A Crossroads for the Digital Therapeutics Industry. Now is the Time to Act

When four companies purchased the remnants of Pear Therapeutics at auction for $6.05 million in May, it marked the unfortunate final chapter in the demise of a pioneer in digital therapeutics (DTx). Pear’s bankruptcy, and ultimate dismantling, have sent shockwaves through the industry and laid bare some of the persistent challenges facing the DTx sector along its winding path forward. But the lessons that can be learned from the loss of Pear will provide us with an important opportunity to better understand the calibrations that companies must make to ensure that digital therapeutics can have a viable and sustainable future.

Despite remarkable growth and the regular development of groundbreaking and potentially life-changing therapies, the fall of Pear might be the clearest indication yet of the challenging headwinds facing the industry. Clearly, intriguing technology is not enough to ensure that DTx companies are successful. Like any pharmaceutical company, DTx firms require large amounts of capital as well as access to markets and reimbursement channels to ensure their success. Despite appearing to be at the very tip of the spear when it comes to the future of healthcare, the ‘if you build it, they will come’ mentality often employed by DTx companies is not enough to ensure sustainability.

The industry is at an important inflection point and it is time to refocus our efforts to ensure the continued vitality of the DTx industry in the years ahead. Through an honest and reasoned examination of Pear’s situation, we can glean valuable information, as well as develop a potential roadmap for current and future DTx companies to follow as they navigate the bumpy road ahead.

Facing an Uncertain Economy

While digital therapeutics has been the fastest growing sector in healthcare for several years and has benefited enormously from investors looking to gain a foothold into a promising and potentially lucrative market, clouds have been gathering on the horizon.

“Market conditions over the last two years have challenged many growth-stage companies, including us,” Corey McCann, the CEO of Pear, wrote in a LinkedIn post last April, when Pear filed for bankruptcy.

Pear admittedly made a few economic missteps. For starters, the company spent nearly $150 million on a broad pipeline before market validation of its first product. And, amidst a tightening financing environment, Pear went public via a SPAC at a high valuation, only raising half the capital it expected ($200M vs $400M). This did not afford the company enough time to establish reimbursement, given their burn rate of $35M per quarter.

From rising inflation and interest rates to supply chain challenges, the stagnating, post-pandemic economic environment has blunted some of the eagerness for investment in DTx companies. Additionally, mergers and acquisitions have fallen, and lending options have become more challenging, particularly for start-ups.

Overall, venture capital funding is trending downward in 2023 and many DTxcompanies—still in the early stages of development—find themselves cash-strapped and unable to allocate the necessary funds for such vital activities as clinical research and commercialization. For instance, Akili (one of only two DTx companies to share its financials publicly) brought in nearly $20 million in revenue in 2019, while in 2020 it only brought in about $4 million, most of which was from an ongoing licensing agreement with Shionogi & Co. to commercialize its products in Taiwan and Japan. In addition, the recent failure of Silicon Valley Bank, as well as the precarious stability of a few other financial institutions, has only contributed to economic uncertainty.

The tides have turned from the financial boom of 2020 (with 73 life sciences firms collectively raising $22 billion), and that presents challenges for the foreseeable future. DTx companies – many of which are startups – will need to batten down the hatches to ensure that they can weather the potential storms ahead. Now more than ever, these companies will have to focus on the economic viability of their products, rather than simply relying on their value and innovation.

Reimbursements are One Key for Success

Regardless of the current economic environment, the outlook for digital therapeutics remains bright, with several conditions that seem to point toward future success. For example, as more of the digitally native Gen Z enters the healthcare marketplace, the appetite for digital products only stands to grow. This, coupled with the accelerating effect that COVID-19 had on the overall comfort-level that most people have with technology in healthcare, would seem to present a positive outlook for DTx companies in the long term.

Yet, despite the growing market and an ever-increasing favorability among patients and care providers toward technology in healthcare, overall adoption rates of DTx products remain stubbornly low. While the global DTx market is poised to reach more than $14.5 billion by 2028, the FDA had only approved nine PDTx categorized as Class II devices as of December 2022. The first was reSET, a PDTx for treating substance use disorder, developed by the now-bankrupt Pear Therapeutics. Several DTx companies tell us that prescriptions are lower than expected right now. Part of the reason for this stagnation is because there is no framework in place for the payer evaluation process.

Clinicians not only want to see trial data and real-world evidence for confidence in PDTx safety and efficacy, but they also want a clear, straightforward claims process and reimbursement pathway for payment. A physician serving on a webinar panel explained, “If one payer has a PDTx as a medical benefit, another as a pharmacy benefit, and another as this ‘new thing that might happen,’ then my office isn't going to be able to manage it."

