Can Digital Therapeutics Become Profitable?

In 2020, the U.S. Food and Drug Administration (FDA) approved for the first time a video game designed to improve attention in children with ADHD—a product by Akili Interactive. This marked the official entry of software-based digital therapeutics with FDA indications into the regulatory spotlight. Now, as the market matures, related companies are showing greater ambition.

Pear Therapeutics CEO Corey McCann said the company has three FDA-approved digital therapeutics and hopes to position them as "standard treatment options," while pushing for broad insurance coverage. Pear went public last year and, based on expectations that more insurers will cover its products and more doctors will prescribe them, the company aims to increase revenue 30-fold by 2023.

However, whether these goals can be achieved, and whether they can support the costs needed to develop new treatment methods, remains uncertain.

Experts point out that FDA approval is only the first step, with many challenges ahead: cultivating physician prescribing habits, establishing reimbursement pathways, and developing software that patients are willing to use long-term. Maya Desai, life sciences director at Guidehouse, said: "There is still a lot of foundational work to be done. Stakeholders and their mindsets need to shift significantly to view digital therapeutics as a distinct category."

Distinguishing from health apps

One of the early challenges is how to differentiate digital therapeutics from other software products. In a market flooded with hundreds of thousands of health and wellness apps, many are vying for the attention of corporate benefits managers. Companies that have accumulated clinical evidence are seeking to differentiate themselves, such as Pear, which has begun calling its products "prescription digital therapeutics" (PDT).

Additionally, there is significant overlap between digital therapeutics and health apps, with many digital therapeutics focusing on behavioral health, a popular area of investment for digital health companies. Some companies are exploring other models, such as Voluntis, which received FDA approval in 2019 for software that helps cancer patients manage symptoms; and AppliedVR, which received FDA approval last year for a virtual reality-based cognitive behavioral therapy to treat chronic lower back pain.

Examples of digital therapeutics

• Pear Therapeutics: Three FDA-approved products—reSET (for substance use disorder), reSET-O (for opioid use disorder), and Somryst (for insomnia).
• Akili Interactive: EndeavorRx, an FDA-approved game for improving attention in children with ADHD.
• Big Health: Sleepio (insomnia) and Daylight (anxiety), CE-marked but not FDA-approved.
• Voluntis: Two FDA-approved apps—Oleena (helps cancer patients manage symptoms) and Insulia (helps type 2 diabetes patients adjust insulin doses).
• AppliedVR: RelieVRx, an FDA-approved virtual reality software for treating chronic lower back pain.
• Freespira: Freespira, an FDA-approved therapy for treating panic symptoms, delivered through guided breathing exercises and a respiratory rate sensor.

Source: Digital Therapeutics Alliance

Price is another difference between prescription and non-prescription products. For example, according to an investor presentation, Akili's EndeavorRx has an average cash price of $247 and a reimbursement price of $387. Pear's insomnia app launched at $899, but offers discounts for new patients.

Desai said: "We're asking doctors to prescribe, and patients to use a therapy rather than just take a pill... Sticking with a digital therapeutic long-term, and even seeing its benefits, especially when the market is flooded with health apps targeting the same therapeutic areas, requires a mindset shift."

Digital Therapeutics Alliance CEO Andy Molnar said that initially, the rigor required to prove digital therapeutics are safe and effective was not fully recognized. When Molnar first entered the field, people thought digital therapeutics might be ancillary products given away free with drugs. Now, the CEO says, people are beginning to consider the economic value of these products, much like durable medical equipment or drugs.

Can the business model be sustained?

Currently, only two digital therapeutics companies have publicly disclosed financial data: Pear (which listed on Nasdaq in December last year via a SPAC merger) and Akili (which has also filed for a SPAC merger). Their revenues are negligible compared to their accumulated deficits, raising the question: can they expand this new market quickly enough to sustain their businesses?

