What-Is-Digital-Medicine-And-Why-Does-It-Matter.Pdf

What is digital medicine and why does it matter? Content

Foreword 3

Executive Summary 4

In search of a magic pill 6 Digital Health: from wellness to clinically driven solutions 7 Defining digital medicine 8

What would a winning DTx solution require? 11 Demonstration of proven efficacy through clinical trials 11 Regulatory clearance by FDA or an equivalent 12 Incorporation into the standard of care and provider prescribed/payor reimbursed model 14 Viable business model 15 White-box AI based predictive and personalised clinical intervention and patient guidance based on clinical grade data 16 Compliance with the highest standards of cybersecurity and privacy 18 Openness and flexibility of system and data architecture 20

Which areas are most ready for digital therapeutics, and why? 22

Where is value for me? 24 Pharmaceutical companies 24 Large technology players 27 Start-up and scale-up tech pure-plays and venture investors 29 Insurance companies 30 Healthcare providers 32 Private equity 33

How we can help 35 We help clients build, grow and transform their businesses 35 Why Engelworks 36

References 37 References 37 Figures 38

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Carl Engelmarc, Founder & CEO, and Irina Pafomova, Managing Partner.

Foreword

It’s common knowledge that health systems We love feedback, around the world are under incredible cost so please email us at pressure, and everyone would love to find [email protected] and sustainable solutions to this problem. [email protected].

Is digital therapeutics the magic pill everyone has been looking for?

Our research shows that there is potentially massive value in digital therapeutics, and to some extent, this has already been proven. In this paper, we look at where the value sits, and how incumbents, upstarts and venture and private equity investors could unlock it.

At Engelworks, we help companies in the health sector create sustainable value through smart and innovative growth strategies, business models and new products and services. Our perspective is informed by our 360° experience of working with big pharma and healthcare providers, as well as building and scaling businesses and investing in them.

If you do have a DTx challenge in mind, please get in touch.

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2024 $379bn

The digital health market is projected to reach $379bn by 2024

Executive summary interventions, clinical grade data quality, compliance with the highest standards of With all health systems being under privacy and cybersecurity, and transparency high-cost pressure, digital medicine in using AI (‘white box’) is a must. and digital therapeutics (‘DTx’) are well placed to help raise the quality Inclusion into standard care and payor of care while reducing costs. reimbursement lists are essential for gaining broad adoption, as the Large pharma companies have seen a majority of consumers are reluctant collapse in their R&D returns over the to pay for their care out of pocket. past decade, which has led to a lacklustre Outcome-linked pricing models help performance in the public markets. make DTx more attractive to payors. On the contrary, investors have shown much enthusiasm for digital health Our research shows that DTx is best and wellbeing, where US$14.6bn was positioned for health conditions that can be invested in 2018 (14x 2010). The addressed, by behavioural solutions; areas digital health market is projected where demand is outgrowing treatment to reach $379bn by 2024. capacity (e.g. elderly care); conditions where connected devices can play a huge role in As digital health matures, investment medical adherence (e.g. asthma and COPD), focus is shifting from consumer and personalised, or precision medicine. wellness applications to DTx, which are clinically focussed solutions DTx could help pharma companies for disease management. improve their R&D returns by shifting from a pill to a total care package for both DTx products need to demonstrate existing drugs and pipeline assets or even efficacy through clinical trials and obtain launching digital-only solutions. As they regulatory clearance to be successful. As lack DTx implementation capabilities, DTx provide direct personalised clinical the best strategy would be partnering

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with tech companies which have built For healthcare providers using DTx could cross-sector platforms to support R&D help cut costs and improve the retention or buying niche tech players for key of customers by providing them with more therapeutic areas and scaling them. convenient and cost-efficient treatment options. This value could be realised via We believe that the best ways of capturing partnerships with startups providing the value in DTx for Big Tech players are on-point solutions, or buying a startup building or buying & scaling platforms and rolling out a solution globally and/ to provide functional cross-therapeutic or rolling up other companies/solutions area solutions in the digital medicine into a new model care provider. space. Extending their wellness products into health by partnering with healthcare Given high multiples paid by private equity companies for expertise and market access; (‘PE’) firms for healthcare assets and and building digital-led, behaviour change more extended holding periods, building a driven total care products in growing reliable growth engine becomes crucial. PE therapeutic areas such as autoimmune firms are well positioned to create platform and mental health conditions. solutions for a particular therapeutic area or a function using an acquired asset as For startup and scale up tech pure-plays a core, and complementing it with bolt- and investors in this space the most on acquisitions. With their robust access significant opportunity is creating a highly to capital, PE firms could build disruptive focussed DTx solution for a therapeutic models that can disintermediate traditional area, function or geography. For those industry players, e.g. new model clinics. with access to large volumes of capital, a roll-up of on-point technologies and Healthcare has been a slow-moving becoming a systems integrator for a industry that works on evidence, particular therapeutic area might be an precedence and practices that spread excellent way to accelerate value creation. from flagship projects. However, once a few of these projects get results, For insurance companies, DTx presents we will see what happens very rarely an opportunity to cut the volume of in healthcare: a sudden and very, very claims by using digital diagnostics and rapid change and exponential growth. disease management tools, improve We believe that DTx is approaching its customer retention by providing them inflexion point, so the time to act would with more convenient treatment options be now. and attractive insurance deals, as well as unlock new customer segments that were previously uninsurable. The best way to realise this value is through partnerships and selective acquisitions.

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In search of a magic pill Research by Roche UK indicates that 82% of 16-24 year olds want to see more use It is common knowledge that healthcare of digital technology on the NHS. 63% systems in most countries have been of young people would be comfortable creaking under the strain of growing with a chatbot giving them a diagnosis.3 costs exacerbated by new lifestyle- related epidemics such as obesity, diabetes and hypertension.

Can a piece of software code be the ‘magic pill’ that would $14.6bn help solve the problem? was invested in digital health & wellbeing Investors are certainly prepared to bet in 2018 on this: the current decade has seen a rush of investment into digital health & wellbeing, with US$14.6bn being invested in 2018, which is 14 times more than in 2010.1 An average deal has gone up by $6m to $21m in 2018 vs 2017. The This is x14 times largest deal in 2018 was a $300m Series C more than in 2010 funding round for Grail, which has created a solution for early detection of cancer using a test for circulating cancer DNA.

