You will hear plenty of commentary from Fitbit (FIT) fans and investors regarding the future of Fitbit with a focus on the company evolving or spiriting products for the healthcare industry.  Of course, this is exactly what Fitbit desires from investor sentiment as the company witnesses its sales in the consumer industry nearing saturation in many regions around the world. While the chatter and even the clinical trials for which Fitbit participates in the healthcare industry seem promising, they are little more than efforts to skirt processes for achieving Food & Drug Administration (FDA) clearance and ascertain some kind of benchmark. In participating in clinical trials this way, Fitbit is attempting to create a new category of sales that lay between the consumer and healthcare industry.

By achieving a benchmark standard from the FDA, Fitbit’s products could find themselves entrance in the healthcare industry, but investors should also understand the scope of the industry Fitbit products would be best aligned. Moreover, investors should also understand that achieving FDA clearance does not guarantee a billing code will be assigned for their product and for which health care providers would receive medical reimbursement.

Achieving FDA clearance with a medical grade label is a timely and costly consideration for any company. Fitbit understands this all too well and it is one of the reasons Apple’s (AAPL) Tim Cook has gone on record stating that the company will not go down that road with the Apple Watch. 

The reality of achieving FDA clearance is also relative to where such a product would be positioned in the marketplace.But before we explore that understanding let’s discuss one of the very few companies today that is working in the healthcare sector with wearable, medical grade devices. Biotricity (BTCY ) is a California-based, remote patient monitoring company listed on the OTCX. The company is led by CEO Waqaas Al-Siddiq, who has held several high-level design positions in IBM, AMD, and Intel. His achievements have been numerous in both the technical and academic world. Waqaas and the Biotricity team have been working on two products over the last couple of years for what will bring about an evolutionary change to the remote patient monitoring (RPM) and mobile cardio telemetry (MCT) industry.When we speak about wearables and their relative use case scenarios for the healthcare industry we generally understand the heart rate tracking functionality to be the most aligned with the industry. But it is important to distinguish that these wearables don’t really track the heart rate today, but rather the pulse rate through a mathematical analysis of blood flow. The distinction is key for the clinical designation and only part of the reason none of the consumer wearables on the market today are able to achieve FDA clearance and designation as a medical grade device. 

In the healthcare industry, diagnostic tests such as ECGs are used to detect, diagnose and track certain types of cardiovascular conditions and arrhythmias. The U.S. portion of the ECG market is expected to be worth $9.32 billion in 2020 and is comprised of three major segments: resting (non-stress) ECG systems, stress ECG systems, and event monitoring systems. The event monitoring segment alone is expected to be worth $4.66 billion in 2020 and is currently broken into the Holter, Event Loop, and MCT monitoring categories. MCT is the preferred diagnostic choice of physicians and cardiologists, as it increases the quality of care and reduces patient risk. The MCT diagnostic is a robust, continuous, remote monitoring solution for cardiac arrhythmia, and often eliminates the need for expensive overnight monitoring in a hospital. But the technology in today’s MCT devices is outdated

Over the last few years, Biotricity has been working on developing Bioflux and Biolife. Bioflux is a remote patient monitoring (RPM) device developed for the mobile cardio telemetry (MCT) category of medical grade devices.

“Unlike Holters or Event Loop recorders, MCT solutions communicate information received on an ongoing basis, as opposed to recording it for future use. Bioflux will monitor a patient’s heart rhythm and send data in real-time to a 24-hour monitoring lab. If a patient is in cardiac distress, an alert will be sent to the monitoring center, which will in turn contact the patient to offer assistance. This increases the quality of care, potentially lowering patient risk and reducing physician liability.

Making the transition to the bioflux MCT system is completely hassle-free, since bioflux is insurance reimbursable and uses industry-standard software. bioflux’s software is designed to integrate seamlessly into a physician’s practice and workflow with no changes to internal processes. This means physicians can start using bioflux with patients immediately upon installation”. 

