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Drive Innovation September 24, 2020

The Digital Therapeutics Race Begins

Partner, Health and Life Sciences, Oliver Wyman
Principal, Health and Life Sciences, Oliver Wyman
Key Takeaway
We expect those innovators with the best capabilities and setup to learn from pharma to gain an edge in the DTx space. #OWHealth

Editor’s Note: With home care now the norm amidst the pandemic, the role of digital therapeutics and remote monitoring is rapidly evolving. Here’s a glimpse of what the future may hold.

Digital therapeutics are among healthcare’s most innovative developments, with great potential to alter how care is delivered, both amidst a pandemic and beyond. We've recently seen the emergence of true digital therapeutics (which we refer to as DTx), is something we're defining for the purpose of this article as digital treatments that produce measurable positive outcomes for patients. 

To understand the potential and likely trajectory of the industry moving forward amidst COVID-19, we believe it's most productive to focus on two crucial aspects: Who is making the treatment decision – the physician or the patient? And who is paying for it – the patient or the health insurer?

More short-term impact on healthcare is likely to come from one of two payer-supported models. One is the benefit model, in which there is no prescription by a provider, and patients, either on their own or in response to encouragement or incentives from the payer, choose to use the DTx. The second is the pharma-like model, where a healthcare provider prescribes the DTx.

But which of those models will prevail, and in what arenas? Companies following the benefit model have taken what looks like an early lead. Wall Street recently gave a resounding vote of confidence to the model, greeting the initial public offering of one diabetes-oriented company with strong support, and bringing the company to a valuation of $3.4 billion on its first day of trading. This company may prove an outlier in time, however: It uses live coaches extensively and markets to employers rather than insurers (a move that encourages continuity of care at a time when companies frequently switch health plans).

This company’s initial sale does not require the sort of field-force marketing that the pharma-like approach would seem to require. And it can thrive in a period when the regulatory status of DTx is still largely undefined. This is because although the path has been defined, few companies have used it so, it is little less known for the greater market on what regulatory clearance means.

Payers can potentially be persuaded by data that, even if it is directionally accurate, might be inadequate for regulatory approval or to persuade scientifically trained physicians. Products that to go the route of proving their efficacy more rigorously and perhaps obtaining FDA approval may find themselves battling established, low-cost, good-enough competitors that pursued the benefit model.

The model has potential drawbacks, however. There is reason to fear that as more companies move into the space, payers will lump them in with products like wellness programs: as a nice-to-have (and ultimately expendable) add-on to differentiate an offering, rather than as a core strategy for reducing costs and improving care.

For this reason, we expect the prescribed model to prevail in the long run. And while there are examples of prescription DTx products that are not approved by the Food and Drug Administration (FDA) or the European Medicines Agency (EMA), increasingly regulatory approval needed, at a minimum as a stamp of approval and frequently as necessary precondition of to establish meaningful physician interactions.

There is probably some room in the market for the models where the patient pays, and we expect to see some true direct-to-consumer DTx, especially for low-acuity diseases and to address certain types of underinsurance and access issues (such as high copays and regional physician shortages). We expect them to have little short-term effect on patient welfare or the structure of the healthcare industry, but significant potential in the long-run.

Learning from Pharma

Pharma companies need to sell their products three times – first to the payer that adds the drug to a formulary, second to the physician who prescribes it, and last, to the patient who takes it. (The last challenge – getting patients to actually pick up their prescriptions, refill them, and go on taking them for a prolonged period – may actually be the most difficult of all.) Pharma’s three customers have different interests, respond to different kinds of information, and present different regulatory and ethical issues to drug makers. And whether they pursue the benefit model or the prescription model, would-be DTx players must understand they will face the same sorts of challenges. They must learn from pharma’s experience.

For DTx providers that follow the benefit model, there’s no prescription, and no legal necessity to persuade the physician. But as the market grows and options proliferate, these benefit-oriented may find that they need physicians to validate their products, pick them out from the pack, and keep patients using them over the long run, and some may need to take on the added expense of a sales force. Balancing this possibility are several clear advantages: Because their products do not require FDA approval, benefit-oriented DTx companies will likely be freer to advertise directly to patients – though there will be limits on the claims they can make. What’s more, they can be upgraded rapidly based on patient data without the need for additional approvals.

