Proteus founders explain. Investors talk DTx.

Issue 072.

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Digital health research from Brian Dolan.

Welcome to E&O.

Last week I published The Virgin Pulse Report. Thanks to everyone who sent in feedback. Here’s what’s happening this week:

I am working my way through some long write-ups of the DTx East event, which took place virtually in September. The first of a few quasi-transcripts of discussions at the event is below. I’ll aim to do a few more for next week’s edition.
In the past few weeks, Pear Therapeutics had a few customer announcements. One marked a new type of agreement for the company: The Hartford agreed to offer its employees Pear’s reSET and reSET-O prescription digital therapeutics as covered benefits. PreferredOne, a health plan in Minnesota with 364,000 members also added the PDTs to its covered benefits.
Cognoa completed its 425-patient pivotal study for the company’s “digital autism diagnostic device” and is moving to submit a De Novo application to the FDA. A related digital therapeutic for autism is likely to be Cognoa’s second product.
Meanwhile, 2Morrow published results from a large RCT that included a 12-month follow-up: “The trial followed 2,415 participants for 12 months to determine the efficacy of an Acceptance and Commitment Therapy (ACT) based app for smoking cessation vs an app based on US clinical practice guidelines.”
UnitedHealth acquired Amazon PillPack competitor DivvyDose. CNBC reports the pricetag was $300 million.
Fast-growing DTC telehealth company Hims and Hers is now publicly-listed after merging with a SPAC. More financial details in the link but this transaction valued the company at about $1.6 billion. It was founded in 2017.
The US Chamber of Congress has some ideas for how the Japanese government should reconsider recent policies that make launching digital therapeutics and other digital health offerings in that country harder for American companies: “The Government of Japan, for example, recently added manufacturing industries related to pharmaceuticals for infectious diseases and manufacturing related to highly controlled medical devices to its list of ‘core industries’ subject to its strictest foreign investment restrictions under the Foreign Exchange and Foreign Trade Act (FEFTA). At a time when the health care sector and specific digital technologies need additional investment to support innovation, initiatives that create additional costs or uncertainty risk hampering that investment without contributing to the overall reliability of supply chains.”
Apple Watch false-positives driving over-utilization? This Mayo Clinic study found the Apple Watch’s irregular heartbeat feature has been sending many people into doctors’ offices unnecessarily.
Results from a 103-patient observational study from GAIA for its prescription digital therapeutic, deprexis, found it to be “effective in real-world routine medical care.”
McKinsey believes more and more life insurance companies will move into connected health.
An eagle-eyed Twitter user spotted this line in a recent Amazon job posting: “Define and execute a strategy for acquiring and managing provider networks.”
AliveCor entered the Indian market with its six-lead ECG device, which is sells directly to consumers.
And Finally… This report from Oliver Wyman, The Digital Therapeutics Race Begins, is well worth a read.

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Proteus Digital Health founders explain why it didn’t work out

At the University of Southern California’s virtual Body Computing Conference this morning, the two founders of Proteus Digital Health explained why they think their digital health unicorn ended up in Chapter 11.

To sum it up: Proteus correctly predicted the way that technology would evolve over the next two decades. Proteus, however, incorrectly predicted that pharma companies would have to innovate on their core business model, which had been slowly failing for decades by 2003. That’s when Proteus got started. The company also overestimated how soon healthcare’s payment models would have to move to value-based contracts.

Here’s the explanation from the two founders in their own words:

“When we began in 2003, we had a whole series of hypotheses for technology and healthcare,” Proteus founder and former CEO Andrew Thompson said. “Let’s [start with] technology. This, remember, is before the iPhone. It is before Amazon Web Services, and it is before Uber. Very early in the whole digital cycle, but we felt that mobile would be ubiquitous. That computing would move to the cloud. That data would be very expensive, and that increasingly business models would move from things that were about buildings, people, and products into business models about mobiles, software, and services… All of that is very much a cornerstone of how we thought about developing [Proteus].”

Thompson and the other Proteus founder, Dr. George Savage, also had a few predictions about healthcare back in 2003. Here’s Thompson again:

“The first was that you could solve this problem of inappropriate use of medicines in the real world by offering patients measurement feedback and nudges. You could do the same thing for care teams. And you would end up with better outcomes. Another one was in pharma where we felt that pharma would progressively — and this is back in 2003 — have financial and market access challenges, because their products were very expensive, their R&D was very expensive, and there were very long regulatory cycles. So, they would perhaps be wanting to find new ways to innovate to solve some of those issues. We also [hypothesized] back in 2003 that — and this especially seemed true in 2008 when the Affordable Care Act was passed — that total cost of care would be a real issue in the United States and that 18 or 19 percent of GDP on healthcare… would become an incredibly important issue that would lead to incentives being created for new services and business models that rewarded innovations or things that actually reduced total costs of care.”

Thompson concluded that most of their technology predictions turned out to be correct, and while he believes Proteus’ studies showed their hypothesis about using measurement, feedback and nudges would lead to better patient outcomes, the company’s other healthcare predictions were “not so good… they just turned out not to be true.”