A recent report by Global Market Insights estimates that the digital health market 2018 will reach $379bn by 2024.2

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Figure 1. Your.MD4 is a free service that uses Artificial Intelligence to help customers find safe health information so they can make the best choices for their health.

Digital Health: from wellness health data, educate them and help make to clinically driven solutions informed choices. Real-time clinical- grade data helps optimise treatment As digital health matures, investment either involving doctors or in some focus is shifting from consumer wellness instances, without human intervention. applications to clinically focussed solutions. Wellness applications comprising consumer Engaged patients correlate with lower activation solutions brought to life as costs and better outcomes. According to part of the quantified self-movement (e.g. Silicon Valley Bank, healthcare costs for myfitnesspal, Runkeeper) and education least-engaged patients are 21% higher & transparency platforms such as WebMD than those for the most engaged patients. have raised multiple rounds of venture Over the past few years, clinical evidence funding in the early 2010s and have of digital health efficacy has grown successfully exited. As these solutions substantially: of 571 studies published have been largely unregulated, their between 2007 and August 2017, 138 buyers have been predominantly outside were published in January - August the traditional pharma and life sciences 2017. 860 clinical trials were underway space and included sports and fashion as of August 2017, with 82% of US trials comwpanies as well as private equity run by patient care organisations.5 firms. Several category leaders have been created, and as the price of entry has risen, the investor appetite has diminished.

The spotlight is increasingly on clinically focussed solutions whose aim is to 571 drive better health outcomes at lower studies have been costs. These solutions are empowering published between patients by providing them with tools to 2007-2017 860 collect and understand their real-time clinical trials were underway as of August 2017

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“At Engelworks, the terminology we tend to use for these clinically driven solutions is ‘digital medicine’. Other names that are frequently used are ‘digital therapeutics’, or ‘digiceuticals’.”

Defining digital medicine Digital medicine has qualities that are fundamentally similar to drugs, therefore At Engelworks, the terminology we this sector can challenge sections of the tend to use for these clinically driven pharma industry. To us at Engelworks, solutions is ‘digital medicine’. Other the excitement stems from being able to names that are frequently used are deliver interventions without any, or with ‘digital therapeutics’, or ‘digiceuticals’. little human interaction, using data, AI and machine learning to drive patient outcomes. Digital therapeutics (‘DTx’) have been defined by the Digital Therapeutics Alliance DTx treats a variety of diseases and (DTA) as “delivering evidence-based disorders, from diabetes to COPD to therapeutic interventions to patients, hypertension to depression. Some of that is driven by high-quality software them work completely on their own, programs to prevent, manage or treat e.g. web-based cognitive-behavioural a medical disorder or disease”.6 DTx are therapy (CBT) programs, some work tested for safety and efficacy in randomised ‘around the pill’, i.e. with a single branded clinical trials, evaluated by the FDA or medicine, and some ‘beyond the pill’, i.e. similar, and increasingly prescribed by with any drug for a specific condition. health providers. In most cases, they are delivered through a cloud-based service Leading companies in this sector connected to the patient’s device such as increasingly look like pharmacos, with a mobile phone, a tablet or a smartwatch. ‘product candidates’ instead of ‘drug candidates. Pear Therapeutics below provides a good example of a DTx company with multiple products across various therapeutic areas and development states.

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Product / Theraputic Academic Commercial Candidate Area Stage Partner Partner

Substance reSET Darthmouth Sandoz Use Disorder

Opioid reSET-O Darthmouth Sandoz Use Disorder

Insomnia / PEAR-003 Virginia Depression

Schizophrenia PEAR-004 Novartis (Pos Sx)

Traumatic DISCOVERY UCSF Brain Injury

DISCOVERY Epilepsy

reCALL PTSD USC

Parkinson’s DISCOVERY Disease

Multiple PEAR-006 Novartis Scierosis

Autism Spectrum DISCOVERY SickKids Disorder

Oncology, inflammation, DISCOVERY CV, GI, Respiratory POC Discovery FDA Presub FDA Pivotal Studies FDA Submission FDA FDA Authorization FDA

Figure 2. Pear Therapeutics digital product pipeline.7 Partnered Internal

For the purpose of this report, we have Propeller Health (a Propeller sensor limited the definition of DTx as the patient- attached to any inhaler feeds into the facing disease and medication management disease management software for asthma solutions. Examples of companies in this and COPD patients9) and Proteus (quick sector would include Voluntis (proprietary bedside diagnosis and management of scalable platform Theraxium supports a lung diseases in the clinical environment10). number of connected medical devices and applications in oncology and diabetes8),

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Figure 3. PillPack is an online pharmacy helping patients who are on a cocktail of prescribed drugs manage supply and take them in a timely manner, therefore improving adherence.

We have excluded (patient- or physician- several successful examples of cross- facing) pure-plays in diagnostics, remote area solutions, including PillPack founded monitoring and telemedicine offerings from in 2013 and bought by Amazon in 2018 this narrow definition, but should point for $1bn. PillPack is an online pharmacy out that DTx could be effectively integrated helping patients who are on a cocktail into health platforms that provide these of prescribed drugs manage supply and functions. However, as in any tech sector, take them in a timely manner, therefore there are many instances of convergence, improving adherence. In addition, there has e.g. where companies providing remote been a rise in the number of companies monitoring of patients, develop disease driving patient behavioural change as part management products. An example of a of treatment. Complex and degenerative crossover is Senseonics which gives the diseases, which cost a lot of money to ability for the nominated ‘My Circle’ of healthcare systems, are harder to tackle, up to 5 people to follow the data, as well but even this space is ripe for disruption. as provide the patient themselves with a diabetes disease management tool.11 The digital medicine sector is being targeted by startups, large diversified DTx companies, just as pharma and biotech, tech players as well as fitness & wellness are supported by specialised digital health companies that have matured their players focussing on operational functions, offering in the wellness space and are R&D, patients’ Electronic Medical Records, now pivoting to clinical technologies diagnostics including genetic screening, through acquisitions, partnering or own and decision support & analytics. These development. While large pharma and life are also outside the scope of this report. sciences companies have only been dipping their toes in the water, they are risking The majority of upstarts in DTx have to being disrupted by new entrants, especially date focused on a specific disease rather in the areas where digital medicine than building cross-therapeutic area solutions would aim to replace rather platforms. However, there are already than complement existing treatments.

