A R O C K
R E P O R T B Y BIOSENSING WEARABLES THE FUTURE OF 2014 JUN 09

A R O C K
R E P O R T B Y AUTHORED BY WITH HELP FROM MALAY GANDHI @mgxtro TERESA WANG @teresawang6 ROCK HEALTH is powering the future of the digital health ecosystem, bringing together the brightest minds across disciplines to build better solutions. Rock Health funds and supports startups building the next generation of technologies transforming healthcare. ROCK HEALTH partners include Deloitte, GE, Genentech, Harvard Medical School, Kaiser Permanente, Kleiner Perkins Caufield & Byers, Mayo Clinic, Mohr Davidow Ventures, Montreux Equity Partners, Qualcomm Life and UCSF. LEARN MORE AT rockhealth.com SONIA HAVELE @rock_health HIS HAS BEEN A YEAR MARKED WITH PESSIMISM ABOUT THE future of biosensing wearables. Put simply: we’re not buying it. After spending over a year looking at the space— including evaluating 100+ startups for investment, watching venture trends, and working with giants from both in and outside of healthcare—we know interest has never been greater. However, excitement shouldn’t be mistaken for impact. We expect biosensing wearables will need to leverage their consumer learnings and evolve into highly functional and accurate devices in order to gain adoption in the industry. The opportunity here is not to be underestimated. A long tail of evolved biosensing wearables, enabled through platforms, has the potential to improve health outcomes and lower costs. Only time will tell if the reality matches the promise—we’re optimistic. T

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Contents 4 Scope of report Definition of biosensing wearables 5 Landscape Companies by type of physiology measured Venture funding of biosensing wearables Market catalysts 18 Axes of innovation Evolution of biosensing wearables Examples of progress Potential for disruptive innovation 26 Platforms and business models Healthcare industry use cases Examples of existing biosensing wearable platforms Role of technology platforms 32 Acknowledgements Contact information SECTION

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Activity trackers Smart watches Smart clothing Patches and tattoos Ingestibles and smart implants Biosensing wearables allow continuous physiological monitoring in a wide range of form factors 4 BIOSENSORS WEARABLES Biosensors are devices that convert a biological recognition element into a signal output Wearables are on- or in- body accessories that enhance the user experience e.g. AliveCor, Scanadu e.g. Google Glass, Oculus Rift FOCUS OF REPORT: BIOSENSING WEARABLES 9:41 ..........................................

Landscape

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A wide range of products have emerged or are being developed in the category, covering numerous aspects of human physiology Source: Rock Health review of marketing for 75+ companies Note: Companies are selected, not comprehensive 6 GROWING LONG TAIL MOVEMENT HEART RATE SLEEP TEMPERATURE RESPIRATION SKIN CONDUCTANCE BRAIN ACTIVITY HYDRATION POSTURE GLUCOSE OXYGEN LEVEL HEART RATE VARIABILITY MUSCLE ACTIVITY BLOOD PRESSURE EYE- TRACKING INGESTION COMMODITY ZONE

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Smartphones are out, wearables are next How wearable tech goes from geek fad to mega-trend 2014 will be the year that wearables become a key consumer technology HOPE Opinions on the future of the category are decidedly mixed, with a tremendous amount of hype mixed with failure Source: News stories, Twitter As the health-gadget market swells, it’s lights out for Zeo’s sleep tracker Nike fires majority of FuelBand team, will stop making wearable hardware Are some fitness band trackers ‘digital snake oil,’ with slick marketing but suspect results? HYPE 7 “ “ ” ”

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Various estimates of wearable device sales through 2018 While the activity tracker segment has about 1-2% U.S. penetration, wearables overall are expected to grow significantly Note: IDC reported smartphone market size as of 2013 Source: Respective company sites PICK A NUMBER, ANY NUMBER 8 DATE OF ESTIMATE Jan ’13 May ’13 Aug ’13 Sep ’13 Oct ’13 Apr ’14 May ’14 Present $ 50.0B Credit Suisse Market estimate in 2018 Market estimate in 2013 $5.8B Transparency Market Research $8.0B ReportsnReports $8.4B MarketsAndMarkets $19.0B Juniper $12.6B BI Intelligence $6.0B ABI Research $20.6B Institute for Information Industry (Taiwan) $30.2B BCC Research $337B Smartphone market size

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Venture capitalists are also betting on the space, with venture funding up over 5X since 2011 Source: Rock Health funding database Note: Does not include Jawbone financing events 9 $0M $75M $150M $225M $300M 2011 2012 2013 Biosensing Wearables Biosensors $20M $29M $58M $54M $229M $53M NOTABLE DEALS • Norwest Venture Partners • Founders Fund • Khosla Ventures • Qualcomm Ventures • Felicis Ventures MOST ACTIVE INVESTORS Total venture funding for biosensing wearables (2011-2013) WEAR IT’S AT

