In 2020, the U.S. Food and Drug Administration (FDA) approved for the first time a video game by Akili Interactive to improve attention in children with ADHD. This was the first time the agency approved a game for treatment, and it is an example of digital therapeutics—a class of software treatment products with FDA indications. Today, as the market develops further, these companies have built ambitious aspirations.

Pear Therapeutics has three FDA-approved digital therapeutics, and its CEO Corey McCann hopes to make them the "standard of care" with broad insurance coverage. After going public last year, Pear aims to increase revenue 30-fold by 2023, based on the assumption that more insurers will cover its products and more doctors will prescribe them. However, whether they can achieve these goals or bear the costs of developing a new treatment category remains to be seen.

Although obtaining FDA clearance is the first step, experts point to several hurdles ahead, including gaining physician adoption, establishing reimbursement pathways, and importantly, developing software that patients are willing to use. "There is still a lot of foundational work to be done," said Maya Desai, director of life sciences at Guidehouse. "There needs to be a lot of behavioral change among stakeholders and their mindsets to see digital therapeutics as a standalone category."

Distinguishing from health apps

One of the early challenges is distinguishing digital therapeutics from other software products. In a market flooded with hundreds of thousands of health and wellness apps, many of which are vying for the attention of benefits executives, companies with clinical evidence are seeking to stand out. Some companies, such as Pear, have begun to call their products "prescription digital therapeutics" (PDT).

Additionally, there is significant overlap between digital therapeutics and health apps, as many digital therapeutics focus on behavioral health, a popular area of investment for digital health companies. Some companies are considering other models, such as Voluntis, whose software was FDA-approved in 2019 to help cancer patients manage symptoms; and AppliedVR, whose virtual reality-based cognitive behavioral therapy was FDA-approved last year to treat chronic lower back pain.

Price is another differentiator between prescription and over-the-counter products. For example, according to an investor presentation, Akili's game therapy EndeavorRx has an average cash price of $247 and $387 after reimbursement. Pear's insomnia app was priced at $899 at launch, although it offered discounts for new patients.

"We are asking doctors to prescribe and patients to use therapy rather than just taking medication..." Desai said. "Long-term adherence to digital therapeutics, and even seeing benefits, especially in a market flooded with health apps that touch on many of the therapeutic areas companies are considering, requires a mindset shift."

Andy Molnar, CEO of the Digital Therapeutics Alliance, said that initially, the rigor of proving digital therapeutics safe and effective was not valued. When Molnar entered the field, the perception was that digital therapeutics might be companion products given away free with drugs. Now, the CEO says, people are considering the economic value of these products, just like durable medical equipment or drugs.

Is the business model sustainable?

So far, only two digital therapeutics companies have publicly disclosed financial data: Pear, which began trading on the Nasdaq in December after merging with a special purpose acquisition company; and Akili, which has also filed for a SPAC merger. Their revenues are a fraction of their accumulated deficits, raising the question: can they carve out this new market fast enough to sustain their businesses?

Both companies' revenues have declined over the past three years as revenue from licensing deals decreased. For example, Akili had revenue of nearly $20 million in 2019, compared to nearly $4 million in 2020, most of which came from an ongoing licensing agreement with Shionogi to commercialize its product in Taiwan and Japan. Pear had revenue of $32 million in 2019, most of which came from an agreement with Sandoz, a Novartis division, which was terminated that year due to leadership changes in the generics business. Last year, the company had revenue of $4.2 million.

Pear expects its revenue to grow to $22 million in 2022 and $125 million in 2023, according to an investor presentation. The company also expects corresponding increases in the number of people with insurance coverage, prescriptions written, and fill rates.

"That looks like an aggressive target, a significant jump from where they were before," said Marie Thibault, managing director of equity research for medical technology and digital health at BTIG. "It's hard to know how that growth will materialize." However, Thibault noted that the company did meet its expected $4 million revenue last year and reaffirmed its 2022 guidance. "When reimbursement kicks in, when more prescribers prescribe and renew more regularly, when all these factors converge, we do expect Pear's revenue to grow significantly throughout the year," Thibault said.

BTIG has had an investment banking services client relationship with Pear over the past year, and BTIG has received compensation for providing investment banking services and expects to receive or seek compensation from Pear within the next three months.

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 to 2023 data. "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," the CEO said.

Licensing deals with pharmaceutical companies were an early strategy for digital health companies, but not all have lasted. Proteus, which partnered with Otsuka to develop and market a schizophrenia drug with an embedded sensor, filed for bankruptcy last year, and Otsuka acquired its remaining assets. "In terms of commercialization, it felt like the pharma path was the version many people initially chased," said Christina Farr, a principal at Omers Ventures. "It was very difficult for various reasons, one major one being 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 while digital therapeutics companies should not dismiss the idea of partnering with pharmaceutical companies, their goals should also be aligned. "Many companies are partnering with pharma, but it's not very clear how the partnership benefits each party," Desai said.