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What would a winning In our view, these are the DTx solution require? attributes of winning DTx solutions: As technology gets more sophisticated, digiceuticals are migrating from more • Demonstration of proven generic user-friendly solutions (mobile efficacy through clinical trials and cloud) and clinically approved devices to data-driven Internet-of-Things systems • Regulatory clearance by underpinned by clinical grade data, where a FDA or an equivalent patient often has a choice which devices to connect into their personalised ecosystem. • Incorporation into the standard of care and provider prescribed/ payor reimbursed model Demonstration of proven efficacy through clinical trials • Viable business model

Digital therapeutics rely on software-based • White-box AI-based predictive interventions which have a direct impact on and personalised clinical a condition or disease. These interventions intervention and patient guidance are often based on large amounts of both based on clinical grade data patient and population data, crunched by machine learning algorithms. This impact • Compliance with the is what distinguishes this category from highest standards of the broader space of digital health or cybersecurity and privacy wellbeing devices which tend to inform and have less bias towards action. DTx provide • Openness and flexibility of guidance for both patients and physicians. system and data architecture.

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Figure 4. The Software Precertification Pilot Program (Pre-Cert)’s current working model explains how the FDA has reimagined its way of regulating digital health products. The accompanying Regulatory Framework document explains how FDA plans to implement the Pre-Cert Pilot Program within FDA’s current regulatory authorities.

Clinical validation in trials and regulatory the results are sturdy. It should also be approval are therefore critical for DTx. We encouraged to publish null findings to believe there is a strong ethical duty for save the industry from wasting resources anyone producing any health intervention, and focus on what genuinely works. either a pill or a piece of software, to demonstrate effectiveness and safety to the highest standards. Clinical evidence Regulatory clearance by and validation through clinical trials and FDA or an equivalent peer-reviewed clinical papers will also make doctors trust a DTx product and regard it Currently, the FDA and its international as an intervention that is going to help the equivalents are tasked with determining patient. This will also assure physicians, how best to evaluate DTx products. Software patients, advocacy groups, and investors that diagnoses or treats medical conditions that DTx meets necessary standards falls under the category of medical of safety, effectiveness, and value. devices. However, as such software is very different from traditional med tech devices, New DTx products need to be assessed approving DTx is not straightforward. A according to their potential risk, with low- number of products including reSET, Pear risk products requiring less evidence up Therapeutics lead product for substance front, in favour of data generation once abuse treatment, have been evaluated employed. In digital health, you can at a through a “de novo” premarket review low-cost track and analyse vast amounts pathway, a regulatory pathway for some of data continuously, making DTx suited low- to moderate-risk devices that have to the collection of real-world evidence. no existing equivalents on the market.

As a lot of digiceutical solutions aim to Given a much faster pace of change patient behaviour, the industry innovation, and often iterative should encourage replication as part of the nature of it, the industry requires a approval process rather than assuming different framework for regulation.

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FDA’s establishment of the Pre-Cert for the UK, the new NICE standards launched Software Program12 is a step in the right in late 2018, address both clinical and direction. Another source of inspiration is economic impact, and what evidence is in finance, which is also a heavily regulated needed to develop a robust case for use in industry, is the UK’s Financial Conduct the NHS. They also specify what information Authority (FCA) regulatory sandbox which to ask for from technology developers allows firms to test innovative products, and understand what ROI to expect. This services or business models in a live will enable the healthcare system to market environment while ensuring that identify which products show promise, appropriate protections are in place. which ones need further development According to the FCA, ‘Early indications and which ones wouldn’t work for the suggest the sandbox is providing the NHS. Furthermore, the framework has a benefits it set out to achieve with evidence comparative approach to defining evidence of the sandbox enabling new products standards, where the evidence required is to be tested, reducing time and cost measured against the risk of a new product. of getting innovative ideas to market, improving access to finance for innovators, We believe that this shift will benefit all and ensuring appropriate safeguards are providers in the healthcare value chain: built into new products and services.’13 • Clear guidelines remove ‘guesswork’ As the number of applications is growing, and help technology firms reach vital the governing bodies are issuing milestones such as MVP, Proof-of-concept new standards needed to develop and clinical evidence quicker and at a digital health technologies including lower cost and with lower failure rates; healthcare apps and wearables. • Quicker implementation timelines In the UK, the new NICE standards launched will benefit not only patients but in late 2018, address both clinical and also commercial companies, payors economic impact, and what evidence is In and ultimately taxpayers;

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Figure 5. Abbott Freestyle Libre Provider the user with a range of reports providing detailed information about glucose data, assisting both patients and healthcare professionals in making informed decisions regarding diabetes management.

• A data-driven model and focus on of this is a recent addition of Abbott’s patient outcomes also help developers continuous glucose monitor FreeStyle to prioritise high-value features Libre which includes a small plastic tablet and user-friendly solutions. that gets attached to a patient’s arm with an associated software either on a mobile phone or on a companion device, Incorporation into the standard which provides a patient with real-time of care and provider prescribed/ data on their glucose level and helps payor reimbursed model them manage insulin and food intake.