Companies following the prescription model face virtually the same challenges as pharma does – with an additional complication. Healthcare providers are now well versed in the language and science of biology and chemistry, but only the youngest generation of physicians has any meaningful experience with digital, programming, and apps. This unfamiliarity (and the resulting need for education) is the main challenge for innovators. And, on top of that, there are very little network effects, such as too few players in the market to be able to share that education burden (let alone this being part of the curriculum of doctors).

The latter stages of the buying process – downloading the app and signing (“fulfillment” in Rx speak), using it as prescribed (“compliance”) and over time (“persistence”) will be similar for both benefit-oriented and prescription-oriented DTx. And in all cases, the experience of pharma will be a useful – if incomplete – guide.

We predict success awaits innovators that most effectively leverage the pharma experience. As in pharma, DTx players need to ensure all puzzle pieces are in place:

  • Data (especially net clinical benefit across efficacy and safety, in comparison to the standard of care)
  • Access and reimbursement, thereby establishing a new standard for digital therapies
  • Sales/marketing efforts to overcome adoption hurdles
  • Consumer muscle (which will need to be secured if you do not already have it)

However, it is not a matter of copying and pasting pharma solutions. Unlike pharma, DTx products do not usually benefit from patent protection, which changes the playing field significantly. At a minimum, this becomes a different type of creating market entry barriers (such as through network economies with winner takes all adoption) – but much more difficult to sustain (and requires different skills on the side of DTx). Physicians understand biochemistry better than software and service-based business models. This extends to questions of user/patient service, so the initial push for adoption will likely be even higher for DTx than for pharma.

With these challenges in mind, we expect innovators with the best capabilities and setup to learn from pharma (including though partnering) to gain an edge. Also, only well-funded innovators will have the necessary stamina to build the large-scale user base and usability focus, which are ultimately the most meaningful sources of differentiation.

The Path Forward for Incumbents

Looking at the expected success of DTx, incumbents should start to prepare accordingly. For pharma, this entails understanding the dichotomy of DTx being a threat (in terms of the competition) and at the same time an opportunity to partner and extend their treatment offerings. DTx will also require (and allow) pharma companies to engage patients in ways that were previously not possible and to begin to get a sense of what continuous product improvement will look like in a medical setting.

The digital revolution in healthcare is something that no pharmaceutical company can sit out. Companies will need to revisit their spending on the drug development pipelines in light of non-drug investment opportunities, taking to a much more integrated approach to portfolio optimization. Pharma will need to learn to create unique products, or at least extremely difficult to imitate, even without patent protection – something that tech partners can help with. On the other hand, DTx players have much to learn from pharma companies’ experience in commercialization as well as their ability to make meaningful, long-term strategic investments. Collaboration will be a priority, but we expect companies to build in-house digital capabilities as they learn to manage the tension between long-run drug development and agile digital treatments.

Providers, to fulfill their promise of having the patient’s best interest in mind, will need to start building the capabilities necessary to prescribe successful innovative models, rather than just waiting for the education to come to them. The most innovative provider systems will start proactively engaging with those innovators with a pharma-like Rx model. At the same time, providers need to figure out how they can work with direct-to-consumer DTx. There will likely continue to be a plethora of mostly useless consumer-oriented products. Physicians are in the best position to establish priorities and guide patients to real value – if only they can discover what products offer it. If they succeed, they will be able to offer patients better outcomes at a lower cost, while allowing their staff to focus on high-value tasks.

Payers are probably in the best position to benefit from DTx entering the market, but that does not mean they can stay on the sidelines. While some might consider DTx merely a new weapon in the arsenal, payers play a crucial role in the adoption of the new paradigm. At least for a certain period of time, payers that establish meaningful reimbursement pathways, and thereby offer their patients a real benefit will gain a substantial edge against the competition – and in particular, be able to bring down their cost. Payers that focus on population health management will reap the rewards of their strategy and drive real health and economic benefits for their members, provided they can identify the DTx partners that will succeed.

The recent explosion of wellness apps, activity trackers, and the like might create the impression that digital health is a relatively insignificant consumer fad. Nothing could be further from the truth. Digital therapeutics – effective, proven products addressing real unmet patient needs – promise to transform the way care is delivered, improving outcomes, and lowering costs. They may be arriving from the tech sector, but they need to be considered for what they will surely become: an essential part of medical practice and the healthcare industry. Payers, providers, and pharma have a brief window of opportunity during which they can get ahead of competitors – and help shape an emerging part of their industry.

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