Issue 226

Welcome back to E&O: SaMD, a paying subscribers-only weekly newsletter focused on the world of digital pharma products, prescription digital therapeutics and other FDA-regulated digital health.

 E&O: Software as a Medical Device

I’ve spent the better part of the week digging into the Virtual Therapeutics-Akili M&A news, so I’m going to skip the short news blurbs this week. Read on for some details and analysis of the latest digital therapeutics exit. Was this forwarded to you? Increasingly, E&O is a covered benefit from many forward-looking digital health-focused employers. Why not yours? Consider a Business or Enterprise subscription today. Click this link to become a paying subscriber (there are personal plans available too).

Details: VR-focused startup Virtual Therapeutics to acquire Akili for (no more than) $35 million in cash

I broke this write-up on the impending VThera-Akili deal into a post focused on the details of the transaction — some of which I haven’t seen posted elsewhere — and a post that digs into Virtual Therapeutics (below).

Acquisition price is (no more than) $35 million in cash: Most of the headlines about this deal peg the price tag at $34 million but it will likely be closer to $35 million. The merger agreement actually makes clear that the final price must be no more than $35 million and specifies which categories of shares will receive how much of that aggregate amount:

• $34,169,338 with respect to holders of Company Common Stock,
• $0 with respect to holders of the Company Warrants,
• $39,956 with respect to holders of Company Stock Options,
• $790,706 with respect to Company Restricted Stock Units, and
• $0 with respect to any Earnout Shares;

If my math is right — that comes out to $35 million exactly.

Chamath gets more than 40 percent: Chamath Palihapitiya, the billionaire who led Akili through the SPAC process to become a public company, has agreed to sell his shares in the company as part of the transaction. Via various entities he owned more than 33.7 million shares in the company. He is set to sell them for about $14.6 million.

Is this the biggest prescription digital therapeutics acquisition ever? It certainly says something that a $35 million deal might be the biggest M&A for this category. Sheesh. Pear was $6 million. Better Therapeutics’ exit was undisclosed but I’d believe it if someone told me it was less than this one from Akili. (Feel free to tell me if you know!)

How will Virtual Therapeutics fund this offer? The agreement makes that clear: It will use Akili’s cash on hand. “Funding the Offer. [Virtual Therapeutics] shall be entitled to use or cause to be used some or all of the Closing Cash in order to pay the Offer Price with respect to each and any shares of the Company Common Stock that Merger Sub becomes obligated to purchase.” One of the stipulations in the agreement is that Akili must maintain a substantial amount of cash on hand up until the time of the closing. (Remember: The company had a little more than $62 million in cash at the end of March.) The deal can be terminated if:

(I’m not a lawyer, but that’s pretty unusual for a transaction like this, isn’t it?) The other related financial metric that Akili needs to abide by between now and the time of the closing is to ensure that its Net Working Capital doesn’t fall below ($1.8 million) — that’s negative $1.8 million — for a close before July 31st or below ($2 million) — again, that’s a negative number — for a close after July.

Termination fees: Akili would have to pay Virtual Therapeutics a $1.05 million termination fee if Akili doesn’t go through with the merger. Akili would also have to pay Virtual Therapeutics up to $175,000 if Virtual Therapeutics decides not to go through with the merger.

Akili will become a subsidiary of VT: This shouldn’t be a surprise since Akili is responsible for developing and maintaining FDA-regulated software as a medical device (SaMD) and VT, historically anyway, has not.

Akili employees are encouraged to continue to support Shionogi: Akili is still due to receive payments from Japan-based pharma company Shionogi related to the rollout of the Japanese version of AKL-01. I wonder if VT considers additional layoffs or restructuring once the Shionogi payments are all in and this partnership ends.

If VT lays off any Akili employees after the closing: Akili told its employees that “Virtual Therapeutics has agreed that any Akili team members impacted in connection with any potential post-closing workforce reduction as part of a reorganization of the combined business would be entitled to transition packages that are similar to those offered to those impacted in Akili’s restructuring announced in April 2024.”