Greater opportunities would be available An NHS representative has commented for companies whose solutions will create that “Increasingly the NHS is going to be value for payors, providers, consumers, offering patients this sort of technology and in some cases employers. to help them more easily manage their own long term health problem. In the In our view, a DTx solution should be NHS of the future, for many conditions, reimbursed to signify that it complies you’re going to get NHS to support with the rules of market access and that directly from your smartphone or governing bodies have had an in-depth wearable device rather than having look at the solution’s safety and quality. to trek to regular hospital outpatient Even though this increases the time to appointments. Supporting people with market, it is paramount to gain access modern tools to manage conditions such to and buy-in from the physician and the as Type 1 diabetes is about to become patient. This also leads to quality assurance much more widespread. Innovations and would help drive consumer adoption. such as these also free up time and resources for the NHS as a whole.”14 Although it takes significant effort, innovative solutions are getting added to the reimbursement lists. A good example

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Viable business model Omada Health is a good example of an ‘outcomes-based’ model. It gets paid when Business models of digital medicine their client’s employees achieve health can be very different from those for results, e.g. their target weight loss.15 other interventions. A digital intervention can be tracked, which enables outcome- As consumers gain access to more or performance-based business models information, they are starting to move that help payors manage risk and cost. more seamlessly between public and For example, the payor would increase private treatment options in a number the reimbursement if the patient of countries. This is evidenced by a used the therapeutic as intended and growing share of private services in the especially if the DTx prevented re- UK (from 4% in 1970 to 10% in 2016),16 admission or repeat intervention. also exacerbated by lack of funding for NHS. Digiceuticals with their lower This approach would address one of the development costs, transparent fundamental issues with healthcare - the architecture and consumer-friendly misaligned incentives between providers business models (e.g. performance- of care, those receiving it and those paying based, subscription) are well positioned for it. Outcome-linked and anchored here. Subscriptions though could create payments are desirable as they incentivise a trap where a supplier is incentivised everyone to create things that work. Where to get people addicted to their service caregivers are incentivised to help the user which diverges suppliers from an get well as cheaply and quickly as possible, outcomes-based economic model. the payor is reducing cost and getting a significant return on investment per outcome vs the cost of today’s inefficient traditional methods of delivering health.

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576 deals have been & $4.3bn made in healthcare has been raised AI startups since 2013

DTx will change what the pharma industry health assistant. Anthem has partnered is selling: rather than a drug, it will sell with Silicon Valley-based Doc.ai which a package of drugs and digital services. allows the user to take ownership of its However, this will also affect to whom health data and get personalised insights the solution will be sold. Pharma firms while earning rewards by contributing to have traditionally marketed drugs to science and accelerating research for all. physicians and pharmacists, based on the efficacy of a specific product. In In H1 2018, China has become the second the near future, it could be paid on the most active country for healthcare AI outcome of a package of digital therapies deals. Having raised $72m, Infervision is and medicines with a closer connection the best funded Chinese startup focused to both providers and patients. exclusively on healthcare AI solutions.

In November 2017, it was announced that White-box AI based predictive the Chinese government had empowered and personalised clinical Tencent with leading the way in developing intervention and patient guidance an open AI platform for medical imaging based on clinical grade data and diagnostics, and Alibaba for smart city development, including smart healthcare. The healthcare sector has started to invest in AI, either directly or through startups. In 2018 Tencent partnered with Babylon In the private market, healthcare AI Health, a UK startup which has developed startups raised $4.3bn across 576 deals a virtual healthcare assistant. WeChat users since 2013, showing the highest level of are getting access to Babylon’s app, which AI deal activity across all industries.17 allows them to message their symptoms and receive feedback and advice. It also Health AI examples are Optum Ventures partnered with UK-based Medopad, which investment in Buoy Health which offers a brings AI to remote patient monitoring. chatbot described as an AI-powered digital

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FDA Fast-track regulatory approval in 2018.20 Recently, Google DeepMind’s opens up new commercial pathways neural networks matched the accuracy of medical experts in diagnosing 50 sight- FDA has been approving an increasing threatening eye diseases. Even pharma number of AI software products for companies are experimenting with deep commercial applications. A good example learning to design new drugs. For example, is IDx,18 whose IDx-DR software screens Merck partnered with Atomwise which is patients for diabetic retinopathy without using AI for Drug Discovery to help deliver the need for a second opinion from an better medicines faster. GlaxoSmithKline expert. It was given a “breakthrough device is partnering with Insilico Medicine that designation” to speed up the process of offers a cost-effective and secure cloud- bringing the product to market. IDx-DR based computational hub for clinical trials. was able to correctly identify patients with “more than mild diabetic retinopathy” Fast-track regulatory approval opens up 87.4% of the time, and identify those new commercial pathways for over 70 AI who did not have it 89.5% of the time. imaging & diagnostics companies that have raised equity financing in 2013- Viz.ai was approved to analyse CT 2018, accounting for a total of 119 deals. scans and notify healthcare providers of potential strokes in patients.19 Post- FDA-approval, Viz.ai closed a $21m Lab data vs free-living data? Series A from Google Ventures and Kleiner Perkins Caufield & Byers. Researchers are now discovering that the best health data may not come from a Arterys, a medical imaging cloud platform lab. Data collected in free-living settings backed by GE Ventures, got an FDA is more representative of the real world approval for analysing cardiac images than data collected within a lab or in a in 2017 and liver and lung AI lesion clinical trial. White-box AI can gather and spotting software for cancer diagnostics analyse self-measurement de-identified

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data automatically in free-living settings Compliance with the highest of large cohorts over extended periods standards of cybersecurity to understand correlations, trends and and privacy predictive factors but also deliver a personalised service including diagnosis Integrated digital healthcare ecosystems and management. This requires high-quality are critical infrastructures that are vital to data with no bias and the right type of AI. the well-being and safety of the public. New digital workflows have evolved in this sector, Using AI, researchers are starting to bringing new security challenges. Systems study and measure atypical risk factors are now interconnected, and mobile devices that were previously difficult to quantify. and sensors are extensively used both for A recent study from startup Cardiogram remote access and for data sharing. This suggests “heart rate variability changes digitisation increasingly exposes the sector driven by diabetes can be detected via to both generic and targeted attacks. consumer, off-the-shelf wearable heart rate sensors” using deep learning.21 One In 2015, the healthcare industry was the algorithmic approach showed 85% accuracy most attacked by cybercriminals according in detecting diabetes from heart rate. to a Cyber Security Intelligence Index by IBM.22 Over 100m healthcare records were Generating new sources of data and compromised during that year in more than putting EHR data in the hands of patients 100 countries. High demand for patients’ — as Apple is doing with ResearchKit and medical records in the black market CareKit — promises to be revolutionary is fueling the numerous cyber attacks for clinical studies as well as diagnosis that have hurt the reputation and and in-your-palm interventions. finances of health care institutions.

