Hundreds of startups are trying to succeed in a digital health market that is now flush with cash.
Investors poured $5.4 billion into healthcare technology startups in the first half of 2020, according to digital health venture capital firm Rock Health.
But having a breakthrough technology is not enough to succeed.
Case in point: Proteus Digital Health, a high-flying digital therapeutics startup that secured big pharmaceutical partnerships, raised close to $500 million dollars, and once had a massive $1.5 billion valuation.
The startup, which spent almost two decades working on ingestible sensors, made headlines in 2017 when it gained regulatory approval for the first “smart pill” in the U.S.
But the company struggled to find a market for its product, reportedly failed to close a $100 million funding round in 2019, and then lost a development deal with Otsuka Pharmaceuticals.
Proteus attempted to raise capital and get more financing this year but potential buyers were turned off because Proteus was burning through too much cash—to the tune of $2 million a month—and it wasn't clear when the company would be profitable, according to an investment bank the company hired.
The company ultimately filed for Chapter 11 bankruptcy in June. Last month, Otsuka’s U.S. subsidiary acquired Proteus’ technology assets for $15 million through its bankruptcy proceedings. “The purchase of Proteus assets and intellectual property will serve as a catalyst for implementing the next phase of our digital medicine program,” said Kabir Nath, president and CEO, Otsuka North America Pharmaceutical Business, Otsuka America, Inc. in a statement when the acquisition was announced.
Some of Proteus’ struggles were unique to the company. Its "smart pill" technology was expensive to develop and it needed to retain top tech talent to run the company, sources say.
Proteus had a highly ambitious strategy to tackle challenging disease states, particularly central nervous system disorders like schizophrenia, for its first application of the technology.
The product’s price point also was an issue.
The average monthly cost for generic Abilify, an anti-psychotic drug used to treat schizophrenia and bipolar disorder, is $500 to $800, according to GoodRx. The product Proteus developed with Otsuka, Abilify MyCite—a drug-device combination of the drug designed to help patients take it as prescribed—costs upwards of $1,600.
Some of those challenges could offer some learnings to other companies across the health startup landscape.
“I think the key issue here is ‘So what? So, you have a cool technology. A cool technology by itself does not make a successful business.'" said industry analyst David Shaywitz, M.D., founder of advisory services firm Astounding HealthTech. "The lesson here is—what problem are you trying to solve?"
The boom and bust of digital health
So how do digital health companies with big ideas avoid the pitfalls of their counterparts?
It comes down to strategy and execution, said investors, industry analysts and digital health leaders who spoke to Fierce Healthcare.
For starters, the question for digital health companies must answer is whether the product will be something the marketplace will see the value in.
For example, Proteus’ "smart pill" system involves a patient taking a medication with an embedded ingestible sensor while also using a wearable patch that detects medicines and captures physiologic response. The idea was, in part, to address concerns of non-adherence to medication regimens, an expensive challenge for the pharmaceutical industry, adding up to about $250 billion annually in potential lost revenue.
"Just because you build something and build it well, it doesn’t mean there is a real need for your product in the healthcare ecosystem or it’s what the end-user wants," said Vasudev Bailey, Ph.D. partner at Artis Ventures, who is not an investor or an advisor to Proteus. "Pharma cares about non-compliance, but why should patients care?”
The idea of an ingestible sensor also might not resonate with some patients.
"Tech innovators talk about wiring people up. But Grandma doesn’t want to be wired up," Shaywitz said.
Kuldeep Singh Rajput, the CEO of digital therapeutics startup Biofourmis, knows about the hurdles of patient acceptance firsthand. His company found early on that the use of wearable patches was a burden for patients, he said. “In the early days of Biofourmis, one of the challenges we faced was how do we make it seamless and build a better form factor,” he said.
So instead of patches, Biofourmis developed medical-grade biosensors to be used in armbands and wrist-worn devices to track whether drug treatments are working and to monitor patients at home. The devices have a high patient adherence rate, according to the company. The company has secured deals with seven pharmaceutical companies and 10 health systems, to date.
Health tech startups must also demonstrate why their innovation is an improvement on the status quo. Proteus’ Abilify MyCite was an add-on to Abilify, a drug that already worked, so the company faced a steeper climb, Bailey said.
All of that makes it dangerous for a buzzy startup that can get sky-high valuations before they establish clinical value or a steady profit and startup CEOs can find themselves under an enormous among of pressure as they develop emerging technologies, industry observers say.
With digital health deals, investors expect to see results quickly and startups may be forced to take on partnerships that might not be the best fit for the product, Bailey said. High-profile partnerships with big drugmakers, like Proteus' deal with Otsuka, can be incredibly valuable for a startup but are not guaranteed to be home runs.
Proteus was just the latest startup to have a deal with a big pharma company fall apart. Novartis' Sandoz dropped out of prescription app deal with Pear Therapeutics last year and Sanofi pulled back from its three-year-old relationship with Verily and their virtual diabetes clinic, Onduo.
“Those partnerships are complex, challenging and tactically hard to execute while developing brand new technology,” said Bill Evans, CEO and managing director of Rock Health told Fierce Healthcare.
Lessons learned from hits and misses
A big challenge for digital health companies is ensuring they've figured out a solid plan for who is going to pay for the product within the complex reimbursement landscape.
“If you look at Livongo, what did they do well? As a whole, they did a great job of figuring out reimbursement early,” Bailey said. “Many others didn’t fundamentally ask the question of who is going to pay for it. “
Shaywitz points to another digital health business model that fundamentally works: Flatiron Health.
That company built its business around oncology-focused electronic health record (EHR) software and a repository of real-world cancer evidence. The company focused on transforming unstructured EHR data into analyzable, actionable information for oncologists and cancer researchers. "Flatiron figured out the importance of understanding what your customers want," he said.
Roche acquired Flatiron Health for close to $2 billion in February 2018.
Health technology is a complex, technically challenging environment and “there are lots of ways to go wrong and only a few ways to go right,” Evans said.
Technology innovators should look to models that have worked, Bailey said.
"The early winners will go across the finish line, which is great for the company and their investors. But it will also inspire other entrepreneurs who will want to do better," he said.
Proteus took a novel approach to address a healthcare problem—medication adherence—and its work will likely spur similar innovations, Evans said.
“Proteus is a phenomenally interesting technology that has been reasonably well-validated through the studies and clinical trials that have been conducted and I think that because of that, fundamentally, there is incredible value to what the company achieved,” Evans said. "We’re not done with that idea. There is more to come.”