Akili: Developing Video Games To Treat Cognitive Impairments (NASDAQ:AKLI)

Akili, Inc. (NASDAQ:AKLI) identifies itself as a “digital medicine company,” which is developing video games to treat cognitive disorders. The FDA has approved its game EndeavorRx for the treatment ADHD.

The company has the goal of treating other brain-related conditions, such as “autism spectrum disorder, multiple sclerosis, major depressive disorder, post-traumatic stress disorder, cognitive impairments in COVID-19 survivors (COVID fog), traumatic brain injury, cancer-related cognitive impairment and Alzheimer’s Disease, among others.”

In this article, we’ll look at some of the challenges the company faces and the variables associated with this particular new field of medicine.

Overview of the company

AKLI went public in August 2022 via a SPAC, raising over $160 million in capital at the time. It was originally incorporated as Social Capital Suvretta Holdings Corp. in the Cayman Islands on February 25, 2021.

In August 2022 it incorporated in Delaware with its main executive office now located in Boston, Massachusetts.

The self-stated purpose of the company is to pioneer and develop cognitive treatments using video games as the means to that end. The idea is to have its patients engaged in what is considered a form of entertainment even as it treats the condition.

As for how it is said to work, the game is built to stimulate parts of the brain used to focus attention on something.

The company says in the U.S. alone, there are approximately 85 million people that have cognitive impairments.

In June 2020, the FDA approved AKLI’s EndeavorRx for the treatment of ADHD in children aged 8-12. It was the first prescription video game treatment related to cognitive conditions given the go-ahead by the FDA. It’s listed as a Class II medical device. Also, in June 2020 it received Conformité Européenne Mark certification for EndeavorRx, meaning it could be marketed to “European Economic Area member countries.”

The U.S. ADHD treatment market is valued at $10 billion, according to management, with over 70 million prescriptions being written annually. That overall addressable U.S. ADHD market is 10.8 million, the company said, citing data from the U.S. Centers for Disease Control and Prevention. Of that, EndeavorRx is cleared to treat 1.8 million patients in the 8-12 age group.

Backing, adoption and prescription results

The company makes it clear that EndeavorRx isn’t a standalone treatment, but rather a complement to medication used for treating ADHD in children.

As for authorization from the FDA, after 5 clinical studies, including over 600 children diagnosed with ADHD, it was found that EndeavorRx helped improve objective attention in Children in the age group 8-12. The children played the game for 25 minutes a day, 5 days a week, over a period of 4 weeks. More recently, a trial showed that after adding another month of treatment, patients showed more improvement.

It should be understood that the clearance by the FDA is associated with a process related to low-risk treatments.

After two months of treatment, 68 percent of parents reported that their children showed improvement from cognitive impairments. As for the children, 73 percent reported improvements after undergoing the treatment. As for adoption, in the second quarter of 2022 under 1,000 prescriptions had been written for EndeavorRx, with only 3 percent of them getting reimbursement from insurance companies. That means under 30 treatments were paid for by insurers. Costs for the treatment are $450 a month for those covered by their insurance, and $99 a month for those without coverage; a pretty hefty price tag for most people.

That leads to a major problem the company has to solve, which is attrition related to the treatment. In other words, does this treatment require ongoing usage to make a difference with patients, or does it help them permanently after a month or two? How many patients and/or insurance companies would be willing to continue or pay for the costs of the game?

It’s possible that by going after the ADHD market, which on the medication side does allow for ongoing coverage, it could result in the same for patients treated with the game.

Major challenges the company faces

The key to long-term success for AKLI to me is concerning the baseline and benchmarks it works from and would have to prove. Other than general feedback from parents and children, is there a way to qualify and quantify the results in order to overcome the obvious and legitimate skepticism connected to this time of treatment?

