Trends that Translate into Investment – Examining Consumer Health with Norwest Ventures
With JP Morgan week and Health 2.0 WinterTech converging this week in San Francisco, the digital health space will dive deep into what will characterize investment in 2015 and identify who the major players are. Health 2.0 sat down with Casper de Clercq, Partner at Norwest Venture Partners to look at some of the trends for 2015 and explore his upcoming discussion of consumer health investment at Health 2.0 WinterTech.
Health 2.0: Today we’re just going to talk a little bit about what you’ll be addressing at Health 2.0 WinterTech and just also kind of getting a better sense for your experience and your insight into the digital health investment space. I was hoping you could start with an overarching look at what your role at Norwest Venture Partners really encompasses and sort of what your day-to-day looks like for our audience.
Casper de Clercq: As co-lead of the health care practice at Norwest Venture Partners I am actively investing in health care IT, technology enabled services and medical devices. We are currently investing out of fund twelve, a $1.2 billion fund. NVP has been in business for over 50 years investing primarily in consumer software, enterprise software and health care companies. We have offices in India, Israel, and New York. Growth equity is also an important aspect of our investment activity in which we typically invest in more established companies. In the health care group, we’ve made a significant number of investments in the digital health and medical device arena. We are among the most active health care IT investors having made over a dozen investments over the last three years. The breadth if our investments aligns with the trends we all hear about. Our portfolio includes enterprise and SaaS solutions such as Health Catalyst (ERM analytics and benchmarking data for hospitals). We also invested in CareCloud (SaaS based EMR) and Cleardata (HIPAA compliant data center). We have made multiple investments in connected devices from consumers to clinical research. In the consumer health and wellness arena we invested in wearable companies Basis (acquired bv Intel) and Misfit. In the pharma world we invested in iCardiac, which has algorithms and wearables for cardiac safety clinical trials. We continue to seek out health care companies which address large unmet needs in chronic disease such as iRhythm and Telcare, which leverage the wearability and cloud connectivity to inform and provide more effective and efficient care.
Health 2.0: That’s great! And as you know, WinterTech is exploring the growth of investment into consumer health and those tools that aid and improve it. Could you speak to your impression of the connected devices movement within the larger digital health market?
Casper de Clercq: There are really two different markets. One would be what I call consumer wellness and the other being health and health care. Its an important distinction as the market dynamics are quite different. So we’ve made two investments in consumer wellness. The first is BASIS, which was acquired by Intel last year. We also made an investment in Misfit, founded by Sonny Vu. Those are pure consumer wellness engagement platforms to inform everyday users through tracking and providing health insights. As you know there has been an explosion of wearable devices, but most are now copies and there will be few that have transformative potential. Consumer wearables have been largely driven by commodity sensors but in themselves these sensors provide little physiological or clinically useful information. Few companies have cracked useful insight and long term engagement. Unhealthy consumers ultimately become patients but its hard for all of use to change our bad habits. We are now more focused on companies that provide context, insight, motivation and coaching. There are applications of more consumer oriented “wellness” devices and solutions in the employer market but we have been cautious. My view is that the effectiveness of those programs is limited. Such endeavors may be interesting from an employee engagement perspective and potentially increase productivity, but I feel that the time between investment and payback is quite long, and therefore difficult to establish an ROI. In broadly defined “consumer health” we prefer to take on the big challenges of chronic disease, behavior change, transparency and provision of care; in other words, large and measurable health care expenses.
Health 2.0: So in reading a little about your bio, it’s amazing to read about some of the projects you have worked on prior to Norwest from developing inhaled therapeutics for diabetes at Aerogen to launching an integrated surgical product line at Heartport. I was curious if you could speak to how these experiences on the development side, building these devices and technologies has informed your decision making as an investor and also how it informs your perspective as a board member to a number of highly successful companies?
