At the virtual DTx East conference in September, five active investors with a focus on digital therapeutics discussed the market. Here are four of the topics they dug into:
- What they look for in potential investment targets
- Red flags when evaluating a digital therapeutic startup
- What startups should look for in investors
- How COVID–19 has just been a speedbump for some and created tailwinds for others
- And more…
Here are the panelists and notes from their self-introductions:
Caleb Winder, Managing Director, MemorialCare Innovation Fund
We are focused on investing in healthcare companies across the US in early Series B or later.
Chihiro Hosoya Head of Venture Management & Business Development, Rx+ Business Accelerator Astellas Pharma
Astellas is a pharmaceutical company based in Japan but we operate globally. My scope includes both digital and devices, so we are super interested in digital therapeutics.
Debbie Lin Executive Director Boehringer Ingelheim Venture Fund
We are also a global pharmaceutical company, but based in Germany. We invest in seed to Series A. $300M fund focused on both digital health and therapeutics. My specific mandate is on the digital health side, so, of course, that includes digital therapeutics today.
Brent Vaughan Healthcare Venture Capital Morningside Partners
We are a family office that was founded to work with The Chan Family Foundation. We have offices in Shanghai and Cambridge, MA. It is an evergreen fund that focuses on TMT (tech/media/telecom) as well as healthcare. In the past six years we have had an increasing footprint in the digital health and digital therapeutics space. We invest fairly stage-agnostic, but certainly, at least, seed through Series B with a wide range of check sizes.
Zack Lynch Founder and Managing Partner JAZZ Venture Partners
We are an early stage, San Francisco-based venture fund. We have a primary focus on what we call human performance technology, and that lends itself into investing into the future of digital medicine. We have quite a few investments in that space, which we have been in for almost half a decade now.
And here is a slightly edited transcript of the panel session:
What are investors looking for from DTx companies to prompt them to pull the trigger when it comes to an investment?
Lin: 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. You need to show a very clear and well thought out roadmap for showing a number of things: Clinical efficacy through a rigorously designed clinical trial with endpoints like you would have in a drug trial; Endpoints that you can show the FDA are statistically significant and different vs. a comparator; Physicians are willing to prescribe it and it is reimbursable. Team is very important to us as well and they need to have thought through the mechanism of action. How does it work in a mechanism of action way? And what is the comparator? If you are comparing to the standard of care, what is that standard of care? Where is the evidence – whether it is in the literature or in some small proof of concept study – that shows your digital therapeutic is better than standard of care? That plan and thought process needs to be there.
Hosoya: Efficacy is everything. We are keen to look at the clinical efficacy. We are also learning that commercialization of DTx is very different from pharmaceutical products. The DTx needs to show us that they have a plan for commercialization and it will probably be a way that Astellas, the pharmaceutical company, can’t commercialize. Also, startups need to show some early traction or achievement to date.
Lynch: We are financial investors at the early stage so usually when we are entering into these investments, these companies don’t even have clinical efficacy. There might be studies out there that could point to the fact that there could be clinical efficacy, but we are willing to take more risk earlier on in the process. What’s really important for us is team. What experience does this team have? How do they look at the problem set? Inevitably, in the course of a digital therapeutic startup you are going to have to pivot in some way or another – whether that is your indication for use or how you go about describing your clinical indication or your outcome or building your technology team. So, team is what is really important to us. The indications are all pretty well mapped out now. We all know where the opportunities lie. As the others said, it is much more about your plan to achieve those milestones to gain market traction. While we are concerned about commercialization, given the stage in which we invest, it is a little less relevant.
Vaughn: We see things very similar to how Jazz does and works. Sometimes at the early stage we will partner up quite aggressively with the founders. We start with: What is the unmet need? How will this team be able to serve it? How protectable is it? And, as Zack said, we focus on team. 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. When we looked at later stage companies, like our recent investment in Big Health, it is much more about seeing the traction and understanding the plan for scaling commercialization. Although we come from a healthcare background, we are not scared of clinical validation studies or FDA approval. But we also find interesting paths, like Big Health’s, which use real world evidence to scale up the commercial side without FDA clearance, to be attractive as well.
