For companies competing in the digital health space, measuring and demonstrating value is going to be crucial
In 2020, according to Rock Health, digital health companies received the highest amount of funding in any first half of the year since 2011. The number of digital health unicorns is increasing, and share prices for digital health companies have broadly increased since the COVID-19 pandemic took hold. However, digital health has yet to see the scale of returns seen in other sectors such as technology. For example, in 2019 very few public digital health companies showed positive net income.
To better understand the drivers of value within digital health we investigated 55 digital health companies (25 public and 30 unicorn), including an analysis of their reported income and share price evolution. We found that whilst only three companies had positive net income in 2019, 43% had share prices above their IPO value at the end of 2019, increasing to 64% in mid-August 2020 (as a marker of the effect of COVID-19 on digital health). In a series of expert interviews, we also unpicked some of the factors that drive adoption and commercial success within the digital health sector.
The business model matters
Business models are converging in digital health and marketing to consumers directly in a business to consumer (B2C) model, often through platforms, as a fast and convenient way to access new customers and generate evidence of revenue. This is an attractive option for unicorn companies, with 50% of those companies we looked at operating through B2C in some way, compared to 32% of public companies. However, generating scale is more difficult. Business to business (B2B) models involving large customers, including employers, payers and providers with integrated delivery networks (IDNs) offer higher volumes of customers thus improving access to patients, data and revenues. We found that for public companies, B2B is the dominant business model, with 16 companies (64%) operating in that sphere and only eight companies (32%) selling direct to consumers. Public companies with B2B models also had larger share price gains up to the end of 2019 with an average gain of just under 900% from the time of IPO, compared to almost no change in value for those companies that relied on B2C models.
Does clinical evidence really matter?
You would expect applications that impact health require evidence, in the same way other therapeutic interventions do. However, 70% of both public and unicorn companies we looked at don’t feature research on their websites, and we found no link between the number of affiliated publications by company and net income for 2019. This might be because the experimental nature of the innovations means there is no precedent for studies, or the dilemma of needing customers and patients first, before companies can generate evidence for publication. It could also be that the commercially sensitive nature of algorithms behind some digital health solutions makes companies reluctant to publish, or that clinical evidence just isn’t always required. We did, however, see a link between number of patents and net income, with public digital health companies overall having a higher average number of patents per company (47.2%) than unicorns (13.7%), and a higher number of patents was correlated with both higher net income and share price gain up to the end of 2019.
What do the experts think?
- Traditional care is being disrupted
- Users don’t have to be digitally enabled
- Applications that drive behaviour change will be most effective
- It’s still all about the data
- It’s not always about the revenue
Traditional care is being disrupted
COVID-19 has shown the world that delivering care remotely is feasible and acceptable to patients. There has been huge uptake in both primary and secondary care outpatient settings in the wake of the pandemic, but there are many other parts of healthcare that are amenable to remote delivery. As one pharma NED put it: “Growth areas will be where you can disrupt the traditional delivery of care and make it more efficient, more available, or where you can prevent people needing to go to primary care at all”. There couldn’t be a better time for digital disruption.
Users don’t have to be digitally enabled
Having a digitally-enabled base of customers or patients makes the idea of adopting digital health solutions straightforward – it stands to reason that consumers who are happy to use digital apps and devices would be happy to use digital health solutions. However, the possibility of passive data collection through sensors and wearables also makes digital health solutions attractive for patients that might find digital difficult, such as those with cognitive impairment. According to a UK based Digital Health Innovation Manager “that's attractive to both the digital savvy and the less digitally savvy…there's a role for digital to be as least intrusive as possible while still giving… the data and the insights to healthcare.”
Applications that drive behaviour change will be most effective
Digital products, particularly those that link with smartphones or devices, can make real inroads into behaviour change for patients. Nudges can be given to patients to take medication, or to check blood glucose, for example. Therapeutic areas where behaviour change can really impact health outcomes are ideal targets for digital health intervention.
It’s still all about the data
Data in digital health is both a blessing and a curse – it offers fantastic possibilities for both patients and companies, but getting clean, standardised data is difficult. Software needs to be designed to interconnect with existing systems, and the data itself needs to be easily sorted and standardised. Finding a niche where data is already standardised and easily available makes scaling a digital health solution much easier.
It’s not always about the revenue
Digital solutions don’t need to be revenue-generating in their own right. They can be used as adjuncts to protect or enhance existing revenue streams, such as an app that is co-prescribed alongside a drug to enhance monitoring and regulatory compliance. As one industry leader put it: “…in a way, we're building layers of the onion and in the middle of it is a successful [pharmaceutical] product”. Revenues from digital solutions don’t tell the full picture and it is important companies find a way to measure the full value contribution of their digital assets.
The importance of demonstrating value
Clearly the investor community has high expectations of digital health companies, but how those expectations are met will evolve over time as the sector matures. Business models are changing along the way and the evidence requirements will increase as the market becomes more crowded. Having a clear way to measure and demonstrate value internally and externally will be crucial as companies seek to compete in the rise and rise of digital health.
If you would like to hear more about our survey or discuss the issue in general please get in touch.
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