What is revolutionary about Bioflux and the Biotricity’s business model is where the company will generate revenues. What is important to understand when it comes to FDA approved, medical grade devices is the ability to achieve financial reimbursement. Without reimbursement, there really is limited need for seeking FDA approval and medical grade status. 

In the United States, MCT diagnostic tests are primarily conducted through outsourced Independent Diagnostic Testing Facilities (IDTFs) that are reimbursed at an average rate of $850 per diagnostic test. The current competitors within the United States MCT diagnostic market have restricted MCT services to outsourced clinics and locked physicians out of the MCT market with no ability to receive financial reimbursement for MCT diagnostics. The healthcare provider/physician is rendered to be little more than applicant referral/sales channel of the MCT and service provider.Biotricity’s business model and Bioflux device change this equation. With Biotricity’s software and MCT diagnostic device solutions, there will finally be a reimbursement insourcing business model employed to the benefit of healthcare providers. The Bioflux solutions are superior to the existing MCT providers’ business model:

• offers better and/or equivalent diagnostics to current MCT devices in use;  
• provides recurring reimbursements to doctors, hospitals and IDTFs;  
• provides a revenue model that fits within the established insurance billing practices;  
• provides built-in cellular connectivity, enabling immediate alert to user in the event of an emergency;  
• provides motion tracking to detect exercise, activity, and disorientation; and  
• incorporates technology that is future-ready, in that its form and function enables opportunities adjacent to the MCT market.  

Biotricity’s business model and products developed have come about with the advancement of new billing codes since the Affordable Care Act came to be. Prior to the ACA, there were no billing codes available for which to derive medical reimbursement for many medical devices and/or diagnostic tests. This doesn’t mean that a device manufacturer couldn’t achieve FDA clearance for a device, but the point would be moot as it would cost a good deal of time and money to go down this road for something a healthcare practitioner would likely not bother with as there would be no reimbursement for the device and diagnostic readings taken from the device that would benefit the physician. Furthermore, the physician is asked to buy these devices to prescribe to their patient at the cost of the physicians practice. This has resulted in the MCT event monitoring market being the smallest segment of event monitoring systems to date, garnering less than a $1bn in revenues in 2015.  

Even though an MCT is the optimal solution for the patient as it offers feedback in real-time to the patient, physicians generally will only prescribe an MCT for high-risk patients where real-time feedback is necessary. This is because the reimbursement revenues associated with MCT incentivize the dominant solution providers to earn the fees independent of the physician. The choice for a physician is to either lose money by prescribing an MCT or use a Holter/Event monitor whereby the revenues are insourced.

The role the FDA plays in health care industry is significant and largely misunderstood when it comes to how wearable devices might find a place in the healthcare industry. One of the key issues that today’s consumer, wearable devices has in achieving FDA clearance is largely due to a lack of accuracy and a misalignment of the use case. Take, for example, the optical sensors employed in the devices and where the devices are worn. Optical sensors are not able to achieve medical grade efficacy for delivering accurate heart rate readings and are actually meant to measure oxygen saturation within the blood. Medical grade oxygen saturation devices are used every day in every hospital. There exists a huge gap between the accuracy and sensors utilized by medical devices employed in the hospital to the ones manufactured by wearable companies. To understand the difference, one can compare an FDA cleared Nonin pulse oximeter to a fitness band. Further confusion exists because such companies use the term heart rate and graphically show an ECG signal in their icon. Heart rate is synonymous with pulse rate, but an ECG signal is an entirely different animal. An ECG is the electrical activity of the heart, something that cannot be collected from an optical sensor. An ECG can be taken from the wrist but only if the user touches an electrode on the band with their opposite hand, thus completing the circuit and grabbing both sides of the heart (something that is required to generate an ECG). This misalignment causes an uphill battle from an FDA perspective. If you have a device, the use case must be aligned. So if you are using an optical sensor for blood flow, you have to benchmark it to a pulse oximeter. The FDA benchmarks and categorizes medical devices based on use cases. It is therefore, critical to ensure that the device you are building is compared to the right medical device. Current fitness bands that employ such sensor can not be benchmarked to ECG devices unless they use electrodes to collect ECGs. This is also why Fitbit is not participating in clinical trials with regards to heart rate monitoring but rather overall health and wellness for users of the device.