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2,546 189,945,874 healthcare data health records were breaches took place exposed as a result 2009 - 2018 of the breaches

According to the Federal Bureau • DTx companies need a cybersecurity of Investigation, electronic health solution that not only detects advanced records (EHR) are far more valuable threats to its network, but ultimately than financial data. EHRs can sell for prevents them from entering at all. This $50 in the black market, compared includes firewall, app control, anti-bot and to just $1 for a stolen social security anti-spam capabilities, as well as threat number or credit card number.23 emulation and threat extraction tech.

Any IT system, whether it is a startup, care • It is best to minimise the complexity of provider, research lab or medical device a network and keep the distinct software company that holds and processes sensitive versions used to a minimum. This would and confidential details about individuals, as make it easier to keep systems up to date, well as possesses valuable IP generated via monitor the landscape and implement its R&D process, is an attractive target security patches when necessary. for cybercriminals. • It is crucial to have full awareness of all • Disruption to healthcare services IoT devices and sensors connected within may have a devastating impact on the environment. Proper access policies patients’ health, so cybersecurity should be enforced, and checks of integrity solutions need to be engineered for of data and operations performed on these reliability, resource-efficiency and devices need to be regularly carried out. resilience to promote operational continuity and minimise downtime. DTx must, therefore, provide the most advanced adaptive security tools and services to secure both patient, staff and corporate data against theft, loss or corruption.

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The need for strong privacy policies datasets, so most secondary analysis and research will continue as before. Between 2009 and 2018 there have However, commentary that relies on using been 2,546 healthcare data breaches confidential patient information may be involving more than 500 records in the affected. The consequences will depend US alone. Those breaches have resulted on opt-out rates. If large numbers of in the theft/exposure of 189,945,87424 people opt out of allowing their patient healthcare records. Healthcare data information to be used for research, this breaches are now expected to reach could affect the quality of research and more than one incident per day globally. undermine work to improve treatments.

As a result, the general public is concerned about their health data Openness and flexibility of security and confidentiality. Nevertheless, system and data architecture recent research shows that people trust organisations such as NHS in the UK Consumers are offered an increasing organisations to manage patient data, number of health and wellbeing apps and there is strong support for data and devices and are becoming better being shared to improve care and for informed at choosing a care provider further research. or a type of treatment or a health service. This presents an opportunity for new Safeguards for the use of patient data entrants (according to McKinsey, about have been strengthened by the $300bn of incumbent healthcare revenue implementation of the General Data could be at risk)25, as well as a headache Protection Regulation (GDPR) in the for the established healthcare ecosystem. UK, and similar regulations are in place or about to be implemented in other In effect, consumers are becoming their jurisdictions. These changes will not own system and data integrators. A have any impact on depersonalised reasonable expectation from a consumer

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is therefore that the devices and apps We believe that for any DTx product to can seamlessly talk to each other, e.g. a gain wide adoption, it needs to have a user’s continuous sugar monitoring device flexible, open modular infrastructure which places a sensor with a tiny needle on which would allow it to ensure a flow of his arm would relay data to his AI-driven a consumer’s data within their personal diabetes management assistant (an app health ecosystem and beyond. on a smartwatch and on a iPhone). If I any new devices are added to this personal health system, a user would expect them to follow the same data protocols. In addition, a user would expect a seamless data transfer to their physician - but only on explicit permission rather than by default!

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Which areas are Our research shows that the most ready for digital target areas that hold the therapeutics, and why? biggest promise for DTx are:

Conditions that could be stabilised or even • health conditions that can reversed by behavioural solutions include be addressed, and even chronic diseases related to habits (of reversed, by behavioural which there are 11 main therapeutic areas and psychological solutions; including Type 2 diabetes, hypertension, allergies, rheumatoid arthritis), as well as • areas where demand a range of mental health conditions. In is outgrowing the developed world, more than 3/4 treatment capacity; of healthcare budgets is spent on chronic conditions. These could benefit from a • conditions where more private, self-driven, cost-effective, connected devices can in-the-palm-of-your-hand solution. play a huge role in medical adherence, for example, An example from the diabetes sector is an respiratory diseases such AI company Biolink.Tech26 which we helped as asthma and COPD; incubate in 2018. Biolink.Tech is using unique biometric data, AI and gamification • personalised, or to promote healthy habits and provide precision medicine. support and motivation to patients that suffer from Type 2 Diabetes. The product is now being adopted by insurers who should see a substantial reduction in risk and costs by supporting patients beyond pharmaceutical treatments, as well as

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Figure 6. Biolink.Tech gathers unique health data from own and partners’ sensors and devices and use AI to integrate into programmatic self-management of eleven big and costly diseases and conditions. The open ecosystem connects to 3rd party health sensors, devices and IoT equipment.

additional revenue from new customers who We believe that the progress in Personalised would have been previously uninsurable. Medicine will be strongly supported by the emergence of DTx. Personalised Medicine Other promising areas are where demand involves the discovery of particular genetic will outgrow treatment capacity. For variations that contribute to illness and to example, with a fast-growing ageing patients’ responses to treatments. This population and a shortage of healthcare enables targeting the molecular cause professionals, there is a risk that of certain diseases and the development healthcare systems won’t cope with the of diagnostic tests to better predict increased workload. DTx solutions are patient outcomes. These will benefit able to reduce the burden on staff by from advancement in data collection via providing opportunities for continuous biometrics and sensors, and diagnostics remote monitoring, equipping physicians via AI and machine learning. DTx would with relevant insights rather than build on this by creating highly tailored drowning them in data and increasingly disease management programmes with being able to make interventions personalised interventions, based on without any human involvement. individual characteristics of each patient.

Some companies are focusing on diagnosis In April 2018 Roche acquired Flatiron and early detection, but we believe that Health for $1.9bn.27 Flatiron Health focuses diagnostics is most powerful when it leads on electronically compiling fragmented to a therapeutic intervention. Imagine patient information from disparate sources you know that in 20 years you might get to evaluate and select treatment options dementia, but there is currently no cure in oncology. It may facilitate current for it. We, therefore, believe the market molecular targeted therapeutics as well will favour solutions that offer a mixture as enable discovery of new clinically of therapeutic and preventative value. relevant molecular variants.additional revenue from new customers who would have been previously uninsurable.

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Figure 7. Performance of S&P indices to 11 February 2019.28

Where is value for me?