Winder: We do look for early evidence of commercial traction but it has to be backed by clinical evidence. Look at Silvercloud Health: I think they have the most robust, peer-reviewed set of data in behavioral health. That was one of the key attributes that we felt was important based on past experience. Silvercloud does need to ramp up their commercialization efforts in the US, and we are in the process of doing that. We were OK with the fact that they didn’t have a US commercialization team in place because of the strength and quality of the product.
Has COVID impacted your assessment of investments in DTx?
Lynch: We are 10 year-investors here. COVID is a very unfortunate situation, but it is a 2.5 year hiccup in the longterm trajectory of really building out a robust digital medicine industry. It has been a great tailwind for quite a few of our companies, whether that is from a regulatory perspective or even a commercial perspective, we are seeing things ramp up in ways that we weren’t seeing prior to the pandemic.
Vaughn: Within the first 30 to 45 days after we moved into a shelter in place environment. There was a bit of a scramble. I heard of large investors pulling back term sheets. There was a little big of “the sky is falling”. A few companies had the misfortune of just getting ready to go out and raise – so they were short on runway – and then they were trying to figure out how bad this was going to be. It turned around quickly. A lot of us see this as a speed bump. There are some temporary advantages, though. I think Akili had a great advantage in this with the FDA. However, we should not overstate how many of these temporary changes are going ot be persistent after the pandemic is over. But the companies that were most impacted were those starting a raise at the end of Q1 and the companies that were attempting to launch a behavioral health clinical study right as the pandemic hit. Besides that, I’d say our deal velocity has picked up a little bit since we don’t meet face-to-face anymore.
Hosoya: The criteria doesn’t really change for how we evaluate startups because of COVID. The clinical efficacy and evidence is still important. But the internal receptivity to digital health startups has changed and there is more interest now. If I bring something to my counterparts in the pharmaceutical business right now, there receptivity to digital is much different now than before.
Lin: We also have a longterm horizon so we are investing as normal. Nothing has changed in terms of thesis or anything like that. I would say the portfolio companies who have pivoted to virtual trials seem to be a nice way to pivot – maybe it is too early to say. A lot of digital therapeutics startups have pivoted towards having some sort of COVID solution. I’m not sure that is the way to go unless there is some pre-existing relevance – if you are really longterm focused. Don’t pivot just because of this two-year situation.
How can DTx companies prepare to secure multiple rounds of funding from the start?
Lin: You should talk to a lot of investors while you are raising and even some while you are not raising. There are some investors who are the right phenotype of investors that will match your value proposition. This comes down to timing too.
Vaughn: Early stage, a lot of companies, including WellnessFX and Cognoa, there are a lot of pivots along the way. It can be hard to predict where your business will land. The biggest mistake I see from some of these companies is taking money from the wrong people. If they end up early stage figuring out what they want to do is go down the path of being an FDA-approved, digital therapeutic being routinely prescribed, and you take investment money from folks that want to see you get revenue traction and who don’t have a business model of being comfortable with clinical and regulatory risk, you are going to be in a hard place. If you think about value creation in a stepwise framework, similar to pharma businesses, you need to be sure to take enough money to get to that next step – that next inflection point. I have seen companies that figured out they had a product that would fit beautifully into a prescription digital therapeutic model, but their initial investors were not comfortable with that kind of regulatory risk or clinical risk. So they were unwilling to fund it. The new investors coming in aren’t comfortable being in business with those initial investors because they don’t know the business.
Lin: Fully echo that. Sometimes folk start out with a variety of approaches. It might be DTC but also have a prescription DTx component. But you need vastly different teams for these types of products. That’s true for software vs. device sometimes too. They can be completely different things and you need engineering teams and a CEO who are familiar with that approach.
When you look at digital therapeutics startups, where is the greatest risk? What makes you nervous?
Lin: It depends on where the company is. The greatest risk is if it was a DTC and it was evolving into a prescription digital therapeutic, the greatest risk is that this is not the right team. The mindset and commitment might not be there. It depends on the stage of the company – it is hard to say the greatest risk broadly.
Winder: 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.
