There are going to be two mobile health markets, but investors may be challenged for some time to find a route to profit from either, despite revenue in the space that should double from about $718 million this year to $1.3 billion next year, according to Research2Guidance.
The two markets can be summed up as regulated and unregulated.
The Food and Drug Administration, or FDA, will regulate only those applications that connect to devices and whose data is meant to be taken seriously by caregivers.
If data derived by the device only goes to consumers, the device won't come under regulation.
Regulated systems, even if they're just software, will be treated as medical devices and subject to approvals that could cost $25-75 million to get. This will raise costs, limit competition, but also bring the mainstream of health IT into the mobile health space.
So companies with substantial health IT plays - such as AthenaHealth (NASDAQ:ATHN), General Electric (NYSE:GE), United Health (NYSE:UNH), and privately-held Meditech - will all be big players in this new regulated space, each from a different angle.
- The Electronic Health Record companies like ATHN will be looking to build integrated solutions tied to hospitals and clinics.
- The insurers will be looking to connect patients more directly to them.
- The equipment players like GE will be looking to link mobile to their existing product lines.
In all these cases, mobile health comes as a "value add" from some trusted source - your doctor, hospital, or insurer - but the data flow is tied to your health record, which can call on professional help when needed.
The cost of regulation will be absorbed into healthcare savings down the road. Better management of blood sugar, of hypertension, and of other risk factors makes sense when you have an incentive, in the form of per-patient payments, for wellness.
The consumer market will be different.
Kaiser Health estimates there are already 40,000 mobile health apps, most of them in the unregulated space, and that the industry is still in its infancy.
Here is where you might expect some VC-funded companies to launch IPOs, from companies like Massive Health and FitBit. These will be sold as consumer apps, tied to consumer products like the BodyMedia arm band, or sponsored by existing health industry players.
The current problem for investors is that, until private equity has squeezed most of the profit from the space, good deals are unlikely to go public. This is what happened in social. The best play here may be the networks on which the data is running, like AT&T (NYSE:T) and Verizon (NYSE:VZ).
Another place to look for profit in this space is in athletics, where Nike (NYSE:NKE) is also showing active interest in products tied to shoes and apparel.
Investors should wait for the market to gain more definition before expecting any pure plays, but some could be worth waiting for as takeover candidates.
Disclosure: I am long GE.