Prescription Digital Therapeutics
A tale of selling drugs with software margins
Over the last couple of months, we’ve had several opportunities to work with (and consider to invest in) companies doing prescription digital therapeutics (PDT). For a digital health investor that has the privilege of in-house assistance from great biotech investors sitting in the next room (Arkin Bio manage three funds with more than $500M AUM in private biotech companies from series seed to pre-IPO), it sure sounds like a perfect sweet spot for us.
During our work, we’ve had a lot of conversations with visionary entrepreneurs and different industry stakeholders, such as leaders from big pharma, payers and KOLs from the providers’ side. Based on these intimate conversations, it’s become prominent that there are a couple of opposing forces that hinder this sector from exploding as some thought would happen (big surprise – what a difference between what you hear on a conference panel vs. off-the-record, one-on-one conversations...)
This is an attempt to capture some of these challenges and offer some thoughts on future directions of PDT.
What is PDT?
In the past few years, we started to see an emerging category of software-based products aimed at providing care. Similar to the “broad” definition of digital health, digital therapeutics is an area where one might encounter different opinions regarding the scope and types of relevant companies. In this piece, I’ll refer only to products that are authorized by regulatory agencies (e.g. FDA, CE) as means to deliver therapy (i.e. the regulatory body examines specifically the part of the solution that is intended to provide some form of care). As such, these products require a prescription as part of the product’s marketing authorization (e.g. labelling and instructions for use). Hence the definition prescribed digital therapeutics, which is essentially a subset of the broader category of digital therapeutics (DTx). It is important to note that some products may have additional components/or functions that are available without the need for a prescription (e.g. an electronic fitness diary).
Put it another way, PDTs are essentially ’virtual drugs‘. That is, they’re an attempt to achieve a similar outcome like “traditional” drugs (improve the prognosis of a disease or even achieve full cure) with a prescribed substance / compound that is based on some scientific evidence (or hypothesis) that positively correlates between its structure/characteristics and the disease’s underlying pathophysiology.
A PDT can be a standalone treatment (prior to/instead of a traditional drug), a complementary treatment (two separate products and regulatory filings, with the PDT aimed at improving the safety and/or efficacy of the traditional drug), or as combination therapy (a single product comprising two components with a joint regulatory process, again aimed at improving safety and/or efficacy of the traditional drug but with the possibility for new IP and brand exclusivity).
As opposed to non-prescribed DTx, taking the “prescribed” route in theory may result in a more scalable (as patients tend to trust physicians more than D2C advertisements) and profitable (you can charge higher prices) products compared to off-the-shelf and D2C wellness plays.
Furthermore, the envisaged benefits of PDTs as virtual drugs compared to “traditional” drugs are multifold
Much shorter and less expensive development process
Inherent capability to collect real world data and thus create visibility on actual utilization (adherence) and outcomes (and end points for studies)
Opportunity to create positive feedback loops based on the software structure and capturing of real time outcomes, thus unlocking continuous product improvement post-marketing
Easy, self administered delivery (vs. invasive and non-self administered delivery mechanisms), generally by mobile device or desktop
Better side-effect profile
And perhaps the holy grail – given all the above, PDTs can potentially enable treatment personalization at scale (as it is much easier to modify a software than a pill) and accessibility (moving pills from factory to patients’ home/access to in-person provider vs. mobile app).
Current situation
So far, PDTs mainly address either mental health conditions (depression, anxiety, etc.) or organic chronic diseases based on a linkage between their pathophysiology and mental or neurological aspects (GI conditions due to the brain-gut axis; autoimmune conditions based on stressogenic factors, etc.)
These therapies are anchored either on emulating in-person encounters with providers (e.g. providing virtual cognitive behavioral therapy, induced hypnosis) or facilitating ’self-treatment‘ (social engagement, relaxation, gamification, etc.)
Now, too often in healthcare there is a material difference between the theoretical value of a new product and real-life results. Currently this is exactly the case with PDTs. Although a couple of products have been cleared by the FDA for a few years now (starting with Pear’s reSet based on the company’s participation in the FDA pre-certification program), uptake has been very slow. In fact, despite the supportive regulatory environment (pre-cert, relaxation of regulation for PDTs addressing mental health) to date, no company has truly established material commercial traction.
But traction is a big word, so let’s try to break it down a bit.
As with traditional drugs, the buy-in of a couple of stakeholders is required for market penetration and this hasn’t really been generated so far for PDTs. Essentially, for a therapy to be prescribed, providers need to prescribe it (and they haven’t) and payers needs to reimburse it (and although PDTs are starting to be included in formularies, actual payments for them have been scarce).
In a very simplified manner, without reimbursement the provider lacks the incentive to prescribe, and without providers’ interest and support, payers have less incentive to reimburse. It’s a classic healthcare chicken-and-egg problem.