The VT management team will lead the combined company: Akili also made clear to its employees that VT’s President and CEO Dan Elenbaas will lead the combined company. (It doesn’t seem like VT has a deep bench of executives leading it. Elenbaas may be the only C-level exec there?) This note certainly implies no remaining Akili C-suite execs are planning to join VT.

Background on the buyer: Who is Virtual Therapeutics? Virtual Therapeutics should be a familiar name to longtime E&O readers. I wrote about them in my deep dive into UnitedHealth Group’s digital health initiatives back in December 2020. UHG acquired Virtual Therapeutics when it bought VT’s parent company, digital health incubator Savvysherpa back in 2017. In 2020, UHG-owned Savvysherpa held about 67 percent ownership in VT. As recently as Q4 2023, UnitedHealth Group affiliated companies owned almost 84 percent of Virtual Therapeutics: Optum Labs: 5.6 percent UnitedHealthcare Services: 36.6 percent UnitedHealth Group Ventures: 41.7 percent STAT News reported this week that, according to an unnamed source, UHG had sold its holdings in Virtual Therapeutics back to the company at the end of 2023.

Who is funding VT? Is it bootstrapped? I did a little digging and found that Virtual Therapeutics CEO Dan Elenbaas and (assuming someone in his family) Michelle Elenbaas created a new holding company called Immerse Ventures in November 2023. Given the timing and STAT’s reporting, it seems likely that holding company now owns some or all of UHG’s former shares in VT. Prior to VT, Elenbaas had a successful run as a software and gaming entrepreneur. He then spent a few years at a failed startup focused on the gig economy called ClearShift, which he worked on while also working with UHG on VT. His biggest success to date was Amaze Entertainment, a video game developer he started up in 1996 and sold to PE giant Francisco Partners in 2006. Here’s his summary from LinkedIn:

Retail sales is one thing, but I dug up some of Amaze’s annual revenue figures. Again this is Elenbaas’ former gaming company. Here are a few revenue figures I found:

• $5.2 million in revenue in 2000
• $12 million in revenue in 2002
• $18 million in revenue in 2004

Assuming Amaze got up to around $25 million or so by the time of its acquisition in late 2006, Elenbaas likely had a good exit. He had also sold at least one other successful startup prior to Amaze. Was his early success in gaming enough to bootstrap the UHG buyback for VT and whatever this Akili deal will end up costing him? Maybe? (Prices are certainly low right now.) The only other investor in Virtual Therapeutics that I am aware of is angel investor Steve Altman, the former vice chairman and president of Qualcomm. Altman was listed on VT’s website as an investor a few years ago. It’s possible that he — like UHG — is no longer an equity holder in the company.

Virtual Therapeutics’ Products Here’s how Elenbaas described Virtual Therapeutics’ progress as of mid-2023:

That was 11 months ago and the company has yet to make any product announcements, but its website and its partners’ websites share quite a bit about what they’ve been up to so far. VT has quietly piloted a handful of virtual reality-based “mental fitness” programs that it hopes to market to employers and healthcare providers. Here’s how Akili explained their new parent company’s business to their employees:

That language leaves out some of the phrases VT typically uses to describe its own work: “mental fitness” and “VR wellness games and experiences” among them. VT has recently branded its suite of programs for employers as “Breakthrough”. More on those below, but first, let’s dig into a few older pilots to get a sense of where VT has been.

