Fredrikson & Byron attorneys Ryan Johnson and Jeff Steinle have extensive experience working with digital health companies. They sat down at the MedCity INVEST conference in Minneapolis to discuss legal strategies for evolving digital health business models and the legal challenges facing digital, mobile and virtual medicine.
Q: How does the business model for digital health differ from more traditional medtech and pharmacy?
Steinle: About a decade ago, traditional medtech focused on the provider or pharma prescriber. Then we saw a transition toward the medtech buyer, such as group purchasing, hospitals or insurance companies. With digital health, we’re seeing a transition to a patient-centric focus on the consumer and a shift toward value-based healthcare.
Q: What are some of the unique legal issues facing digital health companies?
Johnson: Cybersecurity is big, as is how you get access to meaningful data. A lot of the opportunities that are available now were not available when this started.
Steinle: Traditionally, we’re patent-centered. With encoded or sealed devices, we’re moving toward more trade secret protection. If someone can look at and copy your device, you patent it. If your device is locked and no one can discern the security code, you may not need a patent on it. Patents are slower-moving as well. This technology evolves so quickly, by the time you get a patent issued, the technology has moved on.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Q: How does the regulatory landscape for digital health companies differ from that for medical devices and pharma companies?
Johnson: From an investor’s perspective, getting your digital health product on the market is easier. They’re either not regulated or FDA is exercising enforcement discretion in regulating certain things as medical devices.
Steinle: For approved devices, FDA is struggling with thorny issues around artificial intelligence and machine learning. If a device has an approved code sequence and machine learning so the code adapts itself, does the company have to submit a new application every time that happens? FDA has taken a practical, risk-based take on it, rather than a rigid parameter to approving it. It’s new, so it’s tough to say how it’s going to evolve.
Q: Is the regulatory scheme becoming more challenging for digital health companies? Why?
Steinle: It’s evolving and its different. Companies that aren’t traditionally in the healthcare space are starting to move into it, like Google’s Verily healthcare initiative. They could hire the right people to manage regulatory issues, but other companies, as they look to expand or are maybe moving up-margin or entering the healthcare space, they don’t have the same regulatory DNA. FDA and CMS are wrestling with new business initiatives, and that’s creating a new dynamic. It’s not exactly the wild west, but it may be getting there.
Q: Are there any successful partnerships in this market that are breaking down some of the traditional industry silos?
Johnson: Payers and device companies and startups are all trying to find ways to share and analyze data and improve quality. There are partnerships that you couldn’t have imagined 10 years ago, like pharma and providers working on lowering costs, and device makers and providers working to lower costs to improve outcomes. If you look outside healthcare, companies are taking the data they have on people, like travel data, to supplement the medical record. If you overlay this, it’s very meaningful and predictive.
Steinle: Healthcare today has twin holy grails: monetizing the data and creating individualized medicine. The data that people generate could be stacked to create individualized care plans. That’s what these companies are really pursuing.
Q: What do companies that are considering joint ventures with digital health companies need to know?
Steinle: I think about it in the context of who owns the intellectual property or the trade secrets. Who has access to and can use the data? Who takes the regulatory risk for the traditional healthcare and as well as for data breaches? How exclusive is that relationship? There are countless other details.
Q: When do you think the emerging digital companies are going to be ready for a strong market exit?
Steinle: You can see a lot of smaller bolt-on acquisitions right now. Companies are looking to add initiatives or healthcare businesses. The traditional players, like the big medtech or pharmaceutical companies, will likely have lots of competition in this space from more consumer-driven electronics companies that are looking to get into healthcare, from large insurance companies and payers that want to bridge into consumer services, and some large healthcare systems, too, that are trying to provide a broader suite of services for their patients. I think we’re going to see a lot of activity for smaller acquisitions now, and that three to five years from now, you’ll probably see a pretty significant consolidation within the industry.
