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Many companies are entering the digital health market with wearable devices, taking advantage of low-cost sensing and nearly ubiquitous smart-phone usage.  The consumer end of this market has low barriers to entry for companies targeting fitness or activity tracking, where straightforward product design coupled with rapid app development and a direct-to-consumer sales channel allow new entrants to design, manufacture and sell devices with relative ease.

These new gadgets appeal to consumers who seek fashionable products to support their fitness or wellness goals and they are willing to invest their own dollars in the latest wearable technology.  However, when compared to high-volume electronic products such as tablets and smart-phones, the market for these new tracking devices is small.  Furthermore, it is currently dominated by Nike, Fitbit and Jawbone, who together own ~97% of the market.     

Smart companies are taking a longer-term view and recognize that significantly larger opportunities with sustainable revenues and high barriers to entry exist further up the value chain in digital health markets. Considering that the annual US healthcare spend is fast approaching 4 trillion dollars, companies that can successfully tackle large unmet healthcare needs with profitable business models can expect to see much greater returns associated with improved patient access, clinical outcomes, and overall value. An example application is the monitoring of glucose, weight, exercise and diet coupled with a digital ecosystem that encourages healthy behavior and supports physicians in the identification and management of high-risk (and high-cost) patients. 

In addition to offering ease-of-use and user appeal to drive successful adoption by multiple and different stakeholders, these systems must also deliver on all aspects of the value chain from biometric sensing, data and communications, information, and decision making to demonstration of clinical and financial outcomes in order to be viable commercial offerings. This value framework can be viewed as a pyramid where sensors form the foundation and patient and financial outcomes form the peak of the device significance.

Development of successful applications demands a wide range of skills and capabilities. These include: product engineering, wireless communications, data aggregation and algorithm development, behavior change design, clinical and regulatory know-how, healthcare policy, and business model innovation. Coupled with the decreasing, but nevertheless enduring uncertainty in healthcare policy and regulations, these factors create significant barriers to entry.

Companies like Proteus Digital Health have targeted high-value applications in these heavily regulated clinical markets from day one. Proteus has developed an ingestible sensor, which sends a wireless signal to a body-worn patch when a pill carrying the sensor reaches a patient’s stomach. A message is then relayed out to indicate that a patient has taken their oral medication; this information can be used as input to systems intended to monitor compliance to regimen within a clinical trial or systems to drive improved medication adherence. Both of these applications have the potential to offer significant financial returns given the costs to a pharmaceutical company of running a large scale Phase III clinical trial and the massive burden on the healthcare system brought about by poor medication adherence across a myriad of financially costly chronic diseases.

Given the many costs and challenges of bringing such a system to market, it is not surprising to see partnerships emerging as a key ingredient for success. Proteus itself has teamed up with a wide variety of partners including Novartis, Otsuka, Avery Dennison, and Oracle and, in doing so, has accessed diverse capability from materials technology through pharmaceutical market opportunities. More recently, even powerful Google saw the need to partner with Alcon (a Novartis company) to develop its tear-sensing contact lens.

However, when considering the digital health market, it does not have to be a straight choice between consumer wellness devices or complex and regulated healthcare applications. Companies can plan a commercial roadmap that combines the two and reap the benefits of lower development costs and time-to-market of consumer applications with a higher-value regulated offering in the longer term. 

Misfit Wearables, from the team that founded AgaMatrix and developed a glucose meter for the iPhone, has deliberately entered the competitive tracker market in order to learn from consumers and iterate its physical design and digital experience—its strategy is to optimize the user experience before entering the healthcare market to capture the higher value that exists.  It will be interesting to see what Misfit targets for its first regulated application and how high its roadmap takes it.

There is nothing inherently wrong with fitness trackers; a few companies will be very successful and will continue to iterate to capture a decent share of this growing market. However, the smarter commercial move is further up the value chain where well-designed systems have the potential to lead to larger and more sustainable revenues in addition to the obvious human benefit of tackling significant unmet healthcare needs.

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