Stephen W. Bernstein, Partner, McDermott Will & Emery03.03.21
The challenges of the past year have underscored the importance of life sciences to a dramatic degree. With countries worldwide now distributing vaccines that were developed in record time, COVID-19 has also made plain the value of investing in technological and scientific solutions that can reshape the world and improve health outcomes.
The pandemic has particularly accelerated investments in the digital health space, as a significant share of everyday life has migrated to computer screens by necessity. So what does this mean for the sector going forward? Here are five themes to watch in the digital health sector, including what life sciences developers and investors should know about the current deal-making landscape.
Digital Health Is Getting Bigger and More Collaborative
If money talks, then the $14 billion that venture investors poured into 440 digital health deals last year speaks volumes about where healthcare is heading. According to Rock Health, that total was up 72 percent from the previous high in 2018, when 383 transactions were closed. Values increased, too, with 40 separate deals closing in excess of $100 million. The startups that received the most investment were in the on-demand healthcare, research and development, and at-home fitness, and wellness categories.
The sheer variety among these categories illustrates that digital health can mean different things to different people. Many people picture the tools that help patients connect with their physicians and other providers, such as telehealth platforms. But there are also tools that help patients connect with their own symptoms and those that help care providers connect not with the patient directly, but with the patient’s symptoms and history through remote monitoring. It can mean the tools that help life sciences and medical device companies connect with clinical trial subjects or evaluate mountains of data for drug discovery using artificial intelligence. And it now includes tools that are themselves therapies, which is the terrain of digital therapeutics, or those used as diagnostic tools for diseases like Parkinson’s and Alzheimer’s.
The variation within digital health means the system runs among multiple players, and, as a result, collaboration is often the essence of any deal. Such activity has often been in the form of M&A transactions, but more often lately, multiple parties have come together to co-develop a digital product or service and bring it to market.
Clinical Trial Disruptions Are Uncovering New Digital Opportunities
While the pandemic accelerated digital health investments and COVID-19 research, it brought many clinical trials to a standstill. The Lancet reported last summer that approximately 80 percent of non-COVID-19 clinical research trials—numbering in the thousands—were either suspended or stopped. Such disruptions could have a long-lasting impact on research, as well as devastating consequences for patients who had been waiting to enroll in drug trials.
However, the pandemic also has revealed how digital tools could help improve clinical trials going forward. First, digital platforms could make the enrollment process faster. Clinical trial subjects could learn about their decision to participate while at home, and then electronically consent to participate following an online video interview. Second, companies have been saying for years that delays in recruiting subjects cost them millions of dollars. Digital tools could help identify potential subjects more easily, especially if deployed outside of major medical centers and in settings where people receive their everyday care.
Technological Complexity Is Presenting Regulatory and Policymaking Concerns
As advances are made in digital health, some players in the sector are increasingly concerned about what may happen on the regulatory and policymaking fronts. Given the sophistication of technologies, lawmakers could potentially establish policies based on fundamental misunderstandings and incorrect assumptions about digital technology’s role in healthcare and who will ultimately use it.
There are also specific concerns around how federal agencies will effectively regulate and operate within the space. For example, the Centers for Medicare & Medicaid Services is the single largest payer for healthcare services in the United States, but the agency is only slowly beginning to modify its benefit categories to evaluate, cover, and reimburse digital health technology. The issue to watch is whether policy is going to incentivize the adoption of technology as innovation accelerates and demand increases from consumers and healthcare providers.
Investors Are Looking for Clarity
When it comes to deal-making in the digital health sector, there’s a number of issues investors weigh when considering working with emerging companies.
Investors don’t necessarily need companies to provide proof points from a clinical trial before investing, but they do want to see a very clear roadmap for how the company plans to achieve its goals. In the case of digital therapeutic development, for instance, investors will want to know statistics for different arms of a study, trial costs, how subjects will be recruited, enrollment rates, data evaluation techniques, and the specific regulatory (e.g., U.S. Food and Drug Administration or not) and reimbursement (e.g., private pay, insurance, or Medicare/Medicaid coverage) pathways. It comes down to this: What is the company’s specific plan, does it seem achievable, and does management have a track record?
The buy side also wants to see clarity around how a company defines itself. Among digital health companies, many of which are startups, there can be fuzziness around whether they’re trying to be a technology company, a data company, a consumer company, or a healthcare company—and often they’re a little bit of each. This can be worrisome to investors who want to understand a company’s value proposition clearly so they can think through how to position the company to the market, who the right investors are, and who the right research analysts are for presenting the company’s long-term thesis properly.
Clarity of purpose is easy to build at a company’s outset, but hard to fix later on.
The Consumerization of Healthcare Isn’t Going Anywhere
The healthcare industry has traditionally been slow to adopt technology, but the past year has hammered home that it’s incumbent upon companies to embrace digital solutions, innovate, and integrate them into some components of the current healthcare system. For years, there have been whispers that individuals are going to want healthcare delivery to be as convenient, easy-to-access, and tech-enabled as other commonplace consumer services.
After the digital acceleration of the past year, that expectation is now firmly entrenched. Consumers aren’t going back to heavily manual and in-person processes, so neither can companies. It’s important for developers and investors alike to maintain a long-term vision to continue modernizing care through digital tools, to understand the current patchwork and idiosyncratic health system, and to navigate through it while taking into account the various regulatory, financial, and operational factors.
Stephen W. Bernstein is a partner at McDermott Will & Emery. He specializes in e-health, data engineering and deployment of digital health tools, as well as private equity investments, mergers, acquisitions, affiliations, and joint ventures. Bernstein is co-chair of the firm’s Life Sciences Practice and co-leads the company’s Digital Health Practice. He is a current member of McDermott Will & Emery’s Management Committee and has served on the firm’s Compensation, Executive and Finance Committees.
