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Japanese drug maker Otsuka Pharmaceutical agreed to pay as much as $300 million to Click Therapeutics Inc. in January to develop digital therapies for patients with major depression. News of the deal opened the eyes of digital health entrepreneurs and investors to the possibility that partnering with Big Pharma, rather than trying to disrupt the industry, could open up big opportunities. Companies with therapeutic products could indeed find a faster path to market through such partnerships, but only if they’re able to offer up clear evidence that they improve patient outcomes.

It’s important to note here that we’re talking about digital therapeutics, not health tech in general. A digital therapeutic is a software-based intervention that has a direct impact on an illness or disease. While the field of “digital health” spans over 380,000 applications (from diet apps to software for digitizing healthcare records), digital therapeutics (or “DTx” for short) focus on preventing, managing, or treating health conditions — either alone or in conjunction with traditional, non-digital practices.

It is very early days for this type of software, but pharmaceutical companies are already showing significant interest in DTx because of the potential to break paradigms and create a new wave of healthcare, thanks to greater access, improved treatment, and the opportunity for patent extension.

Let’s take a look at these three areas of impact:

1. Making treatment more accessible

Patients are often have limited access to traditional healthcare due to costs, location, etc. DTx could create a level of accessibility for patients never seen before. Not only is it cheaper since it is operated via software; it is also far more convenient. Patients, specifically those suffering from chronic conditions, can receive treatment from the comfort of their own home instead of having to be at a particular location at a specific point in time.

And for those affected by mental and cognitive health conditions, the negative stigma can also be a significant obstacle to seeking treatment. Patients may be more willing to seek treatment via DTx thanks to the greater privacy it affords.

Meanwhile for pharmaceutical companies and physicians, increased accessibility creates diversified revenue streams at a much lower cost. Software can be distributed much more efficiently than medicines, for example.

2. Feedback will lead to improved treatment

Perhaps most significantly, DTx will give pharmaceutical companies access to data they’ve never had before. Importantly, this goes far beyond data from a randomized controlled trial. DTx will give pharmaceutical companies and physicians real-time results from patients and, through accurate and normalized big data, will continue to provide powerful insights over time that can be used to improve treatment, or even create entirely new products.

This data influx could impact side-effect management, drive better R&D and improve patient adherence to treatment (i.e. by tracking usage and providing the necessary reminders). Furthermore, the real-time feedback cycle of digital therapeutics allows patients to progress with their care more rapidly, thanks to regular updates on symptoms and more personalized treatment programs.

3. Patent extensions

While drug patents are good for 20 years after the drug’s invention, this time frame is typically halved to 10 years after testing finally brings the drug to the marketplace. Patent extensions allow pharmaceutical companies to increase revenue streams by preventing copycat drugs from competitors from hitting the market. It’s estimated that once a generic drug hits the market after a patent expiration, name brand sales drop by 80 percent.

Patent extension in the United States, for example, is classified under FDA (505-B). It allows pharma companies to secure a patent extension by developing their existing drugs — thereby providing an incentive for investing in R&D and improving their products. This has been modified so that the combination of drugs with medical devices, which complement and enhance traditional treatment, could be granted a patent extension. With the FDA now considering DTx as a medical device and granting extensions for the combination of drugs with software, DTx companies can help traditional drug companies extend their profits.

So where are digital therapeutics today and where is this sector heading? The opportunities are seemingly endless. Most therapeutics companies are currently focusing on mental health and cognitive behavior conditions, including substance abuse, depression and anxiety — often employing strategies rooted in cognitive behavioral therapy.

Otsuka Pharmaceutical’s partnership with Click Therapeutics (with the latter set to receive up to $10 million upfront and up to $272 million in “commercial milestone payments”) is focused on developing and commercializing a prescription digital therapeutic for treating major depressive disorder (MDD). Another example is Happify, which has partnered with pharma company Sanofi to study potential digital therapy for patients with depression and multiple sclerosis. [Disclosure: Happify is one of my firm’s portfolio companies.]

There is incredible potential within the DTx market for patients and businesses, however it will require extensive evidence based research — in other words, applications must be derived from real evidence and trials. DTx companies will thus need to complete multiple clinical tests, receive an FDA 510K clearance, and likely obtain 505(b) approval, depending on the application. These steps will require hefty investments.

Investors interested in this sector should look for applications that have a high probability of completing these steps. Obtaining FDA 505B approval is not trivial for a young, mobile app startup. The need for scientific based theories, clinical tests, and standards’ based operations are often not in the DNA of many digital health companies and many are just trying to ride the excitement in DTx. Without the necessary regulatory body approval, DTx will struggle to prove validity. But for those companies that do manage to overcome these initial hurdles, major drug companies appear to be ready to partner for the rest of the ride.

Roy Saar is a partner at Mangrove Capital Partners, an early stage venture fund headquartered in Luxembourg, with offices in Barcelona, Berlin and Tel Aviv. Its portfolio includes a number of digital health businesses, including Happify, K Health, and Flo Health.

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