After years of hyping its new digital diabetes monitoring company, Cone Health is scrapping the venture it poured millions of dollars into, citing a highly saturated market for such tools.
A few years ago, the Greensboro, N.C.-based health system gave media interviews and fired off press releases promoting the smartphone app it said would revamp diabetes care. But the deal didn't work out as planned. Tucked in a clause of its latest financial statement, Cone said it's winding down the company this year.
Not-for-profit Cone, which is in the throes of merging with Sentara Healthcare, declined an interview. Chief Financial Officer Jeff Jones said in a statement that when Cone started the joint venture with Wellsmith, an Austin, Texas, technology company, there were no comparable solutions on the market. Cone's financial statement said the venture was formed in late 2015.
"Unfortunately, since that time several well-funded competitors established similar platforms," said Jones, who's leaving the system this month. "This has made it difficult to scale our platform to more customers and develop more partnerships. Due to these factors we made the difficult decision to sunset the Wellsmith platform."
Cone initially funded the venture with a $10.7 million loan to Wellsmith that gave it a 50% stake in the company. That was converted to equity in early 2020, upping Cone's stake in Wellsmith to 77%.
"That's a pretty aggressive, all-in approach," said K. Lance Anderson, an attorney with Dickinson Wright in Austin.
Underwhelming performance has forced Cone to record multiple asset impairments on the disease management technology, meaning expected cash flows fall below its value. That includes a $4.6 million impairment in fiscal 2020 and a $7.8 million impairment in fiscal 2018. Cone won't say what it plans to do with Wellsmith—including whether it will shutter the company completely. Wellsmith officials did not return requests for comment.
On paper, the idea sounded promising, although ubiquitous in today's market. Cone's app sought to improve the health of patients with Type 2 diabetes while simultaneously lowering their medical expenses. It would do that by connecting to patients' glucose monitors and scales using Bluetooth technology. It would also keep them connected with caregivers remotely. Users get digital care plans and an app that reminds them to take medications and encourages them to meet health goals.
Cone started the platform with diabetes and planned to expand that to heart failure and chronic obstructive pulmonary disease. It's unclear whether that happened. The market for digital diabetes management products is highly saturated, and includes giants like Bayer, Medtronic and Johnson & Johnson. It's expected to hit $17 billion in spending globally by 2026, from just $3.4 billion in 2018, according to Allied Markets Research.
Given the huge influx of competitors in this area, potential customers—especially discerning ones like health systems and insurers—need to see third-party research showing it works, said Christopher Whaley, a policy researcher at RAND Corp. Whaley was on a team Livongo commissioned in 2019 to assess its remote diabetes management program, with positive results.
"Intelligent purchasers are becoming aware of that hype and some of those claims and are actually demanding rigorous evidence that programs work," he said.
Wellsmith and Cone said they carried out pilots directed by internal review boards on an unspecified number of Type 2 diabetes patients in 2016 and 2017. Among that group, they claimed physical activity reportedly increased 24% and patients lost a pound of weight per week.
Cone is the only specific partner named on Wellsmith's website, so it's unclear whether other health systems or insurers have signed on. In 2018, Wellsmith told Modern Healthcare that Cone was its only client, but the company's CEO, Jeanne Teshler, said she hoped to have three more "Cone-like customers" within the next year.
In addition to Jones' upcoming departure, Cone's CEO, Terry Akin, also plans to step down once the merger with Sentara closes. Akin has been CEO since 2014. Cone posted a 2.7% operating margin in the year ended Sept. 30, 2020, or $62.7 million in operating income on $2.3 billion in revenue. That's down slightly from a 2.8% margin in fiscal 2019.
In structuring ventures like this one, health systems must have contingencies in the event of failure, said Dickinson Wright's Anderson. That means ensuring the ability to unwind the deal if it's not working out, whether because of changes in market conditions, the regulatory environment or leadership.
"At a high level, they committed a lot of money and at some point, a decision was made to not move forward," he said. "It would have been better to see that de-risking aligned with the amount of money put into it."