Pharmaceutical companies

Pharma revenues, profit margins and 10.1% R&D returns valuations are increasingly coming under Cost pressure. While the headwinds include Forecast the need from healthcare systems to peak sales reduce costs and governments’ increasing focus on prevention, the core problem is the lack of productivity in the lab. 1.9% 2010 2018 Stalling innovation is reflected in a continuous decline in R&D returns. According to Deloitte, R&D returns $2.2bn $816m for 12 large cap biopharma companies have fallen from 10.1% in 2010 to 1.9% in 2018, while the cost of bringing a drug to market has almost doubled $1.2bn $407m from $1.2bn in 2010 to $2.2bn in 2018. Forecast peak sales have halved from $816m in 2010 to $407m in 2018. 2010 2018 2010 2018

©Engelworks Limited 2019 25 What is digital medicine and why does it matter?

Figure 8. The mySugr diabetes app a free diabetes logbook which keeps the patients diabetes data under control and features such as a blood sugar tracker, carb logger, bolus calculator and the patient’s estimated HbA1c value.

This is being reflected in the sector • increase revenue and profit margins performance on the stock market, where for the existing drugs in the market by the 5-year return for the S&P Pharma enhancing them with digital extensions. Index was 0.20% vs 10.54% for the S&P This would help shift from a pill to a 500 and 17.06% for the tech industry.29 total care package. Wider availability of patient data through electronic medical Historically pharma and tech haven’t been data should enable to further explore natural bedfellows due to vast differences outcomes-based pricing which healthcare in speed of innovation, size of investment payors are increasingly seeking, thus and attitude to risk. However, given the improving the drug’s competitive position. challenges in their core activities, a few are dipping their toes in digiceuticals. One • increase the value of pipeline assets. example is Roche acquiring mySugr, an This could include using AI to aid the open platform for diabetes management process of drug discovery, identify in 2017.30 Post-acquisition, mySugr hidden patterns in data to finetune the has become an integral part of Roche’s drug, as well as developing a digital new digital health services platform component as part of the asset. A well- in diabetes care. The companies have designed digital companion could help been partners since 2014, whereby drive adoption and improve adherence. mySugr was supporting Roche’s Accu- Chek portfolio of products in diabetes. • create a pipeline of new digital- only solutions, as their cost is Adopting DTx could help pharma a fraction of pharma R&D. companies improve their R&D returns in the following ways:

• reduce the cost of pharma R&D. This Once added value can be demonstrated includes applying machine learning and unit economics show profitability on and AI to large volumes of clinical a small scale, pharma companies would data gathered from a variety of be able to channel substantial resources sources including DTx tools, to into the space to achieve scale. However, support R&D decision making and they do not currently have the necessary improve trial design. Gene and stem- implementation capabilities to fully embrace cell therapies are a good example of digital medicine. For them to unlock the a sector already benefiting from this. full potential of truly breakthrough R&D capabilities, would require a complete Outside R&D, pharma companies could digital transformation. Current levels benefit by applying DTx tools to provide of R&D returns are unacceptable and support services to patients. Traditionally will be a catalyst for these shifts. they used nurse-led services for expensive drugs. DTx would allow extending these We believe these are the ways pharma services to cover other drugs, capture could capture value in digital therapeutics: more real-time data and improve adherence, all done in a cost-effective way. • Adopt a company-wide digital transformation and DTx strategy; Operating in a highly regulated environment, incumbents are very cautious • Partner with tech companies that have in adopting digital health solutions. This built cross-sector platforms to support creates a risk of large tech players stealing R&D (e.g. Google cloud Big Data solutions, large parts of the market, especially in IBM Watson for data crunching in the growing areas of chronic diseases, R&D, specialised AI for drug discovery whose growth is driven by the increased players such as Atomwise and XtalPi); longevity of population and the conversion of a number of terminal illnesses into • Buy niche tech players or build own chronic. Tech solutions linked to behaviour solutions for key therapeutic areas; changes do have a strong edge here.

• Lead with digital in the therapeutic The majority of tech behemoths are areas (buy/roll-up or build) where muscling into the health space and the company is seeking to establish are leveraging their assets including presence / grow market share; large numbers of users, the app store networks, huge volumes of data, • Shift from the pill to total care existing Big Data infrastructure and solutions including a pill, a digital tools (storage, AI and machine learning therapeutic and where applicable, a expertise), hardware experience etc. prevention/wellness component. We believe that the best ways of We believe that over time the companies capturing the value in digital therapeutics that do not have a strong tech component for Big Tech are as follows: will be seeing further pressure on their valuations in the public market. Build or buy & scale platforms

Large technology players to provide functional cross-therapeutic area solutions in the digital medicine While a number of Big Tech companies that space and leverage existing data and user currently dominate the tech landscape have base. This means being a supplier to DTx been built using the mentality of ‘moving pure-plays and pharma companies: fast and breaking things’, a lot more care is required in the heavily regulated • AI tools for pharma R&D. In September DTx area. A key barrier for Big Tech is the 2018, Accenture and Merck announced healthcare market fragmentation creating a partnership with Amazon to launch difficulties in market access and requiring a data-driven drug development different actions for each market. This platform on Amazon Web Services.31 goes against the fundamentals of large tech companies who are designing for mass scale across a global market.

• Telemedicine and remote monitoring. • Pharma sales and distribution. As of An example of this is Alibaba Health’s March 31, more than 7,500 drug, food online health consultation platform and nutritional supplement companies that as of March 2018 had 23,000 have joined Alibaba Health’ Ma Shang medical practitioners, pharmacists Fang Xin platform, which tracks the full and nutritionists, providing an average life cycle of their products and help fulfil of more than 50,000 consultation their regulatory compliance obligations. sessions daily. There were 28m active Another good example here is Amazon’s users on the company’s ‘My Health’ entrance into the pharmacy sector service through parent Alibaba’s through the PillPack acquisition. Taobao mobile app. Another example is a patient monitoring Streams app for doctors and patients by DeepMind / Extend successful wellness Google, widely used in the UK’s NHS;32 products into health by partnering with healthcare companies for • AI-based communications tools, e.g. expertise and market access Baidu, China’s largest online search service, uses the capabilities of its AI A number of hardware-led companies tool, Baidu Brain, in the medical field, including Apple, Fitbit and Samsung through a chatbot that assists doctors whose smartwatches have previously in their communication with patients; provided wellness applications, are moving into Health. For example, in 2018 FitBit entered partnerships with Dexcom and United Healthcare and participated in the FDA’s precertification program and the National Institute of Health’s Precision Medicine Research Program.33

Figure 9. Livongo joins dozens of data sets together and combines them with the signals from their own Livongo devices, coaches, and web assets, to extract the drivers of behaviour change. They then deliver actionable, personalized and timely recommendations through a broad set of applications to our members.

