Digital Health & Pharma Partnerships Aren’t Dead
Are digital health startups and pharma breaking up?
That’s what many are suggesting after the news of high profile relationships falling apart, including Sanofi+Onduo, Proteus+Otsuka, and Pear+Novartis. On the surface, it seems pharma and digital health companies are struggling to cement long-term relationships.
Are the dog days over?
Though some partnerships will certainly fail, we’ll continue to see many more deals between digital health companies and pharma incumbents. That’s because digital health has the potential to create incredible value to pharma partners through many dimensions. Pharma companies can’t ignore technology that can add top-line or bottom-line growth, and the evergreen fear of “being disrupted” will continue to create a pull for digital partnerships.
Digital health startups should continue to partner with pharma, but only if these partnerships can create shared value. Pharma companies can jump-start digital health companies through their global distribution networks, existing relationships with payers, regulatory prowess, and clinical trial expertise. But what value does digital health provide pharma?
When approaching potential pharma partners, digital health startups should focus on what pharma cares about: growing revenue, maintaining a robust product pipeline, and slashing costs. Here are 7 different ways digital health startups can move the needle on those metrics.
(A note: I use “pharma” here, but most of this can also apply to medical device companies as well. And, of course, there’s always more ways for digital health and pharma to partner, so don’t consider this an “end-all-be-all” list.)
1.Create New Revenue Streams
There are two main mechanisms by which digital health companies can create new revenue streams for incumbent pharma companies. These are high-risk, high reward partnerships because they involve bringing a new type of product to the market, so it’s no surprise that many of the high-profile breakups fall into this category.
Existing channel, new product: Digital Therapeutics (DTx).
This usually involves pharma selling Digital Therapeutics (including prescription DTx), which often undergo rigorous clinical validation and may even be FDA approved. Pharma can use their expertise to negotiate with insurers to reimburse products and/or to reach physicians to “prescribe” the digital product.
Numerous DTx companies have struck deals with pharma, including Pear Therapeutics, Happify, and Click Therapeutics. Some digital health companies, like Akili Interactive, have opted to build distribution infrastructure themselves. These partnerships aren’t all sunshine and rainbows: getting reimbursement is difficult, and pharma’s sales force isn’t perfectly equipped to sell digital products. But, if done right, DTx can open new product opportunities for pharma companies that don’t take 10 years and billions of dollars to get to market.
(note: defensibility will always be a question; DTx don’t yet have patent exclusivity to maintain pricing power)
New channel, new product:
Pharma and medical devices developing entirely new distribution models (i.e. not selling to physicians via direct sales force) has been very uncommon, and mainly represented by the Sanofi+Verily Onduo JV selling into employers. I don’t expect to see many of these JVs because, with industry SG&A at ~30–40%, finding new sales resources is very difficult. Most companies actively try to reduce SG&A, not add to it.
However, there’s still plenty of opportunity to partner. But, don’t expect pharma to build the sales force! Instead, expect incumbents to use mature digital health companies as a new distribution channel for an existing product. Examples include Livongo’s integration with Dexcom’s CGM and Ro partnering with Pfizer to distribute ED meds direct-to-consumer.
Any time digital health has access to a new channel that could prove lucrative to pharma, they’ll want to explore how it might increase share. But, don’t expect a wave of JVs like Onduo in the future.
2.Grow Current Product Revenue
Digital solutions can help grow revenue from current products (drugs) by identifying undiagnosed patients, reducing referral barriers, or improve medication adherence. Pharma companies are already working with providers to identify patients who aren’t currently receiving “optimal care” (which usually involves, of course, their drug).
Here are a few examples of what startups & pharma are doing right now; many times, it’s done through claims or EHR algorithms, but there are obviously other creative ways to identify these patients.
Mendelian helps identify undiagnosed rare diseases
Using AI to identify familial hypercholesterolemia
Allergan using claims algorithm to identify patients with chronic migraine (presumably so they can get their new migraine drug)
And, of course, I’d be remiss not to mention Practice Fusion encouraging doctors to prescribe opioids. Stay ethical, folks.
If you’re a digital health company targeting this segment, be careful that your business model makes sense for pharma. It goes without saying, but price of your digital health technology will have to be lower than the additional incremental revenue you generate for pharma. Target diseases that typically go undiagnosed or have sub-optimal care, with guideline best practice care involving a high-cost drug (think rare disease, gene therapy, etc.).
3.Increase Market Share with Wraparound Solutions
Digital health solutions can provide value “beyond the pill” by giving patients ancillary services or information in addition to a medication.
These provide value for both companies because (1) digital health startups get more reach from pharma’s sales force, and (2) pharma companies can use the wraparound tool to secure additional market share.
Noom & Novo Nordisk — these companies are combining Novo’s drug for chronic weight management and Noom’s behavior-based digital weight loss platform, betting that the offering will create even larger clinical effect.
Propeller Health & inhalers — Propeller partners with drug companies to make respiratory inhalers to improve compliance and outcomes. The value they provide created strong enough product differentiation that, in order to remain competitive, every pharma company was forced to partner.
I expect to see more partnerships that fall in this category, particularly with clinically-validated digital health solutions in strategic disease states. It’s a relatively low-risk route for pharma companies to start experimenting with digital therapeutics. And, DTx companies get an important channel partner.
The key here is to be aligned strategically: create situations where the incremental pull-through revenue of bundling a DTx product with the drug outweighs what the DTx company charges. This naturally lends itself to high-cost drugs that need to secure more market share.