Vaughn: I agree it very much depends on stage. If we are sitting down with a founder at seed, it is a very different discussion. That’s more about de-risking your technology, proving it works for whatever outcome you are targeting, but against a backdrop of an unmet need that ensures there are enough dollars there to pay for your solution. For Series B and C, it is all about commercialization. For those, you have the evidence – you know that it works, you know you can make it – but can you actually scale? This is the problem that is hurting a lot of digital therapeutics companies right now.
I talked to one company and they were so excited to get to $30 million in revenue. Thirty-million in revenue? To what end? If that’s on the path to getting $300 million in revenue – well, at Pfizer they walk away from products that are doing $300 million in revenue. Trying to figure out how to commercialize these things at scale I think that continues to be a problem. Pear, Akili, Click, Big Health – some of the companies that are further down the path and have come up with different business models that show they can start to scale that. There are a lot of people behind them that are waiting. Ultimately, success by some of those companies will get the type of exits that will start to get investors – investors that are early like us and like Jazz – how we are going to get out at the other end. Right now, you look at Livongo and telehealth, sure. Service-based models are now getting to exits that are kind of interesting, but we haven’t yet seen it with the SaMD and digital therapeutics yet.
Lin: To echo your points: A lot of companies start out with a beachhead market and a beachhead product. They can get so focused on succeeding in this niche product area that they have lost the horizon. You always need to keep your head up and think about where am I trying to exit? And what do I need to generate in terms of value so that I can exit in that inflection point that you need to exit at?
Lynch: When I used to work on the pharma side, a friend of mine ran transactions at Bayer. He was looking at a company and they had 50 patients that had achieved an outcome. He laughed and told me in his lab they could make 50 people fly. That doesn’t get me anywhere – how are you going to ever get this to scale in the real world? That, in a nutshell, is some of the problem.
Winder: Some of the signals of success for a traditional pharmaceutical don’t translate well in digital. You know: A successful approval. A successful clinical trial — even if you can show efficacy with a few thousand patients – there are different challenges when it comes to commercialization that a lot of the digital therapeutics companies have not been able to crack yet. That is one of the silver linings of COVID – there is more receptivity to digital therapeutics. But I have been in four companies that have shown great clinical efficacy, but not all of them have done as well as we would have expected. They are all doing reasonably well, which is great. We thought certain companies would be much further along than they are now based on the clinical evidence that they have shown. It’s far better than traditional therapeutics.
Lynch: And where we see challenge there is also opportunity. A lot of building these companies and bringing these new modalities to market really requires a steady bolus of capital to be able to support them. This perhaps requires more capital than people were originally thinking. So making sure you work with investors that are there for the long-term, that can bring a syndicate to support you through those times when you are trying to work through these commercialization or regulatory challenges – is critically important.
Can you speak to the difference between working with a strategic investor vs. a financial firm?
Hosoya: We do have a different aspect from the other investors because we are a strategic. When we make an investment, we are looking to learn from them. Learn from things they can do that we cannot do ourselves. So, we would want the startup company to seek out multiple business models. For us the biggest risk is seeing a company is not moving forward. Not everything needs to be successful but we really want to better understand what is happening in the market through the trials and errors of our startup collaborators.
Lin: I get the question all the time about being a strategic investor so I must not care about the financial outcome, right? That’s not the case at all. We certainly look at the financials and care about them. I would just say we take a longer time horizon and as was said before we also invest to learn. The objective of our fund is to invest in arenas where we are not currently putting in investment on the pharma side of things. We invest in order to seed for the future. For us, we don’t take first right of refusal. There are no other terms that we put into our deals like that. And just because you are working with the venture side of the company, it does not mean – at least for us – it does not mean you get an automatic collaboration on the pharma side. They would evaluate that independently.
Should digital therapeutics companies value themselves as biotech assets or medtech assets? What are the risks associated with each strategy?
Lin: Often when I speak to medtech companies, their clear target is 510(k) designation. As long as we get our 510(k), if that’s the endpoint, then we are good. After that, we are in every physician’s office or selling it door-to-door. That is very different from a biotech asset, which needs clinical efficacy. Just because you get a 510(k), doesn’t mean you have clinical efficacy. It means you have a device that is safe – generally – and can do what it needs to do.
