The Emerging Business Models For Digital Therapeutics

By Rhett Johnson, Andrew Parece, and Lorenzo D’Angelo, Charles River Associates

Digital therapeutics (DTx) leverage technology to deliver evidence-based treatments for various health conditions, aiming to complement or replace traditional treatments with personalized, scalable, and cost-effective interventions.

Despite regulatory hurdles, reimbursement barriers and slow market adoption, the DTx industry has made remarkable progress, securing more than $50 billion in funding back in 2021. However, funding decreased to a little over $10 billion in the first three quarters of 2023,¹ influenced by broader economic factors like increasing interest rates, inflation, and the end of the COVID-19-driven health funding cycle.

This reduced investment has impacted digital health developers, with some questioning the once-rosy outlook for the sector. Notably, industry pioneer Pear Therapeutics filed for bankruptcy in April 2023. Even with a product like reSET, targeting substance use disorder, and the first-ever FDA-cleared DTx,^2,3 supported by clinical evidence and with a first-mover advantage in digitally administered cognitive behavioral therapy (CBT), challenges in reimbursement and adoption surfaced.

In response to these hurdles, other players like Akili and Mahana have pivoted to new business models focused on direct-to-customer initiatives to revitalize products that fell short of expectations.

Adapting To Market Needs Or Grasping At Straws? Exploring New Business Models

DTx developers considered different approaches to generating demand and revenue, providing insight into the potential evolution of DTx. The prescription digital therapeutic (PDT) model pursued by Pear (and initially by Mahana and Akili) mirrors the pharmaceutical model:

• achieve regulatory clearance that enables a medical claim (e.g., through the FDA),
• promote the product to providers and patients to drive demand and encourage the required prescription, and
• secure reimbursement by a third-party payer.

Accordingly, doctors and payers play a central role in this business model.

For DTx developers, however, the PDT model poses challenges:

• The obligatory prescription requires doctors’ awareness of the PDT, understanding of its clinical value, how prescribing it fits into their regular workflow, and navigating reimbursement complexities. Building a large commercial organization like pharma companies to provide all this information to doctors represents a high investment for smaller PDT developers.
• The PDT model’s reliance on payers requires convincing them of the product’s value and its role in providing efficient care to their members. Even if value is demonstrated, the payer’s obligation to cover the PDT is unclear. Payers may require evidence that PDTs can save costs for the plan to cover them, which is a higher burden of proof than even most prescription drugs are required to meet.

To address these challenges, DTx developers may consider a combination of the options below to adapt their business model:

• Migration from PDT to over-the-counter (OTC)
• Seeking payment from sources beyond the insurer, including:
  • employers,
  • direct patient payments, or
  • collaboration with pharma partners, offering various funding options.

Collaborations with pharma companies provide advantages and monetization possibilities. DTx developers can leverage a pharma partner’s commercial infrastructure, focusing on product development. Revenue can be generated through milestone payments, co-promotion revenue, or royalties. Pharma partners benefit by:

• directly charging customers for DTx use (e.g., per download),
• offering holistic products (i.e., drug + complementary DTx),
• increasing adherence driven by DTx use, thereby increasing per-patient revenue, and
• gathering valuable patient data for improved segmentation, evidence generation, or other purposes.

PDT Vs. OTC model

Akili’s Endeavor app is a recent example of transitioning from a PDT to an OTC model. Following the OTC launch for adults with attention-deficit hyperactivity disorder (ADHD), Akili decided to fully embrace the OTC model, citing its benefits in eliminating intermediaries and avoiding high-cost centers associated with a prescription model. Akili aims to provide consumers with clinically validated technology, reducing reliance on payers and enabling self-payment.

The decision was driven by strong demand and rapid and cost-efficient growth observed after launching the OTC version of Endeavor,⁴ highlighting the potential of broadening access through an OTC approach. While the doctor’s gate-keeper role diminishes in an OTC model, their advisory role persists, therefore the focus on doctors cannot be removed completely when switching to an OTC model. More importantly, distinguishing OTC DTx apps from consumer or “wellness apps” becomes a challenge, particularly for conditions like anxiety, depression, or obesity, which are targeted by many wellness apps lacking the clinical evidence associated with FDA clearance.