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The scale and utility of smartphones, in addition to a dramatic shift in healthcare, has catalyzed the space Sources: Smartphone penetration from Comscore as of March 2014; MEMS accelerometer pricing from supply chain sources; ACO penetration from Leavitt Partners OFFLOADING COMMODITIZATION VALUE-BASED HEALTHCARE 10 • Wearables can offload the display (through software apps), the computing, and internet connectivity to a smartphone • Bluetooth Low Energy (BLE) has enabled energy efficient data transfer between devices and smartphones 2008 2013 $0.50 $2.00 MEMS accelerometer price per unit • Due to inclusion in smartphones, many popular sensors are now fully commoditized • Prices for most sensors are dropping at >3% per quarter • Commoditization forces vendors to develop novel sensors, creating a virtuous cycle of innovation • Following the ACA, healthcare has an increased focus on value-based delivery and preventive care • Health plans and employers are experimenting with wearables as “source of truth” for incentives • B2B has become one of the fastest growing components of Fitbit’s business 69% U.S. SMARTPHONE PENETRATION 0M 5M 10M 15M 20M 2011 2012 2013 2014 Accountable care lives

“The ground has to be
fertile for the seeds to grow—innovative technology in wearables and biosensors can be both economically- and functionally-sound because it leverages the trillions of dollars that have already gone into that space. Once the technology lines up, utility will come from people knowing how to use the devices. Healthcare is the biggest and most persistent opportunity and will ultimately define the market.” AMAR KENDALE VP of Marketing MC10‘s technology platform is a unique combination of conventional electronics and novel mechanics that enable a new generation of thin, conformal electronic systems.

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Biosensing wearable products being created today could not have existed even three years ago Source: Product and app rendering courtesy of Spire, Inc. Note: Spire product is launching June 17th, 2014 12 Bluetooth Low Energy radio First device to implement BLE was the iPhone 4S in 2011 MEMS accelerometer Price has fallen 4X in the last five years Wireless charging coil Qi standards-based products first hit market in 2013 Offloaded computation Signal processing from sensors is handled in cloud via iPhone

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Rate of sustained activity tracker use over months of ownership Despite such advancement, wearable products today fail to engage users over meaningful periods of time ENDEAVOUR PARTNERS SURVEY (n = “thousands of internet- connected Americans”) THE TRUTH ABOUT WEARABLES 13 0% 25% 50% 75% 100% 0 3 6 9 12 15 18 21 24 Rate of decline is steepest during the first 6 months of ownership Rate of engagement drops below 50% before 18 months PROPORTION OF INDIVIDUALS CONTINUING TO USE AN ACTIVITY TRACKER MONTHS ROCK HEALTH “SURVEY” (n = 10 Rock Health staff) Note: We sincerely appreciate and respect the Endeavour Partners work; however we would be surprised if the survey could be replicated

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The generic marketing language of most devices leaves use cases to the purchaser's imagination Source: Market share from NPD point-of-sale data (January 2013-January 2014); marketing copy from company websites (May 2014) 14 97% THE TOP 3 WEARABLE ACTIVITY TRACKERS REPRESENT OF THE MARKET “It’s the motivation you need to get out and be more active.” “It celebrates milestones and challenges you to make each day better.” “The smart, simple, and fun way to get more active.”

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Trade-offs between mass market and personalized products All companies face product marketing challenges when making the trade-off between mass and niche markets PARADOXICAL PRODUCTS 15 ADDRESSABLE MARKET (NUMBER OF INDIVIDUALS) UTILITY PER USER SPECIAL PURPOSE DEVICESGENERAL PURPOSE DEVICES Products in this area are marketed towards large audiences but fail to gain widespread adoption due to a lack of usefulness Products in this area are highly valued by niche segments, giving a feeling of personalization Products in this area are the ideal, balancing the marketing of mass market core utility with some level of specialization for narrower segments

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The pathway to reaching large markets for companies today For most activity trackers, the lack of utility and failure of product marketing have made it difficult to scale and meaningfully engage Source: Reviews from Amazon.com and Reebok website PARADOXICAL WEARABLES 16 ADDRESSABLE MARKET (NUMBER OF INDIVIDUALS) UTILITY PER USER SPECIAL PURPOSE DEVICESGENERAL PURPOSE DEVICES Activity trackers Single purpose wearables “Piece of mind protection for a parent!” “Great product. It works as advertised and helps correct bad habits.” Strategic approach: • Improve software/insights • Add more sensors/features Strategic approach: • Create family of segment- specific devices REEBOK CHECKLIGHT LUMOBACK

“Innovation for use case is
important. Right now, everyone is just using off-the-shelf technology so they can only go after things that are obvious, like counting steps and heart beats. In order to provide something more meaningful, it’s important to design a product that has a specific utility. Then you can stand behind it and say to somebody, ‘This is how I’m going to help you.’” DAVID O’REILLY Chief Product Officer Proteus’s vision is to integrate medicines that treat chronic conditions with mobile technology – via our ingestible sensor– to make healthcare more accessible, manageable and innovative.