Casper de Clercq: Thank you. With twenty years of operating experience working in, as you said, medical device companies, drug delivery companies, specialty pharmaceutical companies, and diagnostic companies, I have lived a world of medicine, clinical data, FDA regulation and reimbursement. All of those companies have ultimately required acceptance from not only consumers as patients but physicians, hospital systems, and payors. The health care market involves multiple stakeholders with divergent interests and economics. The questions I usually try to answer first are, “Who will be passionate about this product? Who cares about the result and how will it change the outcome? How is it going to be brought into practice and adopted? And then, who is willing to pay for this and how specifically is it going to get paid for?” To go back to our operating experience, where we bring value to our portfolio companies, both in HCIT and medical devices is to deeply understand the key stakeholders and their cost/benefit tradeoffs. Secondly, building great companies requires accumulation of clinical experience. In health care the bar is high; innovation needs to be based on good science and accumulating product experience with many patients and in different contexts. Its important to go the extra mile; to do the testing and measure outcomes. That is ultimately what physicians, payors and consumers want to see; solutions that really improve clinical insight, provision of care and cost effectiveness; ideally all three. We might look at iRhythm as an example. iRhthym had a very simple thesis; improve clinical care by making a product that is more comfortable for patients, is more efficient for hospitals and improves clinical outcomes. Diagnosis of atrial fibrillation has historically been done with a Holter monitor, worn for 24 to 48 hours wearing multiple sensors wired to one’s body. The company developed a small patch, cleared by the FDA that is pasted on the skin and worn comfortably for up to two weeks. The ZIO collects heart rate information continuously – thousands of heartbeats 24/7 – but that’s only a fraction of the solution. The company developed HIPAA compliant communication, databases, computer algorithms and a service center to identify irregular patterns and validated the system on thousands of patients. The company has now diagnosed over 200,000 patients and a clinically trained cardiac technician interprets each irregular EKG to diagnose whether a patient has atrial fibrillation or not. It took several years to get the clinical data, to convince hospitals, and build sufficient evidence to get reimbursed. Four years of investment in clinical studies and state by state initiatives to get insurance coverage across the US and build a robust business. It was a carefully laid out strategy and in the process the company has collected over a billion heartbeats from hundreds of thousands of patients. The company studied practice patterns and referral patterns to drive physician adoption, it invested in compelling clinical studies for clinicians and payors and it supports a reimbursement team in addition to a salesforce. So good commercialization in health care takes experience and patience.
Health 2.0: Absolutely. That term you just bought up, investor patience, can you speak to that a little more and touch on at what point is it sort of a lost cause? What does that look like and what has been your experience with it?
Casper de Clercq: Yes. The current frothiness in the consumer health and HCIT, worries me because it is attracting less experienced investors. If you don’t go in eyes wide open, some of the health care hurdles can seem daunting. The commoditization of connected sensors and mobile computing have kicked off the “wearables” wave. Government mandates under ACA and Meaningful Use provide both powerful carrots and sticks for adoption of HCIT. The entrepreneurial rush has brought interest from all sorts of of investors. Many technologists have observed that health care is up to a decade behind other industries in implementing IT solutions. There are very good reasons for this; showing up with better software solutions or computing capabilities do not transform institutional inertia. While innovation is speeding up in health care, one still has to address complexity of, again, the stakeholders and the payment mechanisms. We look at all companies with the hard earned experience and awareness of the idiosyncrasies in health care. It may well be years before a company gets to significant revenues but gathering clinical outcomes is essential. If needed, regulatory approvals and reimbursement also build value and barriers to entry along the way. When pilot studies look compelling, we will be quite patient in building a sustainable business with the CEO rather than race for revenues. It really requires a focus on measuring outcomes and collecting clinical data to show that you’re improving care or lowering the cost of health care. We’ve seen numerous companies that conduct several pilots but are unable to convert those into a meaningful business. Customers are curious but not compelled. We try to do hard strategic work upfront rather than after the fact. What are the key issues to drive adoption and lets invest in getting the essential answers. My worry is that many tech investors don’t have the patience for this.
Health 2.0: For the next question I wanted to dive in a little bit more to two of the companies you have invested in. One you just mentioned is Telcare, and also Misfit Wearables. Telcare is offering an affordable cellular-enabled blood glucose monitor. And the Misfit recently announced the Flash which is almost half the price of their more popular and most notable wearable, the Shine. Can you speak to how you’re seeing these digital health companies really start to engage the consumer that isn’t necessarily of the Quantified Selfer Movement, and to start making mass appeal with a lower price point?
Casper de Clercq: Great. As you mentioned the Quantified Selfers, there are many early adopters who assiduously collect data hoping to get an insight toward self-improvement. Triathletes and professional athletes inherently put up with a tremendous amount of effort to make slight improvements in their performance. But it’s a small group of individuals who put up with all that effort long term and with what I call the “friction” of data collection. I’d say the majority of consumers are interested in health but are not willing to put in a huge amount of effort. I believe the two fundamental things that we need to address to broadly improve health are to simplify data collection and to continue unlocking behavior change. It less about price than friction. When we look at the wellness space and Misfit, I think Sonny Vu has really been very thoughtful about collecting information by focusing on making his devices frictionless and beautiful. Take something simple like power management; every time I charge my device I have to become aware, make a decision and then do something. It really only works subconsciously if this can be added to an existing routine. If it’s not part of a habit already, I might have a watch that’s now turned off or shut-down for the day and that’s a lot of friction and negative engagement. So Sonny pursued a six-month battery to reduce effort and thus drive higher utility. Friction is the antithesis of engagement. I’d say the majority of the simple trackers are done at six months. Its not that these devices fall apart, its just too much friction for the user. Without insight and self improvement, “why bother”. Friction is not unique to wearables in health, a good anology might be prescription medications. Drug adherence rates at six months are at 50-60% even for chronic diseases like diabetes that have a direct impact on your health. If you don’t have your pills next to your toothrush and getting a pharmacy refill is a pain, something’s going to give. What we’ve learned from Misfit is that the ideal wearable is an item that I’d really love to wear, it inherently makes me feel good. Misfit has morphed a pedometer into something that I’m proud to wear as a fashion item. The recent announcement of the Swarovski Shine by Misfit is brilliant. That’s been a very clever redirection of motivations; start with something that people like to wear and then provide interesting information for what then becomes no friction. Now its framed as cool jewelry and with built in tracking which provides insight and motivation to change my behavior if I choose. For wearables, it’s a balance between friction, the time and effort you invest in getting the information, and the insight that you get from that information. How valuable does Google Glass need to be to make up for all that friction. Sorry to go on so long about that, but the same thinking also drove our investment in Telcare. Blood glucose monitoring is the standard of care for anybody with diabetes whether it’s Type 1 or Type 2 diabetes. Much like the fitness wearable devices trends, the hassle of keeping a diary is just big enough that people really don’t record their blood glucose information. What we were looking for was the simplest, least-friction way for a patient to collect that information, track themselves and keep their care givers informed. To contrast two possible approaches, either a Bluetooth glucose meter or a cellular-connected glucose meter, we’ve made the bet that a cellular-connected meter is really the critical difference, certainly over the next several years; that is the simplest solution with the least amount of friction. The cellular simplicity and robustness is what gives you high fidelity data, then you can build a platform to get robust information for providers to ensure best care for people with Type 2 diabetes. We believe that ultimately that a platform to improve care will involve patient empowerment with coaching, with algorithms, with reminders, and continued digital engagement. But the starting point is a robust data collection device or platform that takes into consideration what consumers will demand, ease of use and minimal friction.
