Blog | 2/16/2018
Why Flatiron’s Big Exit May Not Be the Boon for Digital Health That Some Expect
By Andrew Matzkin, Partner at Health Advances
Many people involved in digital health and health IT were thrilled to see the news that Roche is acquiring Flatiron Health for a hefty $2.1B. This is a tremendous success story for Flatiron, its investors, and, most importantly, for millions of cancer patients who stand to benefit from insights derived from Flatiron’s trove of real world patient data. An exit this big is bound to stir up a lot of excitement, and some observers were quick to frame this as a much-needed success story for the entire innovation ecosystem around digital health, a sector that has seen billions of dollars in venture funding in recent years but few successful exits.
I am as eager as anyone for big success stories in digital health, but I don’t think Flatiron’s exit will turn the tide in the way that some hope it will. First, a little background on Flatiron. Stakeholders across oncology have long lamented the lack of visibility into real world treatment patterns and outcomes. Because fewer than 5% of cancer patients participate in clinical trials, most of what happens to patients in the real world is hidden, trapped in thousands of disparate software systems spanning oncology providers, insurers, and labs. Shining a light on what happens to the other 95% of patients could reveal insights that would help improve treatment decisions, point the way to valuable new drugs and diagnostics, and ultimately improve outcomes for cancer patients. Flatiron’s vision was to address this challenge by aggregating patient data from EHRs in community oncology practices across the US and transforming it into a unified and rich dataset. Accomplishing this took a huge investment and required a painstaking process of tech-enabled data extraction from the EHR systems of hundreds of oncology practices. That investment has paid off for Flatiron in a big way, initially through data licensing contracts with virtually all of the major oncology drug companies, and most recently through the sale of the company to Roche at a stunning valuation of $2.1B. At last, a big success story for a start-up and its investors in digital health and health IT! Surely, this example will open the floodgates for many other companies to realize similarly successful exits over the next 1-2 years, right? Unfortunately, like everything else in healthcare, the story is not so simple. Flatiron differs from most other start-ups in digital health and health IT in some fundamental ways that limit the relevance of this success for the future of the sector.
1. Flatiron Makes Money from Biopharma
Flatiron’s business model is based on creating a valuable data asset and selling access to that data, primarily to biopharma companies like Roche. While Flatiron is far from the only digital health company targeting biopharma as its primary customer, most digital health activity centers on developing solutions and services for other healthcare stakeholders.
*Many of these example companies sell to multiple stakeholders, and the buyer is not always the end-user, as is often the case in healthcare. Selling to pharma offers at least three notable advantages over selling to these other stakeholders.
- Biopharma companies have urgent competitive needs—primarily improving R&D productivity and differentiating commercial products, among others—and deep pockets. They have the incentives and resources to pay for solutions that create clear value for their businesses, as Flatiron’s data does in oncology.
- Biopharma doesn’t need to wait for regulatory and reimbursement policy changes before they can use and derive value from many digital technologies and data sources for internal uses.
- Although biopharma companies are far from agile, they can move relatively quickly when motivated, as the Roche deal for Flatiron indicates.
All of these points stand in stark contrast to the barriers that digital health faces among providers and payers, which is where most digital health start-ups are focused. The ongoing transition from fee-for-service reimbursement to value-based care will eventually create incentives for providers and payers to spend on technologies and services that can create long-term value by preventing or better managing disease. Unfortunately, for many digital health companies, that is not yet the world we live in. Today, most providers and payers are just not incentivized to pay for something now in the hopes of realizing future benefits that may not materialize for a year or longer, if at all. These misaligned incentives are compounded by persistent questions about regulation and reimbursement of digital health technologies. These dynamics have led payers and providers to experiment with a wide range of digital health technologies on a small scale—via countless pilots—while stopping short of broad adoption. Making matters worse, digital health companies often must contend with painfully long sales cycles just to get those pilots in place, with no guarantee of scaling broadly after the pilot. Employers and consumers have moved more quickly to adopt some kinds of digital health, but often for reasons that have little to do with the medical value of those tools. For employers, keeping employees engaged is priority #1, and many employer wellness programs and tools offer little clinical value but are adopted anyway because employers think workers will enjoy having access and, in some cases, out of hope of eventual cost savings, which rarely materialize. For consumers, wearables and apps have gained traction in applications that help users feel better about themselves, at least for a few months, before they lose interest and stop using them. In both markets, digital health has looked more like a fad than a lasting innovation with real clinical value, raising questions about the sustainability of many of these businesses. Once you appreciate these differences, it is difficult to see how Flatiron’s success portends anything for the prospects of the vast majority of digital health companies that target customers other than biopharma.
