Is Pear’s demise a sign of things to come for digital therapeutics?

As Pear Therapeutics’ financial situation forces the company into bankruptcy, Ben Hargreaves takes a look at whether this is just a blip on the road for digital therapeutics, or a sign of darker times to come.

A start-up company that shows plenty of promise, but eventually succumbs to cash flow problems. It is a pretty common story in the business world. This is especially true in the healthcare industry, where 90% of clinical drug development fails. However, in the case of Pear Therapeutics, one of the leaders in the rapidly growing area of digital therapeutics, its recent decision to file for bankruptcy is a serious event for the emerging space.

Less than two years ago, the digital health start-up went public, raising $175 million and gaining a valuation of approximately $1.6 billion. Only a few years prior, the company had become the first to receive approval by the US FDA to market its reSET digital treatment for substance use disorder. The approval was seen as a landmark that could herald a new era, where digital therapies were rolled out rapidly to patients in need. Now, as one of the leaders of the digital therapeutic market has fallen, questions are being asked about the future of the space.

Where did it all go wrong?

Serious signs of trouble for Pear emerged in March this year, when the company announced that it was seeking ‘strategic alternatives’ for the business, which included a potential sale, merger, or out-licensing of its assets. As time ticked away, this led to an update only a few weeks later confirming that the company had filed for Chapter 11 bankruptcy, as it continued to look for buyers of its assets.

The lack of any takers, at the time of writing, for these assets, which includes three FDA approved digital therapeutics, is perhaps a sign of the scepticism currently held on the market for such therapies. After all, Pear collapsed because of its financial situation, where it could not raise enough capital through its therapies to create a sustainable business.

In comments posted on LinkedIn, the company’s former CEO, Corey McCann, who stepped down on the 6th of April, explained how this situation had arisen: “We’ve shown that our products can save payers money. Most importantly, we’ve shown that our products can truly help patients and their clinicians. But that isn’t enough. Payers have the ability to deny payment for therapies that are clinically necessary, effective, and cost-saving. In addition, market conditions over the last two years have challenged many growth-stage companies, including us.”

A tricky climate

The suggestion by McCann is that payers were reluctant to sign up to the new treatment modality. This had become clear in third quarter financials in 2022, when the company had announced a reduction in workforce, building on previous cuts midway through the year. At the same time, it revealed that the company had only broken through to ten states prepared to reimburse its product, a number of years after receiving approval.

In Pear’s annual report in 2022, the company revealed that it had made a net loss of $75.49 million, with revenues of $12.69 million. The average selling price for its product was $1,195, with more than 45,000 prescriptions. However, the fulfilment rate was a little over half and the payment rate languished at only 41%.

The issues that Pear was facing perhaps would not have been fatal if the overall business and investment climate over recent times had been more favourable. As it was, with the war in Ukraine and high inflation worldwide, there was a broader move by investment firms and venture capital companies to take fewer risks. This was compounded by the fall of Silicon Valley Bank, which had provided support to numerous start-ups, biotechs, and smaller scale companies, such as Pear. The timing was particularly poor for the company, as its high cash burn began to bite hardest just before SVB collapsed. In third quarter financials, McCann had noted that it was looking at raising $40 million, which would allow it a cash runway until 2024. However, the financing did not materialise.

What next for the sector?

The more worrying question for the digital health space is what this failure means for the broader area? In further signs of strain for companies working in digital health, Better Therapeutics announced in March this year that it would be reducing its headcount by 35% and making other cost-savings. In early April, the company followed this up by announcing that it had secured a private placement of shares that allowed it to raise $6.5 million. The latter move served to steady sentiment in the NASDAQ trade company, as shares recovered, after hitting lows of $0.64 upon news of its reduction in costs.

When asked for comment, a spokesperson for the Digital Therapeutics Alliance (DTA), a trade association for those involved in the digital health space, provided an internal communication from CEO, Andy Molnar, to its member organisations on Pear’s bankruptcy. Within the statement, Molnar said, “For many years, Pear Therapeutics has been at the forefront of the digital therapeutics industry. We are grateful for their unwavering dedication and commitment to advancing this field, and for their hard work, which has been instrumental in enabling the digital health sector to reach its current level of development.”

Regarding the future of digital therapeutics, Molnar added, “At the DTA, we will continue to foster collaboration and partnership within the digital health sector. We will work in collaboration with all of you to create multiple pathways that enable us to reach our collective goals for greater sustainability. We will continue to build an industry that leaves a lasting impact on the patients that need our solutions.”

Despite the doom and gloom caused by one of the leaders in the space being forced into bankruptcy, across the wider industry Rockhealth found that investment into digital health in the first quarter of 2023 had reached $3.4 billion, with 132 separate funding deals. In its report, the organisation did note that, if investment trends continued into the future quarters, then 2023 would represent the deepest drop in financing in the preceding five-year period. Regardless, during a tricky climate, the fact investment has not disappeared altogether suggests that capital remains available, but that it may flow only to the safer bets on the market. The test for the emerging digital health industry, and those companies operating within it, could well be that whichever weather the financial storm and emerge at the other end unscathed could be the ones to profit most when the market turns again.

Beyond survival, there is still the larger question of whether these companies will thrive. Pear’s difficulties in having its products reimbursed in the US are still a worry for the long-term health of the sector. However, the sector retaining investment, even at lower levels, suggests that there is hope that such a new modality will eventually find its feet and provide a return.