Despite subdued telehealth funding broadly, the virtual substance use disorder (SUD) treatment industry is an attractive opportunity for venture capital investors, representing a market opportunity of well over $10 billion.
While virtual SUD treatment cannot be a replacement for all types of addiction care, addiction digital therapeutics represent a significant opportunity for market expansion, according to Pitchbook’s Q4 2023 digital health report.
“I expect we will see several VC deals in the virtual SUD space as the subsector emerges as a key market opportunity in specialty telehealth even as telemedicine funding remains muted broadly,” Aaron DeGagne, senior health care analyst at Pitchbook, told Addiction Treatment Business in an email. “Ironically this report was published just a few days before Pelago announced a $58 million round – so the thesis has already started to play out to an extent.”
Pelago’s newly raised capital will aid its product development and expand its clinical capabilities.
Venture capital interest in the digital SUD space has declined since 2021, when interest in virtual health peaked in most categories. Still, several major deals were finalized in 2023, including Affect Therapeutics’s $18 million raise in July, Kyros’ $10.5 million Series A and NorthStar Care’s $6 million seed round.
The digital SUD treatment market expanded significantly when the U.S. Food and Drug Administration (FDA) approved Pear Therapeutics’ reSET digital therapeutic in 2017, according to the report.
“I’d also highlight that while virtual SUD is not/cannot be a full replacement for all aspects of in-person and drug-based SUD care, there is a clear opportunity for virtual SUD digital therapeutics that can expand the market,” DeGagne said.
Though more virtual SUD therapeutics will be considered for FDA clearance, investors will likely be shy of these business models because of Pear’s demise.
The company filed for bankruptcy in April 2023 after its stock price plummeted from $10 per share to roughly $0.22 per share.
Exit opportunities for startups are now nebulous in light of Pear’s stock market performance.
Addiction startup PursueCare acquired Pear’s technology in late 2023, including reSET, designed for general SUD, reSET-O for opioid use disorder (OUD) and reSET-A for alcohol use disorder (AUD).
“Pear’s reSET product is now unlikely to gain meaningful traction following Pear’s bankruptcy in 2023, when the firm’s tech assets were acquired by a range of digital treatment providers for about $6 million in a May 2023 bankruptcy auction,” the report read.
DynamiCare is the only provider besides Pear to have received FDA approval for digital therapeutics, one designed to treat alcohol use disorder (AUD) and the other designed to aid smoking cessation during pregnancy.
While digital therapeutics may be increasingly scrutinized, hybrid approaches to SUD care that include in-person and digital elements have become more popular.
In-person SUD providers aware of this trend could explore the acquisition of a virtual SUD startup, according to the Pitchbook report, modeling themselves after weight management company WW (formerly Weight Watchers) which acquired the virtual weight loss platform Sequence in early 2023.
The report highlights multistate providers who could be potential acquirers of virtual SUD startups, including Caron Treatment Centers, Acadia Healthcare, BayMark and Groups Recover Together. Other virtual behavioral health providers, including Headspace and Boulder Care, could also look to acquire a virtual SUD company.
“I expect to see at least a few partnerships between virtual SUD platforms and established telehealth providers, with the Bicycle Health/Talkspace partnership an early example of this,” DeGagne said. “More specifically, I think there’s a good chance Headspace could come out with a virtual SUD partnership (or M&A) sometime this year as the company called out virtual SUD as a potential growth area during the J.P. Morgan conference this year.”
Virtual SUD platforms fully covered by payers, as opposed to consumer-facing models, represent the opportunities with the highest margins.