VT’s 2019 pilot in Iraq funded by Cisco: One of the few Virtual Therapeutics’ pilots that has been discussed publicly is the company’s work back in 2019 with non-profit Mercy Corps to help people who experienced trauma in Iraq. Cisco funded the pilot as part of a donation to Mercy Corps:

VT’s pilot at Optum-owned Reliant Medical Group in 2022: Another pilot that I managed to dig up also used the VR-based Bloom program but with a patient population at Optum-owned Reliant Medical Group in central Massachusetts. This was in 2022 when VT was still majority-owned by UHG. The 8-week pilot equipped patients with VR headsets to meditate with help from VT’s Bloom program. The participants were asked to do one session a day, at least five times a week and could personalize the VR experience by choosing different virtual environments to meditate in.

Virtual Therapeutics began to explore mobile versions of their VR-based therapeutics at least a year ago: Bloom aims to reduce stress and anxiety while building emotional strength and resilience via focused attention and mindfulness techniques. Interestingly, one year ago a demo video focused on Bloom revealed that Virtual Therapeutics was developing a mobile-version of Bloom for times when a VR headset was not convenient to wear.

Happy Happy is another VT program focused on positive, happier thinking: This virtual reality-based program used Cognitive Bias Modification (CBM) to focus the brain’s automatic responses to be more positive. The repetitive tasks in Happy Happy are to select positive faces in a group of negative and neutral faces.

Virtual Therapeutics has a focus on employers. While the company has done very little in the way of marketing and it’s not clear that it has any paying customers yet, VT’s demo videos (plus a single appearance at an employee benefits-focused mental health conference) indicate that it now views employers as its main customer. As noted above, VT’s mental fitness suite of offerings is called Breakthrough: Unlock your full potential. This suite of apps includes Bloom and Happy Happy, which are mentioned above, along with programs named Travel-To, Sights & Sounds, and Land’s End. Here’s what each program focuses on:

Bloom: Resilience, mindfulness, empathy, self-awareness.

Happy Happy: Resilience, self-compassion, playfulness.

Travel-to: Mindfulness, empathy, curiosity.

Sights & Sounds: Mindfulness, curiosity, playfulness.

Land’s End: Empathy, curiosity, playfulness.

And here’s VT’s pitch to employers:

Based on LinkedIn, only 27 people currently work at Virtual Therapeutics. Almost all of them have backgrounds in developing games or virtual reality software. The company employs one nurse with a PhD who leads its clinical R&D and one product lead who previously worked at digital health weight loss company Calibrate. VT likely relied on UnitedHealth Group for its healthcare expertise while it was still owned by the healthcare behemoth. Akili hinted at what VT sees in them when it explained to its employees why the combination with VT makes sense:

After its most recent round of layoffs, however, I’m not sure the skeleton staff that remains at Akili has the above-reference proven ability to develop and obtain regulatory approvals? That latest round of lay-offs eliminated its marketing and medical affairs teams.

Full circle for Akili? Remember: Back in 2012, Matt Omernick helped co-found Akili after spending more than 8 years working at LucasArts leading the development of various Star Wars video games. Unlike Virtual Therapeutics, Akili has sought out and managed to capture significant press coverage from its earliest days, and those stories almost always mentioned the digital therapeutic company’s connections to Hollywood and big name game franchises like Star Wars. Akili may be reconnecting with its roots by merging with Virtual Therapeutics, but it isn’t getting acquired at $0.43 cents per share because it lacked world-class video game developers. Akili had that on day one.

Before STAT broke the news that Virtual Therapeutics was no longer majority-owned by UnitedHealth Group, I was (a little) excited about this acquisition for Akili. It seemed like a small breakthrough for the category, which has struggled for so long with payers, to have the backing of UHG — the largest healthcare company in the world. But UHG divested. While some Akili shareholders might be happy it’s over (and that it didn’t end in a Pear-like bankruptcy), based on the limited information we have currently, it’s unclear to me how this combination will solve any of Akili’s problems. And I’m not sure it solves any of VT’s either.

Links to E&O’s reports, databases, newsletters

Click below for dedicated pages for each of those categories:

• Read through the long-form E&O research reports here.
• Search and sort the E&O databases here.
• Skim more than 300 past issues of E&O newsletters here.