Vaughn: I’ve been on both sides of the table here. I’ve been a CEO telling everybody we should be viewed as a biotech and specialty pharma asset, but now I’m on the investor side. If you look at exits for biotech vs. exits for medtech and you work backwards from one of those and you are raising money, well, it is pretty clear which one you’d like to position yourself as. Then, try to build a company that fulfills that positioning. The other is when I was on the operational side, I talked to a friend at a large fund who did primarily biotech. He had never decided to step into digital therapeutics. Their assessment was short. As far as we can tell, he said, and we are not in this space, but we look at digital therapeutics more like medical devices. With a drug, when you get approval, we believe it will be ultimately covered and covered at scale. When you get approval or clearance from the agency for a device, that is no guarantee that you will get covered. We see lots of devices with FDA clearances that still are struggling for coverage five years down the path.
So, when you are building a company – and this is something that Pear and Akili have done an excellent job of, and something we did at Cognoa too – you want to be focused on positioning your product as a therapeutic because you want to do studies that show therapeutic-like outcomes, therapeutic-like interventions, and a security or safety profile. Ultimately, that puts you down a different path.
Winder: I’d like to build on that and it goes back to something I said early: The standard cues for digital therapeutics are not the same as they are for traditional pharma. That some pharmaceutical companies or other acquirers look at DTx as more of a medical device is right on. But even when you go talk to payers, it is a very different discussion. You try to talk to the plan and they tell you to talk to the PBM, because this is a drug. You talk to the PBM and they say, no, this isn’t a drug – I don’t pay for this. You have a lot of people telling you that someone else should pay for it. There is just no well-worn path here, which presents a challenge and an opportunity. The companies that are getting through this have worked long and hard at it: Pear, Akili, Welldoc, and others.
Lynch said earlier that the areas of investment opportunities are clear – what are they?
Lynch: We have mapped out the space and done the landscape of where we think the opportunities are. When it comes to early stage, and teams, and how these companies will emerge and develop, the strategy of that young organization needs to be a mission that gets them excited. We see opportunities all over the place. Autoimmune, oncology, psych – just go down the list of indications. From our perspective, 15 years out there is no reason that when you go to see your physician over telehealth that they shouldn’t prescribe you a prescription digital therapeutic right there as you get off the call. It should download to your phone or your AR glasses and you should begin using it right then. That vision of the future is sort of obvious. When you think about it from that perspective, it is a pretty green field here even if you have companies claiming they have large swaths of indications kind of blocked and tackled. How many companies are going after depression? Five, six, seven, eight, nine companies? Well, depression is a big problem. How many pharma companies have depression drugs? It is still really early days.
Vaughn: Just personally, I think we will look back in 10 years and when we reflect on how digital therapeutics are being built today we will think they were kind of quaint. We will think of it like the early days of the internet. There are exciting things coming – some of it is a long way off – like the ability of DTx and SaMD to actually create a disease modification and affect protein-level changes that can be de-risked with translational biomarkers. There was a super interesting paper in Nature that showed by using light stimulation they were able to create the same level of dissociative change in cortical brain cells that you get with doses of ketamine. So, there is actually a way to create a SaMD that can create a microdosed, modulated, ketamine-like effect in the cortical tissues of the brain and do it without any systemic safety exposure of ketamine. Think about building in a feedback loop and applying it to pain in cancer or take this into neuropsych. I think that once we start to think of digital therapeutics not as app-ified CBT but as products that can actually move biomarkers and make protein-level changes, I think that is super exciting.
Closing thoughts?
Vaughn: I think another thing to consider when evaluating an investor is where are they in their fund? We are an evergreen fund, and I’m sure the strategics are too, but not everybody is. Do they have a competitive investment already? We recently looked at Limbix. Super smart. Love the team. We hadn’t announced it yet, but we had just made an investment in Big Health so we couldn’t really do it. But they closed the round and got it done quickly. There can be a lot of factors to why someone says no that are independent of whether or not they think your product is going to succeed.
What lifestyle changes are not currently being addressed by current digital therapeutics offerings?
Lynch: Laziness? Joy? Where’s joy. There is so much to still be done here. It is early days. I encourage clinical researchers, entrepreneurs, technologists to try and find each other and try to find that common bond of what mission will energize you through the ups and downs.