The table below provides an overview of how the DTx business model may vary with the regulatory approach, the strengths and weaknesses of each option, implications for stakeholders, typical use cases and examples.

Funding Approaches

The Pear Therapeutics case highlights the difficulty in obtaining payment from insurers, underscoring the importance of exploring alternative funding options. Mahana announced recently a multimillion-dollar partnership with the Consumer Health division of Bayer to commercialize DTx.⁵ Click Therapeutics collaborates with Indivior in substance abuse disorders, with Boehringer Ingelheim in schizophrenia, and with Otsuka in major depressive disorder.⁶

See below for a comparison of different funding approaches and their implications.

Conclusions

While the past years showed promise for DTx, challenges are emerging for developers as investors confront industry hurdles and higher interest rates. Exploring new business models is crucial, recognizing that one size will not fit all. Developers must align their business model with the disease they are addressing and the value their solution provides. The following models may be sustainable, if matched to the right product:

• A “consumer model” where patients purchase OTC DTx for issues not leading them to regularly see a doctor (by choice or ability to access).
• An “employer model,” where employers purchase access to an OTC DTx on behalf of employees to prevent or address health issues of interest to the employer.
• The “PDT model” for serious medical conditions actively managed by a doctor, with evidence of value to payers.
• The “pharma collaboration model,” where the DTx is funded at least in part by the pharma partner, offering mutually beneficial opportunities for clinical development and commercial infrastructure.

The power of digital therapeutics to improve patient health, enhance access to care, and reduce total healthcare costs has yet to be fully explored or unlocked. As DTx technologies evolve and their clinical value is demonstrated, emerging commercial models (likely evolved versions of what we have seen so far) tailored to product features and the needs of providers and patients will unfold.

References

1. https://www.cbinsights.com/research/report/digital-health-trends-q3-2023/
2. https://www.fiercebiotech.com/medtech/fda-approves-mobile-app-to-help-treat-substance-abuse.
3. Throughout this article, we use the term “clearance” but also intend authorization, approval or breakthrough designation for software-as-a-medical-device (SaMD).
4. https://investors.akiliinteractive.com/news/news-details/2023/Akili-Announces-Business-Transformation-Focusing-on-Non-prescription-Model/default.aspx.
5. https://www.mahana.com/press/mahana-therapeutics-signs-agreement-with-consumer-health-division-of-bayer-to-commercialize-digital-therapeutics.
6. https://www.clicktherapeutics.com/press/click-therapeutics-announces-collaboration-with-indivior-to-develop-and.

The views expressed herein are the authors’ and not those of Charles River Associates (CRA) or any of the organizations with which the authors are affiliated.

About the Authors:

Rhett Johnson is a vice president in the Life Sciences Practice at CRA, a global consulting firm, and has more than 25 years of consulting experience. He assists life sciences clients to develop commercialization strategies that generate a sustainable competitive advantage in a complex and constantly evolving healthcare marketplace. His extensive strategy consulting experience includes corporate growth strategy, asset evaluations and product strategy, pricing and market access, analytics and forecasting, and competitive analysis. Other work has included antitrust, litigation support, and policy analysis, primarily in the healthcare industry.

Andrew Parece is a vice president in the Life Sciences Practice at CRA, a global consulting firm. He has more than 30 years of consulting experience and specializes in competitive strategy, pricing, quantitative analysis, and market research in the pharmaceutical, biotech, and life sciences industries. He has managed competitive assessments and product launch strategy engagements for several high-profile products and franchises.

Lorenzo D’Angelo, Ph.D., is a principal in the Life Sciences Practice at CRA, based in Munich. He is an experienced life sciences consultant helping global pharmaceutical and medical device (medtech) companies in taking strategic decisions as well as implementing them along the product life cycle: assessing new and growth opportunities, developing go-to-market and launch strategies, and developing strategies for medical affairs.