Axes of innovation

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FUNCTIONALITY RELIABILITY CONVENIENCE • Collecting physiological factors with the potential to be of value to individuals or healthcare professionals • Building software that makes physiology meaningful and can close the loop with actions (answering the question “So what?”) • Measuring physiology with accuracy and validity (or using software and algorithms to correct for validity) • Achieving accepted clinical standards and receiving FDA (or other regulatory) clearance or approval • Packaging sensors in form factors that are passive, comfortable, and provide positive reinforcement to the user • Managing battery life and various charging issues • Synchronizing data between wearable device, smartphone, and cloud In order to scale beyond early adopters, biosensing wearables will need to innovate along three axes 19 High value segments will emerge at narrow use case intersections along these three axes

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Functionality determines a biosensing wearable’s potential utility to an end user, whether a consumer or healthcare professional Source: Company website • Novel measurement—monitors your posture and coaches you to improve throughout the day 20 • Provides consistent reminders to maintain healthy posture • Track progress over time as well as daily activities (walking, running, sitting, standing, and sleeping) FUNCTIONALITY WHY IT MATTERS Without core functionality, utility to the user is highly limited. WHAT IT REQUIRES Measuring meaningful physiology and closing the loop with users by delivering insights. WHY IT’S HARD Need to be exceptional at hardware and software. EXAMPLE: LUMOBACK

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Reliability influences the addressable segments due to the unique constraints of operating in a healthcare environment Source: Company website, fda.gov 21 • Single use patch • 510(k) clearance—proven to capture arrhythmias for earlier diagnosis • Interpretation designated for healthcare professionals • Report summarizes findings based on FDA-cleared proprietary algorithm to incorporate final diagnosis EXAMPLE: ZIO PATCHRELIABILITY WHY IT MATTERS Healthcare customers demand valid data to inform clinical decisions. WHAT IT REQUIRES For clinical markets, a regulatory (e.g., FDA) clearance or approval. WHY IT’S HARD Signal processing to overcome accuracy issues; Few in the category have a FDA clearance or approval.

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CONVENIENCE Finally, convenience plays a significant role in engagement with biosensing wearables, particularly at the onset of use Source: Company website 22 • Eschews charging with watch battery that lasts up to a single year • Background syncing handled through Bluetooth Low Energy • Waterproof and can be used while swimming or showering • Form factor is jewelry-like with multiple ways to wear or display EXAMPLE: SHINE WHY IT MATTERS Without convenience, user engagement falls off a cliff. WHAT IT REQUIRES Limiting the number of actions required by the user, covering everything from unboxing through syncing. WHY IT’S HARD Requires expertise in packaging, industrial design and user experience.

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FUNCTIONALITY RELIABILITY CONVENIENCE USE CASES • Directly measures ingestion event along with activity and heart rate • Provides information to healthcare professional or caregiver • Binary state of reliability for ingestion event • Received FDA approval (ingestible event monitor) and clearance (patch) • User wears disposable patch and takes medicine as usual • No charging • No additional tracking required • Medication adherence in key therapeutic areas including heart failure, CNS, and transplant • Measures respiration and activity • Software allows user to be informed about state of mind (e.g., focus) and take clear action • Respiration sensor is comparable to clinical standard spirometer • Developed into a compact form factor that can be worn in multiple places • Supports wireless charging • Customized styles for users • Health and performance of knowledge workers • Respiratory condition monitoring First products from Proteus and Spire demonstrate how innovating along all three axes leads to high utility PROTEUS HELIUS SPIRE Source: Proteus website; Spire product rendering courtesy of Spire, Inc.

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Disruptive potential of biosensing wearables over time Biosensing wearables that evolve along the three key axes have the potential to disrupt large healthcare markets A LITTLE MORE DISRUPTION, PLEASE 24 Note: We strongly object to the overuse of the phrase “disruptive innovation”; however, we feel that it describes both the market dynamics as well as popular backlash against the category PRODUCT PERFORMANCE TIME as defined by FUNCTIONALITY RELIABILITY CONVENIENCE Performance demanded by healthcare markets Driven primarily by functionality and reliability Performance demanded by consumer markets Driven primarily by convenience and price SUSTAINING TECHNOLOGY BIOSENSING W EARABLES MEDICAL DEVICES REMOTE PATIENT MONITORING CLINICAL DATA CAPTURE EMPLOYER WELLNESS $100-125B $10B $6B $6B Our arch competitor will not be Boston Scientific, or St. Jude Medical or Covidien or HeartWare. It will be Google. STEPHEN N. OESTERLE, M.D. SVP, Medicine and Technology Medtronic

“AgaMatrix was medical, medical, medical
for 7-8 years. What we realized was that we had so much difficulty trying to rapidly update our apps. With Misfit, we thought we would go to the consumer first, test, learn a lot, iterate over and over again, and then hit the healthcare market.” SRIDHAR IYENGAR Co-founder and CTO Misfit invents and manufactures great wearable computing products.