Akili is still in the pilot phase for its main product EndeavorRx, although it plans a commercial launch in the second half of 2022. It has not yet released any revenue expectations. "There is no playbook for commercializing a product like EndeavorRx," Ashleigh Chung, head of commercial strategy and operations at Akili, wrote in an email. "We are watching several metrics that could be leading indicators, from the number of prescribers to patient engagement."

The process of developing and marketing these products comes with costs. Both Akili and Pear are in a net loss position, with Akili reporting a net loss of $41.7 million for the first three months of 2021 and Pear reporting a net loss of $65 million for the full year. Both companies have accumulated deficits exceeding $200 million. "There are several barriers affecting the broader adoption of digital therapeutics. These potential challenges range from healthcare providers' perception of digital therapeutics to reimbursement, and each can become a barrier to patient access," Chung wrote. "Although many digital therapeutics have gone through the regulatory process and are prescribed like drugs, they are not reimbursed."

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

The path to reimbursement

As digital therapeutics seek indications similar to drugs, they also want to take a similar approach to insurance reimbursement. This process typically involves collecting real-world evidence showing that their products perform well outside the clinical trial setting and publishing research showing that they have not only therapeutic benefits for patients but also economic benefits.

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

"Getting insurance coverage is a difficult and opaque process," Desai said, adding that a two-pronged approach is best: one considering insurer coverage and another considering self-insured employers. "But it's important to note that the [employer market] is very crowded because you have health apps that may not have received approval." For example, Desai said, companies would be keen to cover products like Sleepio, an insomnia app developed by Big Health that does not have an FDA indication but has randomized controlled trials supporting its claims.

BTIG's Thibault agreed that reaching employers is often faster. "Employers have a captive audience of employees and don't have to worry about churn like commercial payers," Thibault said, adding that the push to create more competitive benefit plans could also attract employers. "For now, I think we will continue to see success while Pear and others push for reimbursement from Medicare and the largest commercial payers."

For its substance use and opioid use disorder products, Pear has gained adoption in state Medicaid programs. It has coverage in Massachusetts and agreements with Michigan and Oklahoma, which have dedicated funding to purchase access to both products.

Insurers also face the question of whether to cover digital therapeutics as a pharmacy benefit or a medical benefit. So far, the former is easier because it provides "greater control, value-based agreements, and reduced friction for providers and patients," Pear CEO McCann said.

Digital health companies are also lobbying for policy decisions to improve coverage, including a proposed bill that would give Medicare the statutory authority to cover and reimburse prescription digital therapeutics. CMS also recently created a Healthcare Common Procedure Coding System code for "prescription digital behavioral therapy," an administrative step for reimbursement that took effect this month. Additionally, last year, the American Medical Association expanded its Current Procedural Terminology codes for remote monitoring to include cognitive behavioral therapy, effectively allowing doctors to be reimbursed for monitoring patients' progress in mental health apps. It is scheduled to take effect in 2023.

It is too early to say how much impact these decisions will have on coverage and prescribing decisions, but they do lay the necessary administrative groundwork. "It's like they created a baseline saying, 'We know these products need to be covered. This is version one,'" said Digital Therapeutics Alliance CEO Molnar.

Pharmacy dispensing

There is also the issue of making these products easier to prescribe. While Pear, Akili, and other digital health companies want their products to be reimbursed like drugs, the actual process of submitting a prescription can be complex. Patients need to "enroll" and receive instructions on how to use the app or activate the required code. Molnar compared it to the patient service centers used by specialty pharmacies, which explain how to use and store certain medications or infusions.

"It's less complex... but you can't send the [prescription] to Walgreens or CVS and have them know how to handle it. I think that day will come, but it's not here yet," Molnar said. "This is the same problem specialty pharmacies face; doctors don't necessarily know which pharmacy to send it to... So it puts us in a humorous situation where doctors prefer to fax a registration form rather than e-prescribe, because if you have a list of forms, you can just fill it out and know where to fax it."

One solution companies are taking is to build some of these capabilities themselves. Akili has overhauled its dispensing process over the past year, Chung wrote. The company partnered with a pharmacy, and doctors can send prescriptions by phone, fax, or through electronic health record systems, and ultimately the patient's caregiver receives a text message with an activation code. Pear has also developed its own patient service center and specialty pharmacy. "We think this is a really interesting set of capabilities for the field and for other companies," McCann said. The CEO added that the lessons learned from this process are part of its "first-mover" advantage. "I don't think launching a streamlined product that every patient can use immediately is the way technology or software deployment works," McCann said. "It's a deeply iterative process to make these products easier to prescribe and ultimately..."