4.Improve R&D Efficiency
R&D is a huge spend for pharma companies, with PhRMA benchmarking the average cost of shepherding a drug from bench to the market at $2.6 billion (including clinical development). Large pharma companies can spend upwards of 20% of revenues on R&D.
R&D productivity has famously been going backwards, called “Eroom’s Law” (Moore’s Law backwards). A 2012 Nature Reviews Drug Discovery paper highlighted just that:
Clearly, improving efficiencies of this operation would be a big win; here’s some examples of companies doing just that:
Benchling provides end-to-end SaaS software for managing the R&D process used by academics and industry (Regeneron, Zymergen, etc.).
Atomwise develops deep learning algorithms for drug discovery, and is working with Merck, Eli Lilly, and AbbVie
XtalPi uses artificial intelligence, quantum physics algorithms, and cloud computing to predict the structure of drugs
Deep Knowledge Analytics’ Pharma Division published a review on “AI in Pharma” for those interested in more detailed analysis.
5.Clinical Trials: Reduce Costs or Improve Likelihood of Success
Clinical trials are difficult and expensive with many pain points:
Patient Recruitment: recruitment can take years and can have a major impact on time-to-market. This is particularly salient in crowded spaces like cancer, where many patients are already enrolled a trials.
Site Recruitment & Retention: finding, recruiting, and setting up clinical trial sites can be a big cost for incumbents. We’re talking hundreds of sites to coordinate!
Chance of Failure: digital health can provide value by improving patient segmentation by predicting which patients a specific drug will work, or by identifying patients early in disease progression. Reducing the number of failures can have a measurable impact on net income. For example, some believe identifying Alzheimer’s disease early will increase the likelihood of clinical success (right now, >99% of drugs fail).
Suboptimal Endpoints: most clinical outcomes aren’t good measures, particularly patient-reported outcomes. There’s effort underway to digitize many “soft” endpoints (ie: not mortality).
HealthXL recently published a report on Clinical Trials Optimization with Digital Health, including a nice overview graphic (shown below — full credit goes to HealthXL). It’s a crowded space.
6.Generate New Regulatory Indications and/or Reimbursement
Randomized controlled trials (RCTs) are the gold standard to inform regulatory and reimbursement decisions; these decisions determine the fate of any new drug or device. However, RCTs have flaws: companies are criticized for cherry-picking patients by using stringent inclusion & exclusion criteria in study design. This means that a drug’s clinical trial performance may not be applicable to “real world” patients, who commonly have more comorbidities or complicating factors.
This problem led to the creation “real world evidence” companies: companies focused on collecting data from the “real world” to bolster regulatory and/or reimbursement decisions. In addition to claims aggregators like IQVIA and Truven (IBM), this buzzy area of digital area has shown no shortage of startup deals:
Flatiron Health was acquired by Roche for $1.9 billion
Aetion has struck deals with many pharma companies, such as Pfizer and Sanofi
These companies can help pharma identify which off-label indications they should pursue a randomized controlled trial; the real-world evidence can also be used as marketing collateral to help bolster sales.
More recently, they’ve been used to support entirely new indications, as Pfizer and Flatiron Health expanded Ibrance’s indication in metastatic breast cancer to include men. While this is an exciting prospect, it is still in its infancy. For now, drugs’ initial approval to be done with an RCT, with real world evidence facilitating indication expansions in orphan diseases that would be hard to enroll in a formal trial.
7.Streamline Sales Operations & Improve Business Decisions
As with any business, pharma sales, marketing, and business development teams have a few key questions they’re constantly asking:
How big is a market? How quickly is it growing? (particularly for analyzing acquisitions in new therapy areas)
Who should our sales team be focused on selling?
What’s our market share?
You can imagine that, if you’re making a multibillion-dollar acquisition, you want the best business intelligence. Not too long ago, many of these questions were answered by blasting physicians with surveys through third parties and collecting responses. Now, with access to much more sophisticated data, many of these questions can be answered with much more precision.
Companies large and small are packaging this data and often providing wrap-around consulting services for business intelligence:
IQVIA has multiple databases, such as the National Prescription Audit, that can be mined to answer questions such as “what physicians prescribe the most doses of Drug X?”
Truven (acquired by IBM) has a commercial claims database commonly used for analyses and publications.
Komodo Health, a startup that recently raised $50M led by a16z, has aggregated data from 150 payers, and goes beyond medical claims to include labs, genomic, EHR, and client-specific information. This additional data can power better algorithms.
Predictions for Pharma & Digital Health
Put together, here’s my predictions for how the pharma+digital health space will play out:
1. Continue strong investment in R&D/clinical trial efficiency.
This has a clear ROI for pharma companies; anything that can accelerate time-to-market or reduce cost in current operations will be a clear winner.
2. In the short term, expect pharma toexperiment more with “wraparound” digital therapeutics.
By “wraparound,” I mean digital therapeutics that are aligned to strategic drugs & diseases. This provides additional revenue while the learn how to overcome the novel sales & distribution issues with DTx. It’s lower risk than simply distributing a DTx in a non-strategic fashion. The best partnerships will involve a high-priced drug that’s trying to gain market share, creating a win-win for both the DTx and the drug company.
3. I predict pharma will expand more slowly into true prescription digital therapeutics.
Now that we’ve identified some of the key barriers (reimbursement, sales, and much of the “plumbing” needing to be built), I expect slower movement in this area. Don’t expect every pharma company to go full throttle on PDTs; they have other opportunities outlined here.
What do you think? Feel free to reach out on Twitter @JConnol or at firstname.lastname@example.org; I’d love to hear from you.