Build & Buy pure-play manufacturers are still around. Not many!), digital therapeutics are on Create (digital-led) total care solutions the rise. in the growing therapeutic areas, which would increasingly use behaviour change We think the biggest opportunities for driven, sometimes non-pharma, solutions value creation for tech pure-plays and (e.g. in autoimmune chronic diseases investors in this space are as follows: such as diabetes, hypertension; in mental health). Big Tech is well positioned to grab a large part of this market from established Creating solutions for a specific players. Big Tech understands what is unmet need required to make an attractive consumer- facing product, has a lot of experience Either in a therapeutic area or a function in picking niche tech players with strong or geography. A startup should only build products and scaling them across their the part of tech which hasn’t been done vast user base. Another opportunity lies before and which would create a barrier to in buying multiple on-point solutions and entry and rent everything else (including integrating them into a scalable platform AI tools) until the proof of concept has that would provide a total care platform been successful, followed by a client pilot, for a specific sector, e.g. elderly care. and the company is ready to scale. This would unlock scale up funding and make the company an attractive target for large Start-up and scale-up tech pure- pharma or Big Tech, or allow to grow plays and venture investors as a standalone company into adjacent areas. We would recommend taking a While the digital wellness sector has step from wellness towards regulatory matured, creating some strong new approval to create a lasting barrier and category leaders, successful exits and make it more valuable to customers. multiple casualties by the roadside (think of how many successful fitness tracker

Joining an accelerator run by a Systems Integrators powerful health sector authority This might be a faster way of building value As an example, the NHS in the UK could in fast-growing or previously underserved help get a rubber stamp or an early trial by traditional pharma therapeutic areas, within this organisation or company. From and where digital could make a large our experience, it might be faster to get a difference. An option would be to build commercial client than a public body client, a core and then buy and integrate as the process of procurement in public complementary businesses to complete health is arduous, and therefore ‘the road to the puzzle. The market values open and the NHS (or similar) is covered with bodies flexible system and data architecture, of startups who have run out of runway’. as consumers are increasingly choosing which devices they want to use, and expect them to be able to talk to each other. Single therapeutic area focus Although it is taking time for the tech to Even a single therapeutic area can easily penetrate the regulated medicine space, be big enough, evidenced by how many as the experience shows, the curve of successful growth companies are operating adoption is likely to be exponential. The in the diabetes space. One example is time to create in this space is now, Livongo, a US startup which was founded and speed to market is key. in 2013 and raised $240m over 6 rounds34 to establish a strong position in the US diabetes sector servicing nearly half of Insurance companies Fortune 100 companies. Having almost reached a unicorn status ($1bn+ valuation) Insurance companies have been so far in the diabetes sector, it is now looking mainly watching the developments in the into hypertension and depression.35 digiceuticals space from the sidelines.

Figure 10. VitalityHealth offers members an Apple Watch Series 4 to stay active and track activity to earn Vitality points.

We believe that digital medicine Improving customer retention could make a difference for insurance companies in three areas: Improve retention via providing their customers with value adds, e.g. reducing their health insurance premiums if they Cost reduction reach their health goals. A good example of such pricing model is Vitality’s private health • Cutting the cost of disease management insurance in the UK, where Vitality provides by providing customers with access to a new member with an Apple Watch for pre-vetted digital medicine tools with £99 upfront and then links the monthly proven cost-efficiency and efficacy; premium to the level of physical activity (which they can track through the Apple • Reducing the number of instances by using Watch).36 As most insurance companies prevention and early diagnostics tools. do not make any profit within the first few years of an insurance contract, retaining a customer longer is key to profitability. Increasing revenues We believe that the best way forward is: Create additional revenue by signing up a cohort which was previously too high risk to insure. This could be achieved by Partnerships partnering with digiceuticals companies that provide tools to contain and in some • Offer branded third-party solutions as cases reverse chronic illnesses, and part of an insurance deal, e.g. offering therefore reduce a potential customer’s a free or discounted Apple Watch; risk and expected the cost of care.

• Add alternative healthcare providers Healthcare providers with more attractive cost structures to the reimbursement list. An example We believe that the rise of of this would be looking at the new digiceuticals presents the incumbent breed of clinics (Babylon Health with its healthcare providers with both online doctor consultation offering);37 threats and opportunities.

• White label: use partner offerings as part Wide availability of technology has made of your own branded package. This could consumers more aware of their choices, even result in a new insurance brand as well as provided them with a range of for a well-defined customer segment; wearables giving them real-time biometric data and increasingly sophisticated applications which are evolving from Selective acquisitions providing information to advising and giving calls to action. This means that For solutions which will be implemented consumers are now more discerning, across the whole insurance company, it demanding and knowledgeable when it might be more cost efficient to buy such comes to choosing a healthcare provider. a pure play tech provider. This would provide an insurance company with We believe that digiceuticals could more opportunities to integrate it into help healthcare providers to cut costs a single health and wellness platform, by automating low-value functions, especially for the players who have both improving the flow of information and insurance and patient care offerings. providing scalable software-based products (e.g. remote monitoring as part of a disease management package).

The median holding period for top 10 exit deals:

4.3 6.7 years in 2016 years in 2017

There is also an opportunity to increase • Buy & roll out where a company revenues through acquiring new customers intends to roll out a solution globally, or improving retention of the existing and it would be more economical ones by: to buy it rather than a license.

