How Google Plans to Reinvent Healthcare

By Markets Fool.com

Image source: Flickr/Creative Commons.

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Glucose-monitoring contact lenses for diabetics, wrist computers that read diagnostic nanoparticles injected in the blood stream, implantable devices that modify electrical signals that pass along nerves, medication robots, human augmentation, human brain simulation -- the list goes on.

That's not an inventory of improbable CGI effects from the latest sci-fi movie, it's a list of initiatives being tackled by Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) GoogleLife Sciences research unit, recently rebranded Verily.

For those who appreciate The Motley Fool's affection for William Shakespeare, "verily" is Shakespearean-era word that means "truly," or "confidently." As in: "I verily believe that sweater is the ugliest one I have ever seen."

Confidence certainly exemplifies Google. Verily was hatched from Google X, the company's secretive lab for oft-nutty projects, such asspace elevators, teleportation, and hoverboards. Google X also launched Google Glass, which was undoubtedly a super-cool device, but wasn'treceived well by its intended market, to put it mildly.

With that kind of background, what are the chances Verily will unleash something that will change healthcare? Are good things about to flow? Or -- courtesy of the Bard of Avon -- is Verily merely a tale full of sound and fury, signifying nothing? Let's look at Verily's current financial situation and then check out the prospect of amarketable product that could move Google's needle.

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A pound of flesh, but no blood

Like the moneylender in the Merchant of Venice, Verily demands a pound of flesh from its parent each quarter. Alphabet, Google's newfangled conglomerate, doesn't break out the performance of subsidiaries, but last quarter's earnings report offered a view into costs and output.

Verily is a subsidiary lumped under Other Bets with Google's broadband business and smart home company. Revenue from Other Bets doubled to $185 million from $74 million in the year-earlier period, and rose 11% sequentially. Costs also increased: Operating losses widened to $859 million from $660 million a year ago and moved up 7% from the previous quarter.

Despite the costs incurred, it's certainly not bleeding its parent dry. After all, Google has an almost endless supporting budget, and if any of Verily's projects pan out, what's being expended now will look like pocket change.

In addition, while some Verily ventures may seem frankly nuts, they might have actual potential. A recent joint venture with U.K. drugmaker GlaxoSmithKline (NYSE: GSK) will use implants that create electrical pulses to help the body heal itself. The collaborators have agreed to spend up to $716 million over seven years, with GSK holding 55% of the joint venture and Verily 45%. It's a new field, called bioelectronic medicine. Despite the quasi-scientific sound of this endeavor, early studies reported in peer-reviewed journals have shown positive resultsin treating rheumatoid arthritis.

Sanofi, AbbVie, and Biogen have also teamed up with Verily over the past few years. Big pharma hopes to tap into Google's data analysis tools, as well as license Verily's miniaturized medical devices (after they are developed), to tackle various disease targets. In a slightly different kind of venture, Johnson & Johnsonhas inked a deal with Verily to develop medical robots.

The less you speak of your greatness, the more shall I think of it

None of these ventures have led to a useful product yet. Meanwhile, Verily has been skewered by multiple scientists for not critically assessing the actual potential behind its various moonshots. "One needs to balance how much these toys are used mostly for marketing and giving a sense of a company really working on something impressive -- the brave new world -- or if we're talking about something that will have clear and immediate clinical impact. The latter is very hard to imagine," said Dr. John Ioannidis,a professor of disease prevention at Stanford University, commenting on Verily's projects.

In the blink of an eye

In light of that, what about one of Verily's oldest initiatives? Looking back to 2012, the life sciences unit was originally developed to create "smart" contact lenses whose super-cool images were appearing all over the internet a scant two years ago. Designed to measure blood glucose levels, the lenses featured sensors and chips the size of flecks of glitter and a wireless antenna thinner than a human hair.

On the face of it, a continuous glucose monitoring (CGM) lens seems to meet Ioannidis' criteria of having a "clear clinical impact." Better yet: it has an investable thesis. Verily and its big pharma partner Novartis (NYSE: NVS)are aiming straight at the $10 billion diabetes monitoring market. With this kind of market, the project was clearly capable of becoming a needle-moving revenue generator.

Look a little deeper, though, and the view is cloudier.

DexCom (NASDAQ: DXCM) Executive VP Steve Pacelli pointed out, "Lots of companies have tried and failed noninvasively to sense glucose in tears. You can measure glucose in tears, but the concentration is a lot lower, there's going to be huge time lag issues; the consistency of measurement is going to be a challenge."

There's abigger problem. Both Dexcom and Medtronic (NYSE: MDT) have continuous glucose monitors on the market, but both face a major hurdle. The FDA does not considercontinuous glucose monitoring -- from any device -- accurate enough to prescribe insulin dosing by itself. While CGM devices are being used, their market is very limited, since they are only allowed to be used as supplemental devices.

Google's CGM lens will face the sameFDA hurdle -- assuming this productcomes out of the lab.

The long and short of it

Apple, Microsoft, Intel--virtually all the tech titans, in fact-- are now pursuing major initiatives in healthcare. A confluence of factors, such as digitization of records, machine intelligence, genetic engineering, and rapid advances in medical equipment, have made the field ripe for disruption from data-enabled, mobile-based, and miniaturized devices.

Even more enticing are the opportunities to massively grow revenue. The tech giants are billion-dollar companies, but healthcare spending is approaching $3 trillion annually in the U.S. alone. Looking globally, the World Health Organization estimates the annual expenditure at $6.5 trillion.

Bottom line: Despite the big carrot enticing it, Google has yet to come up with anything that can lay claim to changing healthcare. AlthoughAlphabet could be a potentially interesting addition to your healthcare portfolio, it should be added with the understanding that there are many other pure-play companies with a much clearer path and investing thesis than Verily.

Still, let's allow Shakespeare to have the final word. While the bard makes an unlikely investment guru, he had plenty of useful things to say that have lasted through centuries, including:"Though this be madness, yet there is method to it."

In other words, it may be that hiddenwithin Google'scraziness liesthe seed of something that couldstill astonishus. Andno matter what, we can be sure of one thing: The ultimate search engine willkeep grabbing headlines with its latest moonshots. After all, we're talking about Google.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Cheryl Swanson owns shares of Apple and Johnson and Johnson. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Biogen, and Johnson and Johnson. The Motley Fool owns shares of Medtronic and Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.