An additional angle is big pharma, who can very much help in promoting this category by investing in companies, partnering around specific products and eventually facilitating/augmenting the sales process (in particular with the “complementary” or “combo” options). In general, it seems like pharma are testing the water –some have made initial moves (Otsuka, Boehringer Ingelheim, Novartis) whilst others are still sitting on the fence.
Challenges
“There are lots of stakeholders involved. That's kind of the problem to be honest. I think the challenge with bringing a novel therapy that is not understood, such as a digital therapeutic, to market is trying to align with those stakeholders and get them a current understanding.”
Innes Meldrum, SVP and chief commercial officer at Otsuka Pharmaceuticals North America
In that spirit, to better understand the key challenges for PDTs to capture more ground, it might be a good idea to examine it via the lens of each stakeholder.
Providers
The physician’s (Hippocratic) oath starts with the phrase “first do no harm” (primum non nocere). As such by default clinicians are often hesitant to administer new types of treatments. The confidence to make this leap of faith is hinged around the breadth of supporting clinical data (“evidence-based-medicine”).
The problem is that to date, most clinical data that was generated by PDT companies is aimed (by design or not?) at passing the FDA bar (in most cases it means not harmful and equivalent to existing treatment) rather than to convince that PDTs are actually superior (in terms of safety and efficacy), which is the required level in my opinion. Generating a sufficient level of supporting clinical evidence takes time (does the effect decrease after X months?) and a lot of resources (right sample population characteristics and size/study power). Part of PDTs’ promise is easier recruitment of study participants, but there are so many other elements needed to bring this task home.
And even if you generated the data, you are not done. Now the post-marketing phase kicks in. You need to educate and train the providers (even more so with PDTs as it is a new type of treatment and heavily dependent on the physicians’ adoption of software-based solutions) and continue to provide the proof that the product is performing similarly in real life compared to the original studies (post-marketing studies). This is even more prominent for products that are expected to evolve over time (like this guidance from the FDA…). Another element that does not exist in traditional drugs is the major potential for cyber threats (i.e. HUGE additional liability!)
Keep in mind that big pharma are investing hundreds of millions in generating and “broadcasting” supportive evidence for each new drug because they understand how crucial it is.
But there are additional layers needed to have the physicians on board. First and foremost, creating the financial incentives for physicians (see below). Another crucial aspect is ease of use and integration to the workflow (the prescribing process and patient monitoring embedded in the EHR).
Considering in mind all the above, it should not be a big surprise that overall there seem to be a growing notion that a direct and dedicated sale force is needed to facilitate the sale of PDTs. “Dedicate” also in terms of separated from the “traditional” (i.e. current) sales force of pharma when a collaboration/M&A with pharma is considered (see more color below) due to the differences in the sales processes. This also means MUCH worse margins than PDTs are currently hoping to achieve.
Payers
The fact we are starting to see reimbursement codes for PDTs is an important milestone but obviously doesn’t mean payers are actually paying (also in the case of employers…) Some early movers tried to claim that because this is a “prescribed (virtual) drug” its price should be similar to a regular drug. However, payers are not blind to the enormous difference in R&D and supply chain costs and by large rejected that. “Regular” drug high prices can be justified by the long and costly R&D and the complicated supply chain – wholesalers, PBM, pharmacies, etc. How can you justify a high price for a software with >90% GM and a relatively cheap and fast R&D process without a TON of data proving ROI (which still does not exist)?
Consequently, PDTs seems to have a problem of finding a proper price point that will incentivize providers while still leaving some margin for them and simultaneously be justified by payers. Frankly, I’m having really hard time to currently justify anything more the $100ish. The only change might come when companies have outcome studies proving ROI to all stakeholders that are matched with a compelling pricing model.
Pharma
As mentioned above, big pharma can have (and to some extent, are having) an important role in fueling the PDT sector as a potential business partner and acquirer. There were a couple of big announcements about PDT/pharma collaborations, but you never hear how these end… The unpleasant truth is that from the shinning double and even triple digits TCVs (co-developments, royalties, rev-share…), to date very limited revenues have been generated based on these agreements.
One crucial observation we had from talking with different executives is pharma are exceedingly careful not to jeopardize their ROI on their core assets when a drug actually hits the market. Any solution that can potentially cannibalize these revenue items (even if it creates a substantial separate revenue stream) will be considered a threat to the foundations of the pharma process (and as a by-product, to many peoples’ jobs). The current bottom line is that a PDT is good for pharma only when it can INCREASE the core sales (i.e. a complementary or combo therapy). The standalone option doesn’t seem viable in that perspective. Besides the significant challenge of demonstrating that a product can actually increase the efficacy, safety or upsell opportunities for a specific drug, in this situation you need to price the PDT on top of the drug (which is really expensive by itself at the first place) which is extra problematic given the unit economic of PDTs that were discussed above.
