Five Key Digital Health Investment Themes for 2017: Insights from Skip Fleshman of Asset Management Ventures

Skip Fleshman, the author of this article, is a partner at Asset Management Ventures and has invested in companies such as Proteus Digital Health, WellDoc, HealthTap, Evidation Health, Reify Health, Lark, and Welkin. Below is his analysis of investment trends in the digital health sector in 2017, compiled by VCBeat (WeChat ID: vcbeat).

Digital health technologies are transforming the healthcare industry. Mobile phones have enabled healthcare providers to maintain 24/7 contact with patients, who can access and share data that facilitates healthcare tracking and personalized measurements. Genomics, analytics, artificial intelligence, and deep learning technologies are all entering this emerging field. According to Rock Health, although investment in the sector declined slightly last year, venture capital remains highly enthusiastic about digital health, with total investment reaching $4.2 billion in 2016.

ThisThe industry is highly diverse, encompassing everything from consumer-facing general medical applications to advanced clinical digital therapeutics that typically require FDA approval. At AMV, we focus more on clinical digital therapeutics designed to address healthcare challenges. Since we began focusing on digital health in 2003, we have invested in dozens of early-stage companies.

The healthcare market is enormous, with the U.S. healthcare market size exceeding $3.2 trillion in 2015. Influenced by the Affordable Care Act and the HITECH Act, the regulatory landscape in this sector has undergone significant changes over the past seven years. As the new administration pursues legal and regulatory reforms, most observers anticipate further substantial changes.

We anticipate further regulatory changes; however, we believe the profound shifts toward industrial digitalization and value-based healthcare will only intensify. We are witnessing the onset of a new wave of technological innovation, as the Internet of Things (IoT), machine learning, and artificial intelligence (AI) transition from consumer and commercial applications to healthcare settings. As the digital health industry enters its second wave of innovation, the following areas represent those where entrepreneurs are currently focusing their efforts and generating significant excitement.

We have observed emerging applications that seek to improve patient health outcomes in clinically demonstrable ways. These digital interventions leverage data on health, behavior, and related factors—such as glucose levels, sleep patterns, body weight, dietary intake, physical activity, temporal information, and weather conditions—to optimize patients’ treatment regimens.

Notable companies in this field include Omada Health, which aims to prevent diabetes; WellDoc, which treats type 2 diabetes; Pear Therapeutics, which focuses on mental health; and Propeller Health, which specializes in respiratory diseases. For WellDoc, these interventions are FDA-approved therapies. Given the compelling clinical efficacy of these applications in improving patient outcomes while reducing costs, insurers have begun to cover them.

Pharmaceutical companies are also interested in combining digital interventions with their medications to improve drug efficacy, differentiate their products, and engage directly with patients. For example, Proteus Digital Health has developed an FDA-approved sensor embedded in pills that tracks medication adherence. The company is collaborating with Otsuka to develop bundled treatment regimens for bipolar disorder and schizophrenia.

In the United States, we are encountering issues with the efficiency of medical visits, as patients typically need to wait weeks or even months to schedule an appointment.

According to research by the American Medical Association (AMA), physicians are often rushed when seeing patients, spending twice as much time entering patient data into computers to generate medical records as they do actually examining patients. I believe that by leveraging data analytics to support decision-making, along with efficient workflows and various forms of mobile communication, digital technology can help time-pressed medical professionals see more patients in less time while providing a better healthcare experience for patients.

Furthermore, leveraging low-cost labor can reduce expenses. By utilizing decision support tools, artificial intelligence, and data analytics, primary care physicians will be able to perform many tasks currently handled by specialists. Nurses and case managers will help alleviate physicians’ workloads, and an increasing number of patients will be able to manage their own care at home using mobile devices.

In this field, the companies I would keep an eye on include HealthTap (which enables patient-physician interactions outside the office), Augmedix (which leverages Google Glass to remotely input patient data into EMRs), and Welkin Health (a tool that improves communication with patients).

In recent years, we have witnessed a surge in the volume of digital health data stored in electronic medical records (EMRs), medical data acquired from smartphones, and genomic data. These new healthcare datasets serve numerous purposes. For instance, insurance companies and employers who directly cover employee health insurance can leverage additional data to refine actuarial models. Physicians can utilize analyses of these data to support diagnosis and clinical decision-making. Ultimately, patients stand to benefit from data mining for disease prediction. Consequently, real-time alerts for patients and healthcare professionals have become feasible.

Startups such as Human API and Validic are striving to help third parties aggregate and integrate these data into their other applications. We are beginning to see the potential of companies like Flatiron Health and Foundation Medicine in analyzing oncology data. Evidation Health leverages its software and applications to facilitate large-scale, rapid clinical trials.

The insurance industry and self-insured employers now recognize that the costs associated with treating mental health conditions, including depression, require upfront payment. Although long-term efficacy has not yet been substantiated for most digital therapeutic programs, a growing number of insurers and employers are willing to fund pilot projects in the field of digital health.

Behavioral health issues are also often inextricably linked to other medical conditions. I have long been skeptical about investing in this sector, as it has traditionally been service-oriented, and the difficulty and subjectivity inherent in diagnosis make outcomes hard to measure. However, with Medicare reimbursement rates rising, investors are now raising substantial capital for companies such as Lyra Health, Pear Therapeutics, and Lantern to address various challenges in the field. The prevailing view is that, leveraging digital technologies, greater patient engagement and interaction can help individuals manage depression, anxiety, substance abuse, post-traumatic stress disorder (PTSD), and other behavioral health conditions.

The most surprising area in digital health venture capital is the emergence of new insurance companies. Oscar ($720 million), Collective Health ($125 million), and Clover ($295 million) have all raised substantial funding.

These startups frequently compete directly with industry giants such as Aetna, UnitedHealth, and Humana, which are also investing in and deploying digital health solutions. Venture capital-backed newcomers in the insurance sector hold certain advantages over incumbent enterprises: for instance, unencumbered by legacy infrastructure and established relationships, they can forge closer ties with provider networks. Furthermore, these companies can build their technology platforms from the ground up, enabling more effective utilization of digital health data and therapeutic interventions tailored to specific, stratified patient populations.

The digital health sector has shifted from the first wave of simple medical devices and applications to companies that understand how to leverage technology to make healthcare more effective and efficient.We are seeing consumer companies, such as Fitbit, Apple, and Samsung, begin to partner with major payers, providers, and pharmaceutical companies.

Despite this shift, the venture capitalists I have spoken with who invest in this field all agree that,Too many companies target the same problems without segmenting them.. Typical digital health founders come from the technology sector and seek to address personal challenges encountered within our often dysfunctional healthcare system. I believe that founders who gain a deep understanding of the complexities of this ecosystem, including knowing who will pay (such as insurance companies and pharmaceutical firms), are more likely to succeed.

Regardless of the products or services offered by startups, they must generate clinical evidence demonstrating improved treatment efficacy and reduced costs; otherwise, no one will pay for their therapeutic solutions.