / sector and will publish the results in the coming months. In each article, we will describe the key driving forces, discuss potential opportunities as well as challenges, highlight interesting companies, and discuss our hypotheses around future trends. Stay tuned!

Authors