To the best of my knowledge, not a single company has succeeded in materializing a collaboration with pharma (i.e. generate substantial revenue stream) or get on real world rev-share with pharma (i.e. actually generated meaningful revenues).
Potential acquirers? (still waiting for the first…)
One last thought related to a more general question that might be important to investors and entrepreneurs alike: what is the potential endgame for a great PDT company? Going ‘all the way’ (via the public market “a la Moderna” or staying private like Boehringer Ingelheim, which is a rare exception for a pharma company) is perhaps an option, but for the sake of the discussion and due to the dependency on many extrinsic conditions that can vary dramatically (like the public market general sentiment), I’ll stick with the M&A path. Which brings me to the question – is there really a viable and lucrative M&A path for PDT companies?
First of all, there are no (good) data points/comparisons simply because there have still not been any significant M&As of PDT companies (even public market activity – only one SPAC whose outcomes have yet be determined), so any discussion on valuations would be based on less-than-ideal proxies and thus might be problematic.
Furthermore, who might be a relevant acquirer? There are a couple of potential suspects, and for each there are some reservations.
Pharma – As discussed above, many of the PDT claims-to-fame actually make it materially different compared to pharma. The R&D elements and cadence, type of sale, product nuances and required talent all make a good PDT company a very different company in its DNA. Considering the argument that PDTs are to be sold by a separate sales force, there is essentially very limited synergy in such an acquisition both in terms of the R&D process and operations. There are examples of large companies acquiring another company to form a new distinct division, but this is highly challenging and in any case it’s safe to say that it generally reduces the incentive for an M&A.
Big tech – I’m having a really hard time believing that a tech player is relevant, maybe apart from Meta/Facebook. The tech companies generally prefer platform plays and marketplaces, and favor less the particular apps. Meta might be relevant in an attempt for them to extend their activity in healthcare given the overlap of at least some of the PDT with the Meta vision.
Telemedicine players – Perhaps the right play is adding an intervention arm to a telemedicine service? In this case, the two companies’ DNA might be more similar. One immediate suspect could be Teladoc + Livongo (“Teladongo”), due to its proximity to the care management/provision elements and the already-available telemental service. On that note, I guess any telemental health player could be considered as well (Ginger-Headspace, in particular). However, recent rumors of challenges combining Teladoc and Livongo might suggest that connecting a ’care element‘ to a telemedicine company is not such a straightforward play after all.
Virtual first providers and hybrid chronic care management players – This category might actually be a good candidate, especially the companies who focus on treatments (as opposed to diagnostics) as their core offering. A nice example might be the V1P (Virtual-First Providers) in the MSK space (Hinge, Sword, etc.) that could really benefit from a solution aimed at reducing pain or improving mental health. One caveat related to this group is the limited potential acquisition size in the foreseeable future – even category leaders are still nimble and have raised (only?!?) hundreds of millions of $$$; thus I’m not sure they will put all their hopes (and money) on this type of acquisition before they go public or gain sufficient size (hopefully).
Ideas and Opportunities
To finish on a positive note, the flipside of all these challenges is a couple of nice opportunities for new or existing companies. Here is an attempt to share a couple of ideas:
Supporting sales process for PDTs – if you buy into the notion that indeed to sell a prescribed digital therapy (and maybe not only the prescribed type) a dedicated sales force is required, there might be an interesting play to create a white label solution for/infrastructure to support any company trying to do that. If you combine the all the potential addressable markets, maybe such a company could be pretty significant, with additional types of products (any FDA-regulated software that is sold in the triangle between providers and patients) that might also be relevant as its next beach head.
PDT marketplace – under the same notion, what about some sort ’PDT app store‘? There might be some strong network effect if this is done right (creating benchmarks for PDTs, a unified and trusted prescription process, etc.) and I would also suggest the same argument regarding current and future market potential.
Supporting the creation of clinical and outcome data at scale for PDT (‘CRO for PDTs and DTx‘?) – is there a way to capitalize on the different R&D and post-marketing processes with tools that will make it easier to generate evidence on the ROI? This might be another product/service line for a CRO (IQVIA seems like a good candidate) but maybe this could be a standalone play as well?
I guess all these ideas have some overlaps and to that extent there might be a consolidated play here as well. In any case, I’m sure there are more ways unlock the PDT opportunity and I’m very much excited for the future to come. If you are working on a novel approach to facilitate or promote PDTs and can address at least some of the challenges in this space, we at Arkin would love to meet and help if we can!
Big thanks to Sam Cronin from our team for the sanity check and thoughts!
Stay tuned!
Nadav
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