Health 2.0: Yeah, definitely. So I think we’ve all noticed the decline in investment in medical devices but then today, as we discuss your large investment in Telcare, how do you as a General Partner work with and oftentimes against investment trends?
Casper de Clercq: Venture capital and capital generally flows to the places where investors believe the highest returns are. That can also be said about the investment of time. So we think not only about how big the return will be; we also think about the timeframe it might take. Traditionally, with medical devices, many companies pursue FDA clearance based on equivalence to a predicate under 510(k) regulation. For more innovative approaches the FDA typically requires a PMA filing to demonstrate clinical either equivalence or superiority to existing treatment. I think the FDA, unfortunately in its mission to protect the public, has made innovation very difficult in the medical device arena. The lack of predictability and clinical requirements; particularly for PMA products leaves medical device companies in a quandary as to what to do. Without clear regulatory guidance, companies chew up resources and time in what sometimes feels like a bit of a game of 20 questions. Secondly, the standard is ever increasing in terms of the assessing failure modes, statistical rigor and the required patient follow up time. For example, in orthopedics the standard is now two-year follow up with hundreds of patients and then an additional five years of follow up after FDA clearance to ensure that the products that were implanted remain safe. In contrast, the FDA has gone out of its way to not hinder mobile and digital health adoption. I’d say health care IT and connected devices typically are considered exempt or at most might require a 510(k) clearance. The FDA has been relatively open to connecting data out of approved medical devices. As long as the basic clinical function hasn’t changed, we’re simply collecting information that should improve the delivery of care. There is absolutely been a shift away from the traditional medical device investing towards connected devices and software because of the constraints of time to market, amount of clinical data required, and the amount of capital required. So whereas a traditional medical device company needing a PMA might require $50 to $100 million, a digital connected device could get the market for a fraction of that. On the other hand what I don’t think a lot of investors appreciate is how long and how much work takes to commercialize digital health products once they are in the market. So while the regulatory barriers to get to market are lower, market adoption will take longer than expected because physicians and payors still want meaningful improvements in outcomes and the evidence to support that. Just because the FDA is more lenient does not mean clinicians or insurers will be. On the consumer side, I think the same principles apply.
Health 2.0: Absolutely. And that kind of circles back to what you were saying earlier, which is the importance of strong pilots, and really making sure that clinical data is validated.
Casper de Clercq: Yes. I guess I would add one more thing just from an overall market perspective. Over $2 trillion is being spent on health care in the U.S. Surprisingly, less than 8% of that amount is spent on medical devices. Somewhere between 10% and 12% is spent on all pharmaceuticals. The remaining 80% totals the provision of care with 1/3 going to physicians and 2/3 going to hospitals and other facilities. Shockingly about 15% of every health care dollar is spent on administering and clearing of medical claims. Your credit card company can do that for 3% and do so profitably. That ‘s just one of the examples of the massive opportunity to improve efficiency in the system. Its easy to pick on the provision of care as the big opportunity, but its hard work and complex. Health care can still become much more efficient, more customer centric and continue improving quality of life for everyone. If hospital and insurers don’t take this on; employers and consumers will do so with their dollars and feet. There are few sectors that spend $2 trillion, it’s not easy to change, but there’s a tremendous opportunity now and in the long-term.
Health 2.0: Right. And that will be the challenge, efficiency without sacrificing quality, right?
Casper de Clercq: Yes, exactly.
Health 2.0: Well thanks for sharing your perspective and we look forward to having you Health 2.0 WinterTech on Thursday, January 15th.