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You know something’s up when pharmaceutical companies start acting like software companies.

The short version:

    • Digital therapeutics are on the rise
    • Drug developers have been given a PR battering in recent years, and see digital therapeutics as a way to avoid that
    • Drug-free interventions are proving effective
    • The cost of digital therapeutic solutions is substantially less than drug development

 

In 2018, $244 billion pharmaceutical giant Novartis made waves by signing an agreement with Pear Therapeutics to commercialise and fund digital therapeutic solutions aimed at alleviating opioid use disorder.

It was a fairly big deal in pharmaceutical circles.

“This is the first time that a pharma company has ever sold a piece of software,” Pear CEO Corey McCann said at a JP Morgan healthcare event last year.

“I joke a little that we’ve seen this evolution—where in the first year or two, people had no idea what we were talking about. After that, people acknowledged the idea but thought it was ridiculous.

“And then they knew what it was, but not what the business model looked like,” he said. “But now last year and this year, I think that they think it was all their idea—which is exactly where we want to be.”

It’s the green shoots of what could be a raft of digital solutions coming to a space where, traditionally, pharmaceutical companies have played.

The fact that Novartis’ investment was into a solution which can alleviate the overuse of opioids speaks volumes.

Why drug companies want to pivot away from drugs

In recent years, pharmaceutical companies have received public badgerings — the likes of which are usually reserved for large oil companies or big banks.

The criticism doesn’t run across political affiliation either, with both Donald Trump and the likes of Bernie Sanders lining up to take a swing at pharmaceutical companies.

It may literally be the only thing they have ever agreed on.

The reasons are pretty obvious.

Public outrage over the antics of ‘pharma-bro’ Martin Shkreli and the widespread skepticism cast on the sector in the wake of Theranos’ collapse haven’t exactly painted the sector in a good light.

Then there’s that old chestnut about the cost of drugs being totally out of the reach of the people that need them the most.

But more damaging than either of those public black eyes is the raging opioid epidemic ravaging the US.

According to the US National Institute of Drug Abuse, more than 130 people die each day from the misuse of prescription drugs.

Fingers have been pointed in all directions for allowing this situation to develop — and pharmaceutical companies have been under heavy criticism for their role in the epidemic.

Questions are being asked, clearly and pointedly, about the role of marketing agents in getting doctors to prescribe medication their patients simply do not need.

It’s why pharmaceutical companies and the healthcare system at large have been keen to develop a suite of treatment options outside drugs.

But to say the focus on digital solutions is simply a PR exercise would be underselling one of the main reasons pharmaceutical companies are piling into the space:

Digital therapeutics are just effective.

Drug-free interventions proving effective

Closer to home, Novita Healthcare (ASX:NHL) has been hard at work developing Tali Train — a digital training program aimed at alleviating inattention in young children.

It’s being seen as complementary to (and as a potential alternative) to prescribing ADHD drugs such as Ritalin (although drugs still do have their place in severe cases).

Several rounds of research has found several measures, from visual attention to numeracy improved in children with developmental disorders when compared with a baseline program.

Its solution has been included in the National Disability Insurance Scheme in Australia, leading to an increase in demand from the schools sector.

Meanwhile in the US, its solution has been listed by the FDA — while the company has recently presented at the Global Digital Therapeutics Conference [PDF], perhaps a sign of where it sees the market.

While the science behind Tali has been brewing in the background since 1991, it’s only fairly recently that the delivery of the program has been enabled by digital means.

READ: From research to impact — the Tali story

Tali worked with Melbourne-based Torus Games to wrap the science into a package which is both appealing to kids and, crucially, scalable.

Cost of drug development

Scaling the development and manufacturing of a drug and scaling a digital therapeutics tool are two different kettles of fish.

While patients and healthcare providers are shocked at the cost of pharmaceuticals — it can’t be said that it’s simply naked profiteering from pharmaceutical companies.

According to a 2018 study by the Tufts Center for the Study of Drug Development, and subsequently published in the Journal of Health Economics, the cost scale has risen sharply in the last decade or so.

It indicated that the development of a new prescription medicine through to marketing approval from the FDA costs an eye-watering $2.6 billion.

In 2003 this was $802 million ($1 billion adjusted for inflation).

That means that in the course of 15 years there has been a 145 percent increase in the cost of developing new drugs — which has led pharmaceutical companies to try and recoup those costs.

That cost can go up as high as $3 billion to account for the full lifecycle of the drug.

While players like Novita would love a $3 billion budget, it’s unlikely to come close.

Its development costs are measured in the millions rather than billions, simply because software development is relatively low-cost.

The cost of scaling a digital solution, once created, is also sharply lower than setting up manufacturing supply chains in key markets.

Once the regulatory clearance has been gained, the main costs are marketing and maintenance costs.

Drug developers, on the other hand, need to go through more rigorous approvals and set up supply chains and marketing partners in each region it wants to sell its solution.

A perfect storm is brewing for digital therapeutics.

Pharmaceutical companies are finding that developing digital therapeutics leads to better PR and social license, effective, and less costly compared to drug development.

As bigger players pour into the digital therapeutics space, expect to find smaller companies who took an early-stage position rewarded.

 

This content is produced by Star Investing in commercial partnership with Novita Healthcare.  This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.