2024 forecast: Digital therapeutics makers will have to get creative to conquer reimbursement issues

The science behind digital therapeutics may sound dubious on paper—a smartphone app that can help someone quit smoking, reverse Type 2 diabetes or treat depression?

In practice, however, these apps have held their own: Studies show that digital therapeutics from Better Therapeutics and Fitterfly can each significantly reduce blood sugar levels in people with Type 2 diabetes; video game-based technology developed by Akili can improve symptoms of ADHD, lupus and depression; and a virtual reality program from Luminopia could help treat lazy eye in kids.

In recent years, those promising study results have led to FDA approvals and clearances of the virtual technologies. Those commercial green lights, however, have largely failed to translate into profitability for makers of digital therapeutics, many of whom found themselves struggling to stay afloat this year.

“Digital therapeutics have really struggled,” John Babitt, a life sciences partner at EY, said during a roundtable discussion with reporters in October. “There was a gusher of capital that flowed into the whole space, and a lot of it’s been washed out.”

As that disconnect between a viable product and healthy finances continues to loom over these tech makers, major overhauls will be needed in the coming months to help rescue them from an otherwise calamitous fate.

Layoffs, pipeline culls and strategy shifts, oh my!

Several digital therapeutics companies underwent reorganizations of some kind throughout 2023. Better Therapeutics, for one, announced in March plans to lay off more than a third of its employees, citing “a cost reduction initiative to improve [Better’s] cash runway and focus on the long-term success of the company.”

In a letter sent to employees at the time, CEO Frank Karbe detailed how, after spending a decade developing an app targeting Type 2 diabetes without securing an FDA nod, and with no guarantees of winning reimbursement for the technology even if it were to be cleared, Better was in a precarious financial position.

In a financial filing just a few months before, alongside reporting growing losses, the company had noted that without “substantial additional funding,” it only had enough cash on hand to maintain operations through the first quarter of 2023.

Though the long-awaited de novo authorization for the AspyreRx app arrived just a few months later, it did so without an accompanying reimbursement policy. By the end of the year, with its cash dwindling and a net loss of $22.8 million for the first nine months of the year—while also facing delisting from the Nasdaq after failing to keep its stock price above $1 for at least 30 days during a six-month warning period—Better was forced to implement another round of cost-cutting measures, including an amendment to a loan and “company-wide salary reductions for the first quarter of 2024.”

Akili, too, embarked on a series of cuts throughout the last year. Despite earning the FDA’s first clearance for a video game-based ADHD treatment for children in 2020, the company found itself in dire straits, culminating in two rounds of layoffs this year: The first, in January, trimmed its staff by nearly a third, and a second, announced in September, lopped off 40% of the remaining roster.

Alongside the staff cuts, Akili also slimmed down its pipeline, announcing in tandem with the first swath of layoffs that it was immediately halting all clinical and regulatory work in indications outside of ADHD; it had previously expressed plans to expand the gamified technology into autism, multiple sclerosis, depression, cognitive monitoring and more.

Then, alongside the second round of layoffs this fall, Akili instituted another major change: After making its Endeavor ADHD treatment program available to adults on an over-the-counter basis in June—while the pediatric version was available only with a doctor’s prescription—Akili said it would shift to an OTC, nonprescription model across all of its offerings and is in the process of applying for the FDA authorizations needed to do so.

The move is meant to get the apps into more patients’ hands, while also reducing Akili’s operating expenses and improving its margins. For the first nine months of this year, the company reported $929,000 in revenues against a net loss of more than $48 million but projected that the move to a direct-to-consumer model would reduce operating expenses in 2024 and bump up its gross margins by late 2025.

The reimbursement ravine

Playing a central role in the cost-cutting moves taken by both Better and Akili this year was a lack of payer support for their technologies. Akili’s shift to a nonprescription, DTC model completely cuts out the need for the widespread insurance support that its prescription-only product was never able to secure, while Better’s continued financial struggles reflect insurers’ reluctance to cover AspyreRx.

Better, for one, is still attempting to score that elusive broad coverage. During a call with investors this summer after scoring FDA clearance, company leaders said they’d met with several major payers in “encouraging” discussions; in Better’s third-quarter earnings report in November, Karbe, the CEO, said, “Securing payer coverage is a critical element for our success. We have advanced our discussions with multiple commercial payers, which gives us confidence that obtaining coverage for AspyreRx is achievable.”

But Better and Akili’s 2023 struggles pale in comparison to those of Pear Therapeutics. Following two rounds of layoffs last year, Pear—whose reSET app for substance use disorder became the first digital therapeutic ever cleared by the FDA in 2017—kicked off 2023 with the news that it was looking into a merger, acquisition or outright sale that could help keep its business afloat.

By April, Pear had filed for bankruptcy and laid off more than 90% of its remaining employees, and in May, its assets were put up for auction, where they sold for a total of  $6.05 million—quite the fall for a company that went public in a 2021 SPAC deal worth $1.6 billion. In its 2022 annual report, Pear listed revenues of $12.7 million, against expenses of more than $136 million.

Amid the company’s slow downfall, CEO Corey McCann, M.D., Ph.D., maintained that reimbursement issues remained a core roadblock to profitability for digital therapeutics makers.

“We’ve shown that clinicians will readily prescribe PDTs. We’ve shown that patients will engage with the products. We’ve shown that our products can improve clinical outcomes. We’ve shown that our products can save payors money. Most importantly, we’ve shown that our products can truly help patients and their clinicians,” he wrote in a LinkedIn post alongside the bankruptcy announcement this spring.

“But that isn’t enough,” he continued. “Payors have the ability to deny payment for therapies that are clinically necessary, effective, and cost-saving.”

Time for a makeover montage

Babitt agreed that payers’ “dubious” view of the clinical utility of digital therapeutics is a key part of the problem. Thanks to that obstacle, in addition to the dried-up “gusher of capital” in the space, he said, there’s also been much less dealmaking than previously expected.

“I would have thought there would have been more of a land grab on a lot of assets that were deeply discounted,” he said during the roundtable. “There hasn’t been, and so I think a lot of that is going to probably just really not materialize.”

But all isn’t lost. Babitt pinpointed two areas of opportunity for digital therapeutics, both of which would position the technology as just one provider of data and support used to inform clinical decisions, rather than the end-all, be-all solution themselves.

For one, the apps could fit into larger “digital-enabled ecosystems,” which combine multiple hardware and software tools and are aimed at creating for patients “a personalized procedure that’s based on their particular ailment,” per Babitt, who called that approach “a market-share game-changer.”

His other suggestion would slot in digital therapeutics as one piece of an even broader healthcare puzzle: “The whole remote care landscape is definitely real. There’s a consumer market there; there’s a medically reimbursed market there. There are benefits,” he said. “So, I think we will continue to see investment go there, and I think that that will be a real market opportunity.”