Another factor to consider is how does one differentiate from the blurring of lines between EndeavorRx and other video games used by children? For example, EndeavorRx is used on Roblox. Children could possibly use other games on the platform and draw the same conclusions they did from using EndeavorRx. Under that scenario, it would be difficult to make distinctions between the two.

I understand that specifically because I have a grandson that is autistic, and uses all sorts of gadgets and games to calm him down, relax and be content. Again, differentiation is going to be a key factor for AKLI in order to distinguish itself from other products used to treat various cognitive conditions.

Another obvious risk is competition. There are so many companies with deep pockets developing video games that they could easily go through a similar process AKLI did with the FDA and win approval for their games, if they choose to go that route. On the other hand, since the market isn’t huge, the larger players may not consider it worth the time and effort to go after that market.

That said, if they start to look at the overall size of the cognitive impairment market, they could start to show interest. In that case, they could, because of the low risk factors associated with these types of treatments, roll out a number of video games targeting other brain issues.

Last, it’s going to take time to gather enough data to convince prospective parents and patients that using this type of game will be beneficial and compelling for a prolonged period of time. That means attracting a much larger pool of users, which will cost money to expand the size of the customer base it serves.

On the positive side, if AKLI is able to position itself as a market leader in this technology by its performance, it could easily be an attractive takeover candidate by a larger company. Either way, it still has to show a lot more promise in order to generate that type of attention.

One thing the pandemic showed was people that were experiencing anxiety and depression were encouraged to play more video games. The question that remains to be answered is whether or not it helped people because it kept them from sitting around and thinking too much, or if some of the games themselves contributed to the positive effect. That’s the big question AKLI must answer if it is to grow sustainably in the future.

Company strategy

The strategy of AKLI is to further solidify its foothold in the pediatric ADHD market segment. From there, it wants to target other areas of the ADHD population.

Next, it wants to leverage its technology to address other areas of “mental health and neurology conditions.” At the same time, it’s working on the development or pursuit of new technologies that will treat other cognitive conditions. That would of course vastly increase the customer base it could treat. Finally, it wants to advance the treatment paradigm by developing new ways of assessing cognitive issues. While it’s obvious AKLI is working on scaling its business, it also must be able to show it can raise capital in order to effectively implement its strategy over the long haul.

Some of the numbers

The company reports it has had net losses and negative operative cash flows each year from the time it was formed. For the quarter ended June 30, 2022, AKLI had a net loss of $22.5 million, up from the net loss of $14.8 million in the same quarter of 2021.

For the full-year 2021, the company showed losses of $61.3 million, significantly higher than the $25.6 million in net losses for 2020. As of June 30, 2022, the company showed a net deficit of $275 million. For the first calendar half of 2022, the company used $41.4 million in net cash for operations, up $20.2 million from the $21.2 million spent in the first half of 2021. Management stated these costs are expected to jump much higher as it continues to invest in R&D, its platform and the development of technology. Marketing expenses will continue to climb as well.

AKLI needs to win approval for more products in its pipeline in order to garner more financing going forward.

Conclusion

AKLI is an interesting company from the point of view of developing games that are designed to target various parts of the brain in order to treat specific cognitive impairments.

While receiving approval from the FDA for EndeavorRx to treat ADHD in the 8-12 age group, the number of people adopting the treatment, so far, are very small, and even with the approval, prescription payments are extremely low at this time.

Even though it has a pipeline that could be approved because of the low bar from the lack of any meaningful risks, it has yet to be proven whether or not that will translate into growing revenue. So far with approval for EndeavorRx by the FDA, it hasn’t been able to do so at a high level.

This is a highly speculative company that trades at a robust $2 per share that I think is likely to drop much more if it isn’t able to roll out more video game treatments targeting not only other ADHD age groups, but also other cognitive impairments that would provide more revenue streams outside of its current one. AKLI is an interesting company from the technology point of view, and if it can prove, over time, that its video games really can improve various cognitive conditions, it could be a sleeper stock in the long term, assuming it can raise enough operating capital to survive.