Fitbit and other wearable devices could easily employ high-grade sensors and create devices that would achieve FDA clearance. This is not beyond any vendor/manufacturers reach, but in doing so we have to consider the end-game for such a product and its ultimate use case. Why go down this road unless you have an established billing code to achieve reimbursement for the device in a clinical setting and to be prescribed by physicians. Physicians aren’t in the retail business; they are in the healthcare business and will likely only prescribe devices based on their efficacy and ability to achieve reimbursement. Fitbit would have to develop software solutions to be used by physicians and ensure an ecosystem that would provide physicians the ability to achieve reimbursement revenues otherwise it’s not worth the physicians cost of buying the goods from Fitbit and prescribing them to patients. Again, if this were the path chosen by Fitbit, it would cost millions of dollars and years of R&D to create such a device that would also need to include cellular connectivity solutions and provide real-time feedback. The clinical trial participation on the part of Fitbit for the benefit of the healthcare industry may ultimately only achieve recommendations from the healthcare industry, but fall short of finding a prescribed device. If this were the case, the product would still be found in a retail setting, making all the monies spent in the healthcare venture futile.

Feedback is the “thing” that most every wearable device lacks.Fitbit products are quite passive in their usage. While they gather data from the user’s body when worn, that is really all the device does. The user is left to engage the data in an active state and decipher what to do based on the data gathered. As such, the device is not a physician. Feedback drives patient adherence. You can have feedback and get cleared by the FDA, but this also depends on the type of feedback.

Truth be told, the FDA has given clearance to certain health and wellness apps that are downloaded onto a person’s cell phone. In this use case scenario, because again the device doesn’t offer any feedback/direction to the person, the FDA has deemed the app as having little risk and offers these apps Class 1 status, similar to a Qtip. In such a use case scenario, the FDA has cleared the application simply by offering that there are no health risks with using the app or device. Additionally, many apps are not likely to achieve FDA clearance or Class II status without a very critical healthcare element, real-time feedback. Samsung has such an app named “S Health”. S Health was granted FDA clearance for the app in 2014 after 2 years of R&D and applying for FDA 510K clearance. The reality is the FDA clearance has done little for adoption of the app and unless one is reading this article they probably have never heard of S Health. The reason behind this is that without a medical use case, FDA is simply assessing whether or not a particular app/device poses a health risk. Grabbing an FDA 510k clearance on an App is simply a branding exercise, the value of which is simply that FDA has identified that such app/device does not pose a health risk to the user.

The FDA separates medical devices into three classes, Class I, Class II and Class III.Class I devices are deemed to be low risk and are therefore subject to the least regulatory controls. For example, dental floss is classified as Class I device. Class II devices are higher risk devices than Class I and require greater regulatory controls to provide reasonable assurance of the device’s safety and effectiveness. Class III devices are generally the highest risk devices and are therefore subject to the highest level of regulatory control. Class III devices must typically be approved by FDA before they are marketed. For example, replacement heart valves are classified as Class III devices.  