2. Data Monetization Has Always Been Flatiron’s Core Business Many digital health companies hope to amass valuable data sets as a consequence of their core businesses. A connected inhaler company like Propeller, for example, will eventually build a real world dataset spanning tens of thousands of asthma and COPD patients, potentially offering many valuable insights. Such companies may eventually have the opportunity to monetize that data by de-identifying and selling it to biopharma or other stakeholders. For these companies, data monetization represents a promising but secondary revenue stream that only becomes viable once the core business has scaled. Flatiron, by contrast, focused on data monetization from the beginning. In 2014, they acquired an oncology EHR company, Altos Solutions, not because they wanted to make money selling EHR systems to providers, but because they wanted access to the patient records at oncology practices using Altos. In parallel, Flatiron was investing in technology (data extraction tools based on natural language processing) and hiring and training medical data abstraction specialists to execute the laborious process of pulling insights out of the EHR, including unstructured areas like physician notes, and standardizing the data to create a rich, consistent, large-scale dataset. Those investments are what have made Flatiron’s dataset so uniquely valuable. Few companies for whom data monetization is a secondary priority would be willing to invest at that scale. Companies cannot just dabble in data monetization and expect to achieve success like Flatiron’s.
3. It’s Not Just the Data… It’s the Provider Network in a High-Value Specialty Flatiron’s dataset is the most obvious reason for Roche’s investment, but the data is not the only thing that Flatiron brings to the table. Flatiron has over 800 community oncology practices in its network, and all of them are connected through Flatiron’s data infrastructure. This network offers enormous potential for a biopharma company like Roche, particularly in trial recruiting and management, but also in digital marketing, patient assistance programs, and other commercial applications. This network is particularly valuable because it is focused in oncology, a major priority for many of the world’s leading drug companies. Most digital health companies have nothing close to the scale of Flatiron’s customer footprint and can’t offer their customer networks as something of value to biopharma. The few that do tend to be other provider software vendors like Allscripts or athenahealth, who were not built around data aggregation and monetization and do not have the depth in a high-value clinical area like oncology. Contrast Flatiron to Practice Fusion, another EHR company that sought to make money in ways other than selling EHR software. Practice Fusion recently sold to Allscripts for $100MM, a huge disappointment for a company that had raised $157MM and had at one time sought a valuation of $1.5 billion. Reports following this sale focused on Practice Fusion’s failure to generate enough revenue from advertising in their free EHR. Receiving less attention was Practice Fusion’s other failure, its inability to monetize its EHR data. Despite efforts to unlock this value, this business never took off like Flatiron has, likely because most of Practice Fusion’s customers are primary care practices. For biopharma companies, primary care data is not nearly as valuable as rich data from a high-value specialty like oncology, immunology, neurology, or any other specialty where the pricey branded therapies that drive biopharma revenues and profits are prescribed. For all of these reasons, don’t expect the Flatiron exit to usher in a wave of similarly successful outcomes for other digital health companies. Digital health continues to hold enormous promise for patients, the healthcare system, entrepreneurs, and investors, but unlocking that potential will require continued, often painstaking work to break down formidable barriers. The good news is that Flatiron’s success reaffirms that great outcomes are possible when a company targets a real, pressing need in healthcare and pursues it with a clear vision, the right technology, and a smart business model.
About The Author:
Andrew Matzkin is a Partner at Health Advances, a strategy consulting firm focused exclusively on commercial strategy and product development strategy for health technology. He co-leads the firm’s Digital Health and Health IT practice and regularly works with digital health companies, tech companies, life sciences companies, and investors on strategy in digital health, advanced analytics, and precision medicine.
Follow Andrew on Twitter: @MatzkinHealth