This unfortunate reality has put all DTx companies at an extraordinary disadvantage, which many—including Pear—find to be a barrier to success.

“The advancement of digital therapeutics requires a paradigm shift in how medical interventions are delivered and integrated through a complex infrastructure,” said Autumn M. Brennan, director of marketing and communications at the Digital Therapeutics Alliance (DTA), a global non-profit trade association. “It’s an absolute necessity that we clear the path by collaborating with policymakers, regulatory bodies, payors, patients, and caregivers. All their input is imperative for us to build systems and standards for healthcare that are fair and equitable.”

In many ways, DTx companies find themselves ahead of the marketplace. And while this speaks to their extraordinary level of innovation, it has also created the unenviable situation of having far too many payers who are unequipped to reimburse them appropriately—or at all—for their products. The entire healthcare ecosystem needs to come together to rectify this situation or else the innovation, improved care, better access, and potential cost savings that might be gained from the innovations created by DTx companies might never come to fruition.

“The lack of a defined benefit category and the patchwork of commercial coverage options have meant too few people—and especially those with public coverage—are benefiting from DTx therapies,” Brennan said.

The Access to Prescription Digital Therapeutics Act of 2022, which was introduced in the Senate last year, aims to change this ineffective structure. The legislation would create a new benefit category for digital therapeutics and ensure permanent coverage and reimbursement of digital therapeutic products by Medicare and Medicaid. This would help to pave the way forward for DTx companies to see more reimbursements and earn a fair return on their considerable investments toward improving care and access to care.

Accessing a Hard-to-Access Market

As with any company, DTx firms often stake their claims around the singularity of their products. And while it is easy to understand this tactic, the blinding light of an exciting new technology can often distract companies from their most fundamental responsibility: Producing a product that has economic value. It is more likely that health plans and payers will take notice and markets will open with a financially viable product.

Last year, Pear reported that 45,000 prescriptions were written for its products, yet only about half of these were filled and the company was only reimbursed for a mere 41% of those filled prescriptions. Despite its attempt to follow the rules created for more traditional pharmaceutical companies, this poor adherence and reimbursement record proved disastrous for Pear and has had a negative residual effect on all companies in the DTx sector.

Regardless of how impressive the technology is, the products that have longevity—and, ultimately, profitability—also have an unwavering focus on health economics. Clinical trials can be the path to demonstrate the health economics as well as efficacy and safety of DTx, but they are expensive. And as the pandemic-related loosening of regulatory requirement restrictions gets tightened once more, DTx companies are facing an even steeper challenge when it comes to the commercialization of their products.

If companies are not reimbursed enough for their prescription digital therapeutics, low returns could stifle innovation, said Marisa Greenwald, healthcare partner at consultancy EY-Parthenon.

“Pear’s situation really highlights the need for more transparency and clarity around what it requires for companies to bring a product to market,” Brennan said. “Digital therapies have a big educational learning curve, not only for customers but also for practitioners.”

In a provider survey, Decimal.health found that even though fewer than 22% of providers had prescribed a DTx product, more than 87% indicated that they would be interested in prescribing DTx in the future. The question is: what is the best path to profitability? Some DTx companies are reevaluating regulatory strategies and considering alternative paths, including direct-to-consumer (DTC) routes, to commercial success.

In a DTC model, the product would be sold on websites and pharmacies the same way you might purchase health and wellness products, vitamins, and ‘cosmeceuticals.’ This strategy eliminates the per-unit sticker price, but at the cost of losing FDA credibility. If you can get treatment without a prescription, the product price plummets so the seller must make up for that gap with significantly greater sales volume. DTx companies are left facing a dilemma to choose between two less-than-ideal options:

1. Pursue the FDA approval process even though they are uncertain about reimbursement
2. Commercialize directly to consumers under the Federal Trade Commission (FTC) without payer reimbursement

Clearing a New Path to Success

The road to success begins with clarity. We must continue to lobby for universal standards on how digital therapeutics are defined and establish a common regulatory and coverage infrastructure to support broader access to these innovations.

More broadly, the industry should invest in educating practitioners (and patients) about the value and use of digital therapeutics the same way traditional pharmaceutical companies keep physicians up to date on their scientific developments.

“We’re seeing big gaps with digital therapeutics. Students graduating from medical school right now absolutely need to understand digital therapeutics,” Brennan concluded. “It’s the future of medicine and the next wave of practitioners need to understand the power of digital therapeutics and how it can serve the communities that they are treating.”

In many ways, DTx companies have been a victim of their own successes. By producing such unique and groundbreaking products, they have gotten ahead of the often slow moving and archaic healthcare regulatory system. Yet now more than ever, the DTx sector needs to come together to create a new pathway forward that will help to ensure its long-term success so that consumers can benefit from these remarkable innovations for years to come.