Platforms and business models

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Critical use cases for the industry and biosensing wearables Evolved biosensing wearables will solve significant problems for the healthcare industry AND THE QUEST FOR THE HOLY GRAIL 27 PAYERS PROVIDERS BIOPHARMA IDEALIZED USE CASES • Consumer behavior change • Early diagnosis and intervention • Source of truth for biometric-based incentive programs • Remote patient monitoring • Support for telemedicine services • Clinical data capture for executing adaptive clinical trials • Collection of post-market and real world effectiveness data • Combination device and drug products PERFORMANCE REQUIREMENTS • Functionality has to focus on making physiological data highly meaningful and actionable to the end user • Convenience is paramount as consumers are highly likely to abandon devices that cause any type of engagement friction • Functionality has to focus on data transport and integration into clinical workflow • Requires high reliability (e.g. regulatory clearance) if healthcare professionals are dependent on data for healthcare delivery • Functionality must focus on the clinical endpoints tied to specific therapeutic areas • Reliability has to pass compliance with existing regulation—data collection as part of a clinical trial must be 21 CFR Part 11 compliant (U.S.)

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INDIVIDUAL WELLNESS CORPORATE WELLNESS REMOTE PATIENT MANAGEMENT CONSUMER ENGAGEMENT AND ANALYTICS DATA NORMALIZATION AND TRANSPORT Consumers Payers Providers Payers, biopharma Agnostic (API) Attempts at consumer/industry platforms for integrating biosensing wearables Multiple companies have emerged in an attempt to enable these use cases, although none are close to becoming scaled platforms Note: Devices and platforms are selected, not comprehensive COMPLETELY FRAGGED 28 EXAMPLE PLATFORMS USE CASE TARGET CUSTOMER BIOSENSING WEARABLES

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CORE SOFTWARE S Health Health PLATFORM Samsung Architecture Multimodal Interactions (S.A.M.I.) HealthKit ENABLING DEVICES Galaxy S-series Simband (reference platform) iPhone ? Activity trackers and watches Smart clothing Patches and tattoos Ingestibles and smart implants Non-wearable biosensors Wearable makers and end customers are both heavily platform shopping, limiting scale and leaving an opening for tech giants Note: Yes, we expect Apple to release an enabling biosensing wearable device. We do not know what the release date, form factor, or underlying product story will be. 29 .......................................... ............................ 9:41 HARDWARE ECOSYSTEM SOFTWARE ECOSYSTEM Mobile apps Data transport and liquidity to/ from the industry

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VIRTUOUS CYCLE Starting from a scaled platform could catalyze a virtuous cycle, enabling new business models for wearable companies PLATFORM SOLVES 30 HARDWARE ECOSYSTEM SOFTWARE ECOSYSTEM PLATFORM ENABLING DEVICES CORE SOFTWARE 1 2 3 1 Scale for everyone A massively scaled consumer platform attracts industry and developers, seeding an ecosystem within the healthcare industry. 2 3 Software: challenges of fragmentation Pure software players, including the industry, can define valuable use cases and no longer worry about choosing a specific type of biosensing wearable—maximizing flexibility and consumer choice. Hardware: missing integration Device companies can build once (for defined use cases) and connect to multiple endpoints (inclusive of both consumers and the industry) through a scaled platform, eliminating the current challenge of having to be a “full stack” company (hardware, software, integration). SUBSCRIPTION SOFTWARE ADD ON SERVICES (E.G., COACHING) DISPOSABLES HIGH GROSS MARGIN (VALUE-BASED PRICING) NEW BUSINESS MODELS

Characteristics of disruptive businesses, at
least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. “ ”PROF. CLAYTON CHRISTENSEN We’re at the beginning of a long journey with biosensing wearables

ACKNOWLEDGEMENTS We are indebted to
our industry partners who not only support our work every day but provided invaluable feedback on an early draft of this report. A number of industry, startup and venture folks also offered their expertise. Special thanks to Aaron Duran, Ingo Elfering, Sridhar Iyengar, Amar Kendale, David O’Reilly, Jonathan Palley, and Sundeep Peechu for their time and insights. Finally, we are fortunate to work with the most talented (and fun) team in digital health. Thanks to Halle Tecco and Mollie McDowell for reviewing our final drafts and providing edits. research@rockhealth.org @rock_health PRESENTATION © 2014 ROCK HEALTH