The pandemic has particularly accelerated investments in the digital health space, as a significant share of everyday life has migrated to computer screens by necessity. So what does this mean for the sector going forward? Here are five themes to watch in the digital health sector, including what life sciences developers and investors should know about the current deal-making landscape.
Digital Health Is Getting Bigger and More Collaborative
If money talks, then the $14 billion that venture investors poured into 440 digital health deals last year speaks volumes about where healthcare is heading. According to Rock Health, that total was up 72 percent from the previous high in 2018, when 383 transactions were closed. Values increased, too, with 40 separate deals closing in excess of $100 million. The startups that received the most investment were in the on-demand healthcare, research and development, and at-home fitness, and wellness categories.
The sheer variety among these categories illustrates that digital health can mean different things to different people. Many people picture the tools that help patients connect with their physicians and other providers, such as telehealth platforms. But there are also tools that help patients connect with their own symptoms and those that help care providers connect not with the patient directly, but with the patient’s symptoms and history through remote monitoring. It can mean the tools that help life sciences and medical device companies connect with clinical trial subjects or evaluate mountains of data for drug discovery using artificial intelligence. And it now includes tools that are themselves therapies, which is the terrain of digital therapeutics, or those used as diagnostic tools for diseases like Parkinson’s and Alzheimer’s.
The variation within digital health means the system runs among multiple players, and, as a result, collaboration is often the essence of any deal. Such activity has often been in the form of M&A transactions, but more often lately, multiple parties have come together to co-develop a digital product or service and bring it to market.
Clinical Trial Disruptions Are Uncovering New Digital Opportunities
While the pandemic accelerated digital health investments and COVID-19 research, it brought many clinical trials to a standstill. The Lancet reported last summer that approximately 80 percent of non-COVID-19 clinical research trials—numbering in the thousands—were either suspended or stopped. Such disruptions could have a long-lasting impact on research, as well as devastating consequences for patients who had been waiting to enroll in drug trials.
However, the pandemic also has revealed how digital tools could help improve clinical trials going forward. First, digital platforms could make the enrollment process faster. Clinical trial subjects could learn about their decision to participate while at home, and then electronically consent to participate following an online video interview. Second, companies have been saying for years that delays in recruiting subjects cost them millions of dollars. Digital tools could help identify potential subjects more easily, especially if deployed outside of major medical centers and in settings where people receive their everyday care.
Technological Complexity Is Presenting Regulatory and Policymaking Concerns
As advances are made in digital health, some players in the sector are increasingly concerned about what may happen on the regulatory and policymaking fronts. Given the sophistication of technologies, lawmakers could potentially establish policies based on fundamental misunderstandings and incorrect assumptions about digital technology’s role in healthcare and who will ultimately use it.
There are also specific concerns around how federal agencies will effectively regulate and operate within the space. For example, the Centers for Medicare & Medicaid Services is the single largest payer for healthcare services in the United States, but the agency is only slowly beginning to modify its benefit categories to evaluate, cover, and reimburse digital health technology. The issue to watch is whether policy is going to incentivize the adoption of technology as innovation accelerates and demand increases from consumers and healthcare providers.
Investors Are Looking for Clarity
When it comes to deal-making in the digital health sector, there’s a number of issues investors weigh when considering working with emerging companies.
Investors don’t necessarily need companies to provide proof points from a clinical trial before investing, but they do want to see a very clear roadmap for how the company plans to achieve its goals. In the case of digital therapeutic development, for instance, investors will want to know statistics for different arms of a study, trial costs, how subjects will be recruited, enrollment rates, data evaluation techniques, and the specific regulatory (e.g., U.S. Food and Drug Administration or not) and reimbursement (e.g., private pay, insurance, or Medicare/Medicaid coverage) pathways. It comes down to this: What is the company’s specific plan, does it seem achievable, and does management have a track record?
The buy side also wants to see clarity around how a company defines itself. Among digital health companies, many of which are startups, there can be fuzziness around whether they’re trying to be a technology company, a data company, a consumer company, or a healthcare company—and often they’re a little bit of each. This can be worrisome to investors who want to understand a company’s value proposition clearly so they can think through how to position the company to the market, who the right investors are, and who the right research analysts are for presenting the company’s long-term thesis properly.
Clarity of purpose is easy to build at a company’s outset, but hard to fix later on.
The Consumerization of Healthcare Isn’t Going Anywhere
The healthcare industry has traditionally been slow to adopt technology, but the past year has hammered home that it’s incumbent upon companies to embrace digital solutions, innovate, and integrate them into some components of the current healthcare system. For years, there have been whispers that individuals are going to want healthcare delivery to be as convenient, easy-to-access, and tech-enabled as other commonplace consumer services.
After the digital acceleration of the past year, that expectation is now firmly entrenched. Consumers aren’t going back to heavily manual and in-person processes, so neither can companies. It’s important for developers and investors alike to maintain a long-term vision to continue modernizing care through digital tools, to understand the current patchwork and idiosyncratic health system, and to navigate through it while taking into account the various regulatory, financial, and operational factors.
Stephen W. Bernstein is a partner at McDermott Will & Emery. He specializes in e-health, data engineering and deployment of digital health tools, as well as private equity investments, mergers, acquisitions, affiliations, and joint ventures. Bernstein is co-chair of the firm’s Life Sciences Practice and co-leads the company’s Digital Health Practice. He is a current member of McDermott Will & Emery’s Management Committee and has served on the firm’s Compensation, Executive and Finance Committees.
