A Philips Digital 3T MRI scanner © Bloomberg
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It has not been a good few months for disruptive “unicorn” companies in the healthcare sector.

First came questions over the accuracy of blood testing technology developed by Theranos, the much-hyped Silicon Valley start-up whose 32 year-old founder, Elizabeth Holmes, had promised to revolutionise medical diagnostics.

Next to have its bubble burst was Zenefits, the HR software company which set out to challenge traditional health insurance brokers. Its similarly youthful founder and chief executive, Parker Conrad, was ousted in February amid concerns over the Californian company’s compliance with insurance laws.

The humbling of Theranos, Zenefits and their high-profile young founders marks the first big setback for the wave of technology companies aiming to make healthcare the next industry to feel the force of digital disruption.

From mobile sensors that monitor people’s vital signs to machine learning systems that speed the search for new drugs, investment has been pouring into the intersection between healthcare and technology. According to the San Francisco-based venture fund Rock Health, funding for US health-tech start-ups exceeded $4.5bn in 2015, more than quadruple the 2011 total.

The boom in “digital health” has now given way, however, to a more sober mood as companies set about the difficult task of delivering on their ambitious and often unproven plans.

Practice Fusion, a US electronic medical records company, laid off a quarter of its staff in February, six months after replacing Ryan Howard, its founder and chief executive, in a sign of the more straitened times. Fitbit, the maker of wearable fitness trackers, has seen its share price decline by half since listing on the New York Stock Exchange last summer.

“There has been a lot of learning in the past 12 months — for companies and investors,” says Unity Stoakes, president of StartUp Health, a New York-based technology “accelerator” which helps nurture digital health companies.

Theranos and Zenefits operate in very different segments of the healthcare market but their experiences highlight the central problem facing many companies pushing disruptive approaches in such a highly-regulated sector.

In recent months, US regulators have censured Theranos for using unapproved devices to collect blood samples and warned that flaws at one of its laboratories risked “serious injury or harm, or death”. Zenefits has also come under investigation for compliance breaches, including the use of software that allowed employees to falsify regulatory training reports.

Jeroen Tas, head of healthcare informatics at Philips © Getty

Both cases seemed to highlight a clash of cultures between the freewheeling spirit of Silicon Valley entrepreneurs such as Ms Holmes and Mr Conrad and the industries they are trying to reshape.

Mr Stoakes says the burst of negative headlines could be a useful corrective to the hype that has built around digital health. Investors need patience, he says, as regulators, patients and medical professionals gradually build confidence in new tech-driven approaches.

“People are accustomed to how quickly things move in technology but when you are dealing with people’s health you need to take a longer view,” says Mr Stoakes. “We’re still very early in a cycle that is going to take 20-25 years to play out.”

While the froth may have subsided, the underlying current is still running strongly in favour of digital innovation. Research by McKinsey last year concluded that healthcare had greater potential than any other industry for value creation from “connected technology” by 2018 — more than twice as much as retail and three times the estimates for carmakers and utilities.

The controversies at Theranos and Zenefits may have shaken confidence in the ability of start-ups to exploit this trend but big technology groups are pressing ahead strongly.

Apple last month signalled an expansion of its healthcare ambitions with the launch of CareKit, a new software platform for apps that help patients monitor their health and share information with medics. The iPhone’s sensors can be used to track physical activity and other vital signs, while alerts can be issued to help people keep up to date with medications.

CareKit adds to the ResearchKit platform introduced by Apple last year which aimed to harness health data from iPhones for use in “crowdsourced” medical research. More than 100,000 people have already enrolled on studies — including 10,000 with Parkinson’s disease who have volunteered iPhone measurements of their dexterity, balance, gait and memory.

Ray Dorsey, professor of neurology at New York state’s University of Rochester Medical Center, which is leading the Parkinson’s study, said ResearchKit had opened the way to “inexpensive, high-quality clinical studies with unprecedented reach”. He hoped CareKit would have a similar impact on day-to-day care.

Google is investing heavily in the sector. Almost a third of the funds dispersed by its GV venture capital arm last year were allocated to healthcare. Google’s Alphabet holding company has a life sciences unit called Verily, which is working on projects ranging from a contact lens that can measure glucose levels in teardrops to magnetic nanoparticles that travel through the bloodstream hunting for early signs of cancer.

Philips is another big player, having recently spun off its 125-year-old lighting business to sharpen focus on health-tech. Jeroen Tas, head of healthcare informatics at the Dutch group, says gimmicky fitness gadgets for the “worried well” are being superseded by medical-grade technology capable of improving outcomes and reducing costs for health systems.

Some of the greatest benefits look likely to come from remote monitoring of patients with chronic diseases — a population which typically accounts for 80 per cent of healthcare costs in developed countries. “Healthcare can become a largely virtual network,” says Mr Tas. “Of course you still need some physical [interaction] but not in the way that health systems were originally set up.”

Ultrasound scans are just one example of the services that will become possible to conduct remotely via a mobile device without the patient needing to visit a clinic, says Mr Tas. “The family doctor will become a health coach and a trusted adviser but a lot of what a doctor used to do will become self-service like we’ve seen in other industries.”

The proliferating volume of medical data being collected and shared online is making cyber security a growing challenge. The US Food and Drug Administration has raised alarm over the potential for hackers to sabotage medical devices, while several data breaches at big US health insurers has fuelled concern over patient privacy.

Mr Tas says these problems are surmountable. “Twenty years ago I worked for Citibank and everybody told me I was wasting my time because nobody would do their banking on a computer. There is a lot of technology from the financial world that can make health data secure.”

He argues that big groups such as Philips are better equipped than start-ups to navigate the security and regulatory hurdles of digital health. Mr Stoakes says large and small companies can learn from each other. “In technology the idea is usually to bypass the established companies. In healthcare it is better to take a collaborative approach. Established companies that engage with start-ups are likely to emerge as the healthcare leaders in future.”

Some start-ups are determined to go it alone. Oxehealth, a spinout from Oxford university, is developing software that can measure data such as heart rate, blood pressure and body temperature by analysing live video images of a patient. Lionel Tarassenko, the Oxford professor who founded Oxehealth, says the company can move faster than would be possible in a larger group. Six clinical trials of the technology are under way with a target to secure US regulatory approval next year.

The technology has been likened to the “tricorder” scanner in Star Trek but Prof Tarassenko chafes at the comparison. “It is not science fiction,” he says. “Cameras are now so good they can pick up micro blushes with every heart beat.”

Prof Tarassenko says some start-ups have made the mistake of seeking shortcuts to market in an industry where painstaking accumulation of evidence is essential for credibility. “Some of the things I read make me cringe,” he says. “Exaggerated claims will not help anybody.”

Copyright The Financial Times Limited 2017. All rights reserved.
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