Savage then jumped in:

“At least not true yet… but it certainly has proved incorrect so far. When we talk about pharma business model challenges, for example, just consider the history. We got the first digital medicine [New Drug Approval] in 2017, but by then the approval rate of new drugs was trending up significantly, not down as it had been sort of in a sawtooth fashion over prior decades. And, indeed, many of these NDAs had an emphasis on specialty drugs, especially in cancer, and that changed the risk-benefit equation. What we found was that pharma was marketing drugs to narrow populations at extremely high prices. The combination was a small number of patients with a really serious problem, a drug that met their needs, and the pricing could be hundreds of thousands if not millions of dollars. That solved the business profitability problem that pharma had been running into that might have caused them to innovate. And, so, in some respects, right now the established pharma business model is more successful now than it has been in the past…”

Savage pointed out that pharma probably wouldn’t move into new business models like adherence and outcomes unless they had to do so:

“Doing anything new is risky and challenging to any organization and it brings regulatory concerns and all kinds of other issues. You only do it if you have to, I think. The current model of high-priced drugs that are proprietary to use for a certain number of years is working fine right now.”

Savage wrapped up by pointing to the final healthcare prediction he and Thompson made back in 2003: That healthcare payment would fundamentally change to reward companies focused on reducing the total cost of care. Obamacare helped create programs that offered these kinds of payment models, including value-based care ones, but Savage said those kinds of contracts proved to be “very problematic” in Proteus’ experience.

“Value-based contracts, which Proteus implemented several of, many actually, but each took over a year to negotiate. They were all incredibly complex. Very bespoke. Very hard to generalize and scale. And, frankly, the systems we were all dealing with were all still mainly operating in fee-for-service. So, if you are 25 percent value-based contracts and 75 percent fee-for-service, you are going to run your business to make the fee-for-service end work. That is a legislated and highly regulated business model. It is very much about this building-people-product business model that Andy described, and not about what we believe is the future, which is mobile, software, and service.”

“We proved that we reduced minutes in clinics and heads in beds, but, unfortunately, that isn’t how people get paid.”

If you haven’t yet read The Proteus Digital Health Report, it tracks the company from its earliest days up until its Chapter 11 filing earlier this year. ICYMI: Otsuka ended up acquiring Proteus a few weeks ago for a $15 million song.

Five investors talk funding digital therapeutics, red flags, what they look for, and more…

I met many of E&O’s early readers at last year’s DTx East event in Cambridge. Like most of you, I’m sure, I was bummed that we had to attend the event virtually this time around. Still, the speakers delivered. The sessions were mostly great.

I’m taking my time digging into them and will share lightly edited transcripts of a few of the sessions each week in the next few newsletter issues.

Below are a few excerpts from the investor panel, but you can read a lightly edited transcript (4,000+ words) of the whole session over at the E&O site here.

Debbie Lin, Executive Director, Boehringer Ingelheim Venture Fund: I can tell you what we are looking for. Digital therapeutics cannot include a device component. Classic examples of digital therapeutics companies like Pear, Click, and Akili do not include a device. As a pharma company, so we think of a digital therapeutic as a drug and so we need a straight line to the clinical efficacy. Just getting a digital therapeutic to market isn’t a win.

Brent Vaughan, Healthcare Venture Capital, Morningside Partners: I wish at the early stage the whole team was there, but usually there are one or two really strong people and then there are some good players around them. But that’s fine. I talked to one company last week that admitted they were not that strong on the commercial side. And, I said, you haven’t done your first clinical study yet. You’re not going to attract a great commercial lead until you do. The commercial person you attract at this stage is not going to be the one you want in three years anyway, right? So, don’t worry about that.

Caleb Winder, Managing Director, MemorialCare Innovation Fund: As a later stage investor (Series B and later), typically it is proven to work and there is efficacy to the product. For us, the risk is product adoption. Historically, in a lot of these companies, we can show that they work but getting broad distribution can be difficult. A lot of that, of course, depends on your business model: Are you going through payers, providers, or employers? Ultimately, a lot of these companies signed early-stage contracts and they have pilots. So, you either end up with death by pilot or you have clients who will not do what it takes to make the product a success.

Read on for more insights from the investors above plus Chihiro Hosoya, Head of Venture Management & Business Development, Rx+ Business Accelerator Astellas Pharma and Zack Lynch, Founder and Managing Partner, JAZZ Venture Partners.

Quick links: E&O research reports and databases

The links below aim to make it easier for paying subscribers to find the long-form research reports and databases on the E&O site:

The Virgin Pulse Report (Subscribers-only Link)
The Evidation Health Report (Subscribers-only Link)
Database: Rx-only Digital Therapeutics Pipeline of Pipelines (Subscribers-only Link)
Database: Online Diabetes Prevention Program Companies (Subscribers-only Link)
Database: Digital Health PPP Loans (Open Access)
The Proteus Digital Health Report (Subscribers-only Link)
The Hinge Health Report (Subscribers-only Link)
The Digital Health Enrollment Report (Subscribers-only Link)
The Omada Health Report (Subscribers-only Link)
The Google Health Report (Subscribers-only Link)
The Pear Therapeutics Report (Subscribers-only Link)
The AliveCor Report (Subscribers-only Link)
Apple’s Healthcare Work Experience (Subscribers-only Link)
Approximating Livongo’s S-1 (Subscribers-only Link)

That’s a wrap on Issue 072 of E&O.