Both companies have seen revenue declines over the past three years due to reduced licensing deals. For example, Akili had revenue of nearly $20 million in 2019, while in 2020 it was nearly $4 million, mostly from an ongoing licensing agreement with Shionogi & Co. to commercialize its products in Taiwan and Japan. Pear had revenue of $32 million in 2019, mostly from an agreement with Novartis's Sandoz, but that agreement ended that year due to leadership changes in the generics business. Last year, Pear's revenue was $4.2 million.

Pear expects its 2022 revenue to grow to $22 million and to $125 million in 2023, while also expecting corresponding growth in insurance coverage, prescriptions, and fill rates.

Pear's financial projections

• 2021 (projected): Revenue $4 million, prescriptions 12,500, covered lives 30-40 million, fill rate 50%
• 2021 (actual): Revenue $4.2 million, prescriptions 14,000, covered lives 31.7 million, fill rate 51%
• 2022: Revenue $22 million, prescriptions 50,000-60,000, covered lives 100-120 million, fill rate 50-65%
• 2023: Revenue $125 million, prescriptions 150,000-190,000, covered lives 200-230 million, fill rate 75%

Source: Pear Therapeutics investor presentation, March 2022

Marie Thibault, managing director of BTIG's medical technology and digital health equity research, said: "This looks like an aggressive target, a significant jump from where they've been. It's hard to know how that growth will materialize." However, Thibault noted that Pear did meet its projected $4 million revenue last year and reaffirmed its 2022 guidance. She added: "When reimbursement kicks in, when more prescribers prescribe and refill more frequently, when all these factors come together, we do expect Pear's revenue to ramp significantly through the year."

It should be noted that BTIG has had an investment banking services client relationship with Pear over the past year, has received compensation for those services, and expects to seek or receive additional compensation from Pear within the next three months.

Source: Pear annual earnings report

Most of Pear's 2021 revenue came from product sales, unlike previous years. Pear's McCann told MedTech Dive that this is also the main driver of Pear's 2021-2023 data. He said: "It's not that we won't do licensing deals; the company may still consider some deals. But I think the main driver is the core business model."

Licensing deals with pharmaceutical companies were an early strategy for digital health companies, but not all deals have lasted. Proteus partnered with Otsuka Pharmaceutical to develop and market a schizophrenia drug with an embedded sensor, but the company filed for bankruptcy last year, and Otsuka acquired its remaining assets.

Christina Farr, investment lead at Omers Ventures, said: "In terms of commercialization, the pharma path was indeed the model many initially pursued. But for various reasons, it's very difficult, and one key reason is that pharma companies ultimately... they know how to sell drugs, but not how to sell software or devices connected to software."

Guidehouse's Desai added that digital therapeutics companies should not dismiss the idea of partnering with pharma, but both sides' goals should be aligned. She said: "Many companies partner with pharma, but it's not always clear how the partnership benefits each party."

Akili is still piloting its lead product EndeavorRx, with plans for a commercial launch in the second half of 2022, but has not yet released any revenue expectations. Ashleigh Chung, head of commercial strategy and operations at Akili, wrote in an email: "There's no playbook for commercializing a product like EndeavorRx. We're watching multiple metrics that could be leading indicators, from the number of prescribing physicians to patient engagement."

Developing and marketing these products comes at a cost. Both Akili and Pear are in net loss positions: Akili reported a net loss of $41.7 million for the first three months of 2021, and Pear reported a full-year net loss of $65 million. Both companies have accumulated deficits exceeding $200 million.

Chung wrote: "There are several factors affecting the widespread adoption of digital therapeutics. These potential challenges range from healthcare providers' awareness of digital therapeutics to reimbursement issues, and each can become a barrier to patient access. While many digital therapeutics have gone through the regulatory process and are prescribed like drugs, they are not yet reimbursed."

Chung added that Akili is in discussions with payers about reimbursement, while also working with other industry leaders to lobby legislators to establish the necessary mechanisms for Medicare and Medicaid coverage.

