Akili Interactive Stock for Digital Therapeutics
Regular readers of Nanalyze may have noticed that we don’t cover too many startups these days. That’s partly because you’ve let us know that you’re most interested in learning about investment opportunities available to retail investors. Many people who invest in private companies are folks who shower in the morning and don’t have to pull money out of an ATM in Indonesia to look rich on paper. But we still keep tabs on the startup scene, because that’s where technological trends usually start. That’s certainly been the case with digital healthcare and digital therapeutics (DTx).
What is Digital Therapeutics?
The big brains at CB Insights define digital health as companies whose core business revolves around developing software to manage and deliver healthcare services such as telehealth. Funding to this sector has really boomed in the last five years or so, with investors passing the $10 billion mark back in 2017 at about $11.7 billion, according to CB Insights. Last year, funding reached a record $57.2 billion, up 79% compared to 2020, which had also been a record-setting year. All that cash certainly spilled over to digital therapeutics, an emerging medical intervention that uses software to treat, manage, and even prevent various diseases and disorders.
Like the hard stuff, digital medicine (a term sometimes applied to smart pills, which is definitely different) must prove its merits through clinical evaluations. These therapies use everything from mobile applications to virtual reality to treat addiction, hit the snooze button on insomnia, and address other cognitive and mental health challenges. Investors must like what they see, because they dumped about $3.4 billion into digital therapeutic startups last year, more than doubling the amount invested in 2020.
Digital Therapeutics Stocks
Of course, last year was also a record one for startups to enter the public markets by merging with special purpose acquisition companies (SPACs). That hasn’t exactly gone as planned. While such IPO mergers have certainly slowed, as valuations plunged for many SPAC-backed companies that had already made it to the big show, we’re still getting a few breakthrough cases. In Q4-2021, two digital therapeutic companies, Pear Therapeutics (PEAR) and Better Therapeutics (BTTX) were among the latest cohort of SPAC companies to make it across the finish line.
The former is commercializing software-based prescription meds for substance abuse, opioid addiction, and insomnia, among other treatments. We wrote about Pear Therapeutics last year before it completed its SPAC merger, a deal expected to value the company at $1.6 billion at the time. Today, its market cap is less than half that amount, with annualized revenues still well short of $10 million, when things start to feel real. A pre-revenue company we had not covered before, Better Therapeutics is not even finished with clinical trials of its lead candidate, which is basically an AI-powered app to help people with type 2 diabetes make better dietary and lifestyle choices. The deal had valued Better Therapeutics around $200 million. Its market cap is now about $80 million and dropping.
So, it’s not without a bit of skepticism that we dive into Akili Interactive Labs – a digital therapeutics company we’ve watched since 2017 – and its proposed SPAC merger at a $1 billion valuation.
About Akili Interactive Stock
Founded in 2011, Boston-based Akili Interactive has raised more than $300 million, with a $110 million Series D round last May, accompanied by another $50 million in debt financing. The company has nearly two dozen investors, many of them venture capital firms that specialize in the life sciences industry. The Series D also included David Baszucki, the founder and CEO of Roblox (RBLX), a social VR company that represents one of the growing pure plays on the metaverse. There’s some obvious synergy between a company with an addictive digital platform with one developing digital-based therapies for ADHD kids with attention problems.
The SPAC in this case is Social Capital Suvretta Holdings Corp. I (DNAA), which is expected to bring $412 million to the table before fees and any possible redemptions by institutional shareholders who think this may not be the best use of their money. Whatever cash does end up in Akili’s bank account at the end of the day will largely be devoted to building up a salesforce to educate doctors about how a video game can actually help kids focus better. Let’s dive a bit into the tech before we talk about the bottom line – making money from digital therapeutics.
Digital Therapeutics for Paying Attention
Akili is developing software-based medicine designed to “directly target neural physiology” for cognitive impairments, including poor concentration, memory loss, difficulties learning new skills, and difficulties with decision making. That pretty much covers most of the world’s population.
Akili’s core therapeutic engine, the Selective Stimulus Management Engine (SSME), is designed to deliver “specific sensory stimuli and simultaneous motor challenges [that] target neural systems involved in attentional control (i.e., fronto-parietal areas of the brain).” Studied in more than 30 clinical trials, SSME engages patients through interactive mobile games, which are personalized to each individual. Algorithms constantly adjust the difficulty and personalize the treatment experience for each individual.
The first product out of the gate is EndeavorRx, an FDA-cleared prescription video game designed to improve the flea-like attention spans in children between the ages of eight to 12 years old who have some type of attention-deficit disorder. About 10% of U.S. kids, or somewhere around six million, have been diagnosed with ADHD, according to the U.S. Centers for Disease Control.
EndeavorRx has been tested in five clinical studies involving more than 600 children diagnosed with ADHD. Patients who use the game have shown improvements in a digitally assessed measure called Test of Variables of Attention. The most recent study, published in the medical journal PLOS ONE, went beyond TOVA and showed that EndeavorRx treatment increased brain activity related to attention function, as measured by EEG. The only side effect is frustration, according to the company. That’s likely to be a side effect for investors in Akili Interactive stock as well.
Should You Buy Akili Interactive Stock?
It’s taken about a decade to get to this point, which is about as long as it takes a real drug to reach the market. It’s also about as long as you might want to wait before buying Akili Interactive stock. We’re MBAs, not neuroscientists, so we can’t argue about the soundness of the science, but we can find reasons to avoid adding Akili to our own Nanalyze Disruptive Tech Portfolio.
First, the company is still essentially pre-revenue, and we don’t invest in companies without a history of significant revenues (defined as at least $10 million annually). While we generally favor software-as-a–service (SaaS) companies, EndeavorRx isn’t a pure SaaS play. Doctors must issue a prescription like with any other medication, so there’s not a reliable recurring revenue stream. A three-month prescription costs $295 out of pocket or $425 with insurance, though currently, insurance companies are covering only about 10% of all prescriptions. Akili concedes that number will have to be closer to 50% to meet its financial projections. While a full commercial launch is expected this year, Akili has already signed up about 1,000 doctors who have already prescribed Akili.
Oddly, there’s no hockey stick growth chart for revenues in the flashy investor deck. Akili does claim a total addressable market of $10 billion, with a target of $500 million in annual revenues in the next five to seven years:
While the company does have other digital therapeutics in the pipeline (including something for COVID brain fog), there doesn’t seem to be any sort of timeline for commercializing anything beyond EndeavorRx. About $150 million in SPAC funds are earmarked for developing other products and expanding EndeavorRx to other ADHD populations.
That’s one niche commercial product in a single niche category. That’s not the foundation of a billion-dollar company.
There’s no doubt that Akili, Pear Therapeutics, and others have helped lay the groundwork for digital therapeutics to play a future role in cognitive-based healthcare. But investors need to be aware that we’re still years and years away from digital therapeutics companies scaling these software-based treatments – if at all. If the deal goes through as planned, Akili Interactive stock will trade under the ticker symbol AKLI.
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