Digital Therapeutics are waking up. Big Health, an Octopus portfolio company since 2016, just announced a $39m Series B investment round. Octopus also recently led Series A investment into Pelago (formerly Quit Genius) which provides digitised, personalised therapies to tackle substance addiction, including nicotine, alcohol and opiates. These two pioneering teams are leading examples of the ways in which digital therapeutics are positively affecting populations on both sides of the Atlantic.

Digital Health is core to our Future of Health pod’s investment strategy. Since its emergence in 2000, the term has expanded to include diagnosis, treatment, clinical decision support, care management, and care delivery in genomics, artificial intelligence, analytics, mobile applications, and telemedicine. Specifically within Digital Health, Digital Therapeutics (DT) are showing that they can deliver superior results to patients compared to incumbent clinical approaches and is now seeing more and more emerging players each year. The uplift in outcomes is impressive, for example, using Pelago’s approach to quitting smoking, they have seen a 54% increase in success rates. This is not a marginal difference. Three other companies we remain interested to track and speak with in this field are Kaia, Hinge and Bold Health.

In this fascinating market we thought it would be worth sharing our observations and some of our decision-making criteria in this space:

Medical efficacy

There will be increased scrutiny on effectiveness as the barriers to establishing a digital health business continue to drop, and rightly so. Professor Colin Espie at Big Health cites the importance of viewing a digital therapeutic as you would a pharmaceutical drug; that the same rigour and integrity regarding efficacy must be applied. If you are going to be compared to a pill or existing clinical approach, you need to talk about effectiveness in the same way incumbents do.  Likewise, the founders of Pelago, three medical doctors, emphasised randomised control tests and many peer reviewed studies in developing their product. This might seem unnecessary early on but given the time and cost associated with successfully running this process, it shouldn’t be overlooked and should be core for the strategy. Some customers might not mandate this but as your contract sizes grow or you look to secure strategic partnerships, they increasingly will.

Relationship

An issue with many medical treatments is the patient’s willingness or ability to complete the course (known as adherence – our portfolio company Medisafe addresses this issue). Pelago has superior and identical effectiveness and completion rates. This means that when people complete a course it works. So the challenge becomes driving completion and this is a key component of DT when compared to traditional medicine. One additional advantage of this approach is that through a dynamic patient flow, which segments users closely, lasting patient engagement and rapport can be built but without the requirement for high OPEX or headcount. GSK, by contrast, has only the instruction notes on the pill box to build that patient relationship! Few people even read these, let alone derive any sense of motivating relationship with the provider. For this reason, I could never see us investing in a DT business without sophisticated product leadership; the quality of the digital product is a huge component in unlocking the medical potential and long-term engagement.

Route to Market

It’s a privilege to spend time with the leading digital health entrepreneurs in a given field, hearing their strategies and witnessing them play out. The most important differentiator in almost every case is their go-to-market strategy, sometimes even over product or team quality. For digital health, this means having the very best relationships with payers, pharmacy benefit managers or health plan operators and the ways they partner with benefit consultants. Typically our later-stage meetings with DT companies always focus on this area. Route to market is key to category leadership. There are too many examples of superior GTM strategies winning out over worthy competitors’ unique characteristics. This is always sad to observe.

Geography

The UK is great for a lot of things, but it is really hard to scale a direct-to-consumer health company in an environment where customers are anchored to a price of £0 given the presence of nationalised health provision. There are categories such as fertility, dental, beauty and fitness, where private spend is high. But looking at the trajectories of Big Health and Pelago, the growth for both to become £billion companies comes from the US. Both companies started selling B2C (business to consumer) in the UK but the price that consumers are willing to pay meant the unit economics couldn’t get to where they needed to be to sustain aggressive growth. Both companies switched to selling to pockets of the NHS with patchy uptake but meaningful contract values (sometimes £200k+ per territory). But even here it was hard to sustain the 200%+ growth rates VCs want to see selling in the UK alone. It was from this point that both Big Health and Pelago went after the self-insured US employer market. Here potential customers have available budget, operate on a very clear ROI basis and can sign multi-million dollar deals if they can see such platforms unlocking sufficient value. There are challenges with this strategy, such as the heavily seasonal buying patterns, and driving employee engagement, but for those able to surmount these, this is an increasingly well-trodden path.

The fittest

Some prominent races currently playing out in the Digital Therapeutics space are testing and revealing the best strategies. We’re watching closely to see who will succeed in head-to-heads including:

• Headspace vs Calm
• Kaia vs Hinge
• Livongo vs Noom

The UK

The UK definitely punches above its weight in this category. We are privileged to have backed what we think of as the two most promising UK-based digital therapeutics companies now addressing the global opportunity. We are always keen to hear from others who are building pioneering companies in this space or those who want to engage in the discussion.