Users control a spaceship to dodge obstacles in this game Akili uses to improve attention.

Image credit: Akili Interactive

The road to reimbursement

Digital therapeutics hope to gain indications similar to drugs and also expect similar insurance reimbursement approaches. This process typically involves collecting real-world evidence to show the product performs well outside clinical trial settings, and publishing studies showing the product has not only therapeutic benefits for patients but also economic value.

According to a Credit Suisse research report from March 29, Pear expects to obtain more health economics and outcomes research data for its three products in the coming months. Analysts wrote: "Specifically, 12-month data for [opioid use disorder treatment] Reset-O could be meaningful to certain payers." However, presenting this data does not necessarily guarantee coverage.

Desai said: "Getting insurance coverage is a difficult and opaque process." She added that the best approach is twofold: considering both insurer coverage and self-insured employer coverage. "But note, the employer market is very crowded because those health apps that may not be approved are also vying for it."

For example, Desai said, companies might be eager to cover products like Sleepio—an insomnia app developed by Big Health that, while lacking an FDA indication, has randomized controlled trials supporting its claims. BTIG's Thibault also believes that reaching employers is often faster. She said: "Employers have a captive audience of employees and don't have to worry about churn like commercial payers do." She added that building more competitive benefits packages could also attract employers. "Right now, I think that will be an area of continued success, while companies like Pear push for reimbursement from Medicare and large commercial payers."

For its products treating substance use and opioid use disorders, Pear has gained adoption in state-level Medicaid programs. Massachusetts has covered its products, and Michigan and Oklahoma have reached agreements with dedicated funding to purchase access to both products.

Insurers also face a question: whether to cover digital therapeutics as a pharmacy benefit or a medical benefit. Pear CEO McCann said that currently, the former is easier because it offers "better control, value-based agreements, and less friction for providers and patients."

Digital health companies are also lobbying for policies to improve coverage, including a proposed bill that would give Medicare statutory authority to cover and reimburse prescription digital therapeutics. The Centers for Medicare and Medicaid Services (CMS) recently also created a Healthcare Common Procedure Coding System (HCPCS) code for "prescription digital behavioral therapeutics," an administrative step toward reimbursement that takes effect this month.

Separately, last year the American Medical Association (AMA) expanded its Current Procedural Terminology (CPT) codes for remote monitoring to include cognitive behavioral therapy, effectively allowing physicians to be reimbursed for monitoring patients' progress in mental health apps. The code is scheduled to take effect in 2023.

It is too early to judge the impact of these decisions on coverage and prescribing decisions, but they do lay the necessary administrative groundwork. Digital Therapeutics Alliance CEO Molnar said: "It's like they've set a baseline, signaling 'we know these products need to be covered, and this is the first step.'"

Pharmacy dispensing

Additionally, making these products easier to prescribe is also an issue. While Pear, Akili, and other digital health companies want their products to be reimbursed like drugs, the actual prescribing process can be complex. Patients need to "enroll" and receive instructions on how to use the app or activation code. Molnar compared it to specialty pharmacy patient service centers, which explain how to use and store certain drugs or infusions.

Molnar said: "It's not complicated... but you can't send a prescription to Walgreens or CVS and have them know what to do. I think that day will come, but it hasn't yet. It's the same problem specialty pharmacies face: doctors don't necessarily know which pharmacy to send the prescription to... This leads to an interesting situation: doctors are more willing to fax an enrollment form rather than e-prescribe, because if there's a list of forms, you just fill it out and note the fax number."

One solution companies are adopting is building some of these capabilities themselves. Akili's Chung said the company has spent the past year overhauling its dispensing process. Akili partners with a pharmacy, and doctors can send prescriptions via phone, fax, or electronic health record systems, and eventually patient caregivers receive a text message with an activation code. Pear has also built its own patient service center and specialty pharmacy.

McCann said: "We think this set of capabilities will be very interesting to the field and to other companies." He added that the lessons learned in this process are part of its strategy.