So Fitbit could get a Class I or II FDA clearance in the future, but in doing so this does not mean a Fitbit device is guaranteed medical reimbursement. Just because a device is offered FDA clearance does not mean there is a billing code that exists for the device as noted earlier. Again we are back to the conundrum of “what is the purpose of achieving FDA clearance if no billing code is available, essentially making the clinical application of a Fitbit futile”. The reason to go after FDA clearance is to apply Fitbit’s products in a clinical setting and with a billing code that would achieve reimbursement for healthcare practitioners and open up the Fitbit business model to an ancillary market. Consumers have bought millions of fitness tracker devices without FDA clearance; they don’t seem to care if the device is FDA approved or not. Furthermore, even if Fitbit was able to apply its products to a specific billing code, the road only gets longer from that achievement. Once Fitbit gets a code from American Medical Association (AMA), the Company will have the added hurdle of trying to convince CMS (center for Medicaid and Medicare) to adopt it. Just because you have a code from AMA, does not mean that CMS will recognize it. The “holy grail” is a code recognized by CMS since the device would get the federal reimbursement. Now, once a code is in-hand the manufacturer of the device will have to get private insurer’s to adopt it; this is a state-by-state and insurer-by-insurer problem. The reason CMS codes are so valuable is that if CMS has adopted a code, all insurers will adopt it because they want to be able to provide coverage for those under CMS.

Moreover, attempting to replicate the business model of medical device makers such as Medtronic (MDT) and/or Biotricity to achieve market participation in a segment of the MCT industry worth less than $1bn doesn’t seem beneficial when the consumer market is the largest industry.Go into any Wal-Mart (WMT) or Target (TGT) around the nation and you will find a rather sizable offering of Fitbit products. In these retailers, there are FDA-cleared medical devices for monitoring blood pressure and glucose levels. They generally take up a small segment of retail space in the pharmacy section of these hypermarket retailers.Very little foot traffic is found in these sections of the store, which are only duplicated in convenience store locations like CVS and Walgreen. The consumer market has already found Fitbit over $3bn in sales, more than 3 times the market size of the MCT event monitoring market. If successful and after years of R&D spending, Fitbit would not likely find its products generating $100mm in clinical settings given its position in that particular market and coming to the market with a lesser established reputation. If Fitbit ever did achieve the necessary infrastructure to address the medical device market, they would have to go against major incumbents, depending on the market they go after. How many hundreds of sales persons do Medtronic, Johnson & Johnson (JNJ), Stryker (SYK), General Electric (GE) and Boston Scientific (BSX) employ? It is just one of the many reasons that Fitbit better understood its opportunity for achieving billions in revenues would come from the consumer market and not the healthcare market. Lastly, it’s also one of the many reasons Tim Cook doesn’t desire to achieve FDA clearance with the Apple Watch. Apple may choose to develop other products for the healthcare industry, but it is unlikely to be a consumer driven product effort that already exists within its product line.

But what about the latest partnership between Medtronic and Fitbit?  Fitbit investors need not give it the credit that headlines would presume.  

"The medical technology firm hopes its iPro2 myLog app will provide a simplified way for patients with type 2 diabetes to manage their condition by presenting their glucose and physical activity levels within a single app. Medtronic said its tie-up with Fitbit would provide “meaningful insights into how exercise impacts glucose levels for more effective diabetes care management”.

In its simplest definition, the partnership between the two firms is no better than the clinical trials Fitbit has been doing over the last couple of years. Fitbit's software and app are being used as a motivational platform for Medtronic diabetes device patients. Medtronic and diabetic patients being the beneficiaries of the Fitbit technology more so than Fitbit deriving anything meaningful in the way of sales. It's a test, a study to see if patients and their physicians can benefit from the joint technology and apps. 

By creating a connection between physical activity and glucose levels, our iPro2 myLog mobile app solution provides new tools and insights, so that physicians can optimise therapy and patients can better understand how to manage their diabetes.

One of the biggest problems when it come to disease management is not technology and to a great degree, it never has been. The greatest problem is and has always been patient compliance. Simply put, you can give a patient all the tools necessary to treat and manage their ailment, but their compliance and use of those tools is left to their discipline. It's why many patients have relapses or never quite "kick the habit".  Fitbit should be lauded for its efforts with continuing its "clinical studies" and partnerships for developing better applications in the medical industry. Having said that, investors should be careful and better understand the relevance of these initiatives.