Five questions: 5AM Ventures’ Andy Schwab

In this series, Digital Health Business & Technology interviews a range of digital health investors, from those who work at venture capital firms and at health system and health insurance venture funds to individual and angel investors. If you’re interested in participating, email us here. 

Andy Schwab has seen technology advancements in pharma evolve since starting his venture capital firm 5AM Ventures in 2002.

“Twenty years ago, there was little capital in the space. This was at the beginning of the Human Genome Project,” Schwab said. “What we knew about biology and science was totally different. It was a black box of investing.”

Since then, the industry has seen developments in precision medicine, digital therapeutics and genomics. The advancements have led to better defined business ideas and some notable portfolio investments for 5AM Ventures, including Pear Therapeutics, a digital therapeutics company that went public in 2021. Schwab said the rapid development of COVID-19 vaccines has further boosted interest in biotech investments.

Schwab spoke about the increasing interest Big Pharma companies have in digital health, the potential of decentralized clinical trials and more. The interview has been edited for length and clarity. 
 

What are you seeing in terms of Big Pharma’s interest and willingness to invest into digital health?

It’s here. They all have their own digital health groups [within the larger company] and they're committed to investing in it. Digital is a broad term and there are many different parts of it, but if you think about the pharma-related piece of it, the diagnosis and treatment of diseases, they're all in on using digital technology to do that. What are the right tools? How do you monetize that? Those are questions that need to be answered but pharma knows digital has got to be part of their long-term strategy. They have embraced it.

What interest are you seeing in decentralized clinical trial technology?

The way we think about digital health broadly is in in two buckets. It's pharma and biotech using these tools to improve the discovery or development of new therapeutics. It’s also the patient and physician side, using these tools and technologies to improve their experience. Our team is all scientists. It's MDs, PhDs. We look at everything through a scientific lens and clinical trials is a big piece of that. And we're really interested in improving the efficiency and effectiveness of clinical trials. It is going to be huge for the industry. Finding patients and running efficient trials is not simple. COVID had a negative impact on clinical trials because hospitals were obviously busy with patients and really couldn't run clinical trials. We need new strategies to think more globally and more digitally to access patients and run more efficient, effective trials.

What are the biggest challenges for companies operating in this space?

For one thing, healthcare is a huge industry with a lot of issues/opportunities to improve but trying to find game-changing technologies that are really going to move the needle is hard. There are a lot of incremental ideas out there. Having a true game-changing, disruptive idea is hard. 

That’s one. Two is business models. These are novel business models in many cases. Who's paying for the technology? Who's getting value? Is it getting reimbursed? What do you need to prove to get it reimbursed? And ultimately, how do you make money as a company and therefore as an investor?  There's no cookie-cutter business model here. You've got to almost create your own business model each time and that just makes it harder.  
 

What’s the most important thing you want to hear from a company pitching you?

If you come to us with a business plan that's reasonably formed and we believe in you as an entrepreneur, we're going to be more excited about it [than other firms]. Other firms may be heavier on due diligence. We have a gut element in what we do. 

One of the biggest mistakes people can make, especially in digital health, is not knowing the business model. How do you get to profitability? What is really the ultimate investment that you're asking people to make? To get a return? The job is to create returns for investors and for that you must find successful companies that are based on sound business models. Often, people get too excited about the science, the discovery or the tool, and they forget to build the company.  
 

With your background, how important is data and efficacy of the technology you’re evaluating?

You know scientists, we’re the biggest skeptics. We have had meetings where scientists pick apart ideas because there's just no scientific evidence. That puts us in a certain bucket as an investor where we’re going to be very scientifically and data driven. Others might wing it and obviously sometimes winging it works. For us though, we want to know what is the trial that proved something is efficacious? 

When you talk about Pear Therapeutics and what they've done in the prescription digital therapeutics space, the reason we got excited is because they wanted the Food and Drug Administration to run clinical trials.  They wanted to go through an FDA pathway and that was critical for us. We want that rather than having some sort of consumer app that people can download and use when they when they want, and maybe it works or maybe it doesn’t.