• providing new services supported by health • Buy & build: where an existing tech, e.g. urgent online GP appointments business model is under pressure. or opening up new segments to consumers An example of this is a traditional (e.g. using CBT applications is cheaper chain of hospitals buying into a than (private) face-to-face sessions and digital-only new model care provider. might attract customers that would otherwise not be able to use it); Private equity • Creating digitally-led total care packages. The private equity industry considers From our point of view the most healthcare an attractive investment optimal ways of capturing value for sector due to a number of longer-term incumbent healthcare players are: trends including ageing populations, the development of innovative drugs and • Development of a comprehensive devices, consumerism, digitalisation digital transformation strategy including and the entry into the industry of non- ‘develop / partner / buy’ targets is a traditional players. The gold rush has must to be able to stay competitive; driven up competition resulting in much higher multiples being paid for assets. • Partnerships with clinically validated This results in a pressure to deliver on a startups and scaleups. From our strong value-creation plan before an asset experience, seed-funded and Series is resold, as well as in a longer holding A startups are acceptable for pilots, period. According to a recent Bain’s study, while post-Series B scale-ups are the median holding period for top 10 better suited for roll-outs.

Figure 11. Babylon is a subscription health service provider that provides remote consultations with doctors and health care professionals via text and video messaging through its mobile application. The service also allows users to receive drug prescriptions, referrals to health specialists, and book health exams with a limited number of facilities in London.

exit deals shows was 6.7 years in 2017, • Gain leadership by increasing scale compared with 4.2 years in 2016.38 within a category, therapeutic area or a function; We believe that as traditional pharma is seeing a collapse in R&D returns, • Leverage an asset’s R&D capabilities; digiceuticals present a significant source of value for Private Equity firms. • Buy tech assets that can help reduce costs; From our point of view, these could be attractive strategies: • Access new profit pools by reaching into new segments;

Build and buy/roll up We see such opportunities for PE firms in elderly care, mental health As asset holding periods are increasing, autoimmune chronic diseases it becomes crucial that PE firms not only and more. optimise costs post-acquisition but also build a strong growth engine. As they are able to mobilise large volumes of capital, Investing in disruptive models we believe that they are well positioned to create platform solutions for a particular Invest in disruptive models that could therapeutic area or function using the disintermediate some traditional industry acquired digital or traditional healthcare players. An example of this is new asset as a core, and complementing it model clinics that are using the latest with other bolt-on acquisitions. These technology for all core (treatment) and acquisitions would drive up the value supporting functions and may or may by helping the portfolio company: not have an offline presence. Babylon Health, which has started online, now operates 5 offline clinics in London.39

How we can help We help clients build, grow and transform their businesses. We help companies in the health sector create sustainable value through smart Our services include digital transformation and innovative growth strategies, business and creation of innovation engines; growth models and new products and services. strategy & business model development; customer experience and product & service We combine advisory and consulting design. We also provide our clients with work with incubation of own solutions. market intelligence, acquisition target assessment, technology and new We work with owners (founders or investors partners audits. Where necessary, - private, strategic, VC or PE) or C-suite we bridge leadership roles in execs in Healthcare, Wellness and Digital transformational situations. Health businesses, or companies entering this sector, that are looking for either organic growth solutions for their portfolio companies (via new products and services, digital, or new markets), or for support in transformational deals that create value including mergers, spin-offs, and roll-ups.

We can help if:

• Your existing model • You already have an idea • You are considering has stopped working or of new tech, products, investing or buying a the market has moved services or business business in the health away from you; models but need to space and need an opinion develop them further; on its current state and • You are looking to execute prospects or would like corporate development • You are looking to adjust, to improve growth in the solutions incl. restructuring, improve or defend your business that you have spin-offs and roll ups. existing business model invested in or purchased; to adapt to a changing • You are future-proofing environment; your business and want to explore completely new business models and growth strategies;

Why Engelworks Discretion and experience of working on market-sensitive transactions 360º experience (M&A, IPOs, disposals).

We have started, grown, investor-funded Fast hands-on delivery and senior and successfully exited businesses, advised engagement: we use proven young and established companies, and proprietary and third-party models. worked for leading multinationals. We have an entrepreneurial mindset combined Deep understanding of value creation with frugal innovation and focus on practical sustainable solutions. We have Due to our corporate finance experience, a strong passion for the health sector all our solutions are grounded in deep combined with deep domain expertise. understanding of value creation in private and public markets, investor criteria, and Interdisciplinary and cross- have clear milestones understandable sector approach for various types of finance providers.

Our team have diverse professional Empathy, client centricity, transparency backgrounds, providing expertise as and honesty: we listen carefully, we strategists, marketers, financiers, will tell you if we think something doctors, technologies and scientists. is not going to work, AND we’ll always present an alternative.

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13. https://www.fda.gov/medicaldevices/ 26. https://biolink.tech/ digitalhealth/digitalhealthprecertprogram/ default.htm 27. https://flatiron.com/

14. https://www.fca.org.uk/publications/ 28. https://www2.deloitte.com/uk/en/pages/ research/regulatory-sandbox-lessons- life-sciences-and-healthcare/articles/ learned-report measuring-return-from-pharmaceutical- innovation.html 38 What is digital medicine and why does it matter?

Figures

1. https://cdn-images-1.medium.com/ 4. https://www.mobihealthnews.com/sites/ 8. https://tech.eu/wp-content/ max/2000/1*FR4xJ3E_wyKrXrYGe7qQmA. default/files/Screen%20Shot%202017-09- uploads/2017/06/mysugr-app.jpg jpeg 14%20at%203.16.41%20PM.png 9. https://www.livongo.com/program.html 2. https://peartherapeutics.com/science/ 5. https://dhq1cs4l68nw8.cloudfront.net/ product-pipeline/ catalog/product/cache/image/700x700e9c 10. https://www.vitality.co.uk/ 3970ab036de70892d86c6d221abfe/s/t/ 3. https://cdn.vox-cdn.com/thumbor/ starterpack_1_6.png 11. https://www.babylonhealth.com/product Jz4Xw7Xs-Fxnige1c2qnDlez- c0=/0x18:1100x751/1200x800/ 6. https://biolink.tech filters:focal(0x18:1100x751)/cdn.vox-cdn. com/assets/3968063/PillPack_Shipment. 7. https://us.spindices.com/indices/equity/sp- png pharmaceuticals-select-industry-index

Irina Pafomova [email protected] https://www.engelworks.co.uk/