Hi friends,

Two days ago, Cerebral acquired Resilience Lab.

You’ve probably seen that news. But what is this deal really about?

Why did it happen, and what can we expect from the new Cerebral?

Over the last few days, I spent some time with the leadership of both Cerebral and Resilience Lab to learn more about what’s next for the combined company. In this week’s edition of The Hemingway Report, I share my analysis of the deal.

I’m increasingly aware that many of you are short on time. So if you want the top-level insights from this edition of The Hemingway Report, I’ve summarised them below.

• Cerebral goes on offense. After a rebuild period, Cerebral are back making moves. They’ve been quietly re-establishing payer relationships and adding a therapy offering, all while continuing their focus on psychiatry and medication management. With some cash left in their bank account from their $300M SoftBank raise, they are now going on the offensive.

• Resilience Lab looks to scale its supply-side solution. Resilience Lab has built some interesting assets to solve the supply-side challenge of mental healthcare. Their Resilience Institute makes it easier to train and certify early-career therapists. Their Resilience Methodology improves consistency and quality of care delivery. This makes clinician acquisition and retention easier and provides differentiation from other organisations. However, they were not immune to the challenges of operating as a sub-scale mental health business and wanted a way to give more leverage to their unique assets.

• This deal is based on delivering high-quality, collaborative care at scale. The thesis for this deal is straightforward, but not easy. In short, it looks like this… Combine the assets of the two companies to provide higher quality, collaborative care. Use that to deliver superior outcomes. Build a brand on those outcomes. Combine that brand with Cerebral’s D2C muscle to acquire clients. In parallel, combine the brand with Resilience Lab’s Institute to acquire clinicians. Sell to payers based on the superior outcome and ROI data. Use this to get to a scale and ultimately, better economics.

• Execution will determine success. This thesis makes sense on paper, but will require top-class execution. They’ll need to balance delivering high-quality care with delivering the strong growth needed to reach scale. They’ll need to do this whilst maintaining good margins. Finally, for long-term success, building a dominant brand will be critical. This won’t be easy. But it’s possible. If they pull it off, they’ll be in a category of their own. That would be quite the story.

That’s the TLDR, but if you want the back-story and analysis, keep reading.

Let’s get into it!

Cerebral goes on offense

Cerebral has a complicated history. They were founded to make psychiatry and medication management services more available through telehealth. Along that journey, they raised over $460M (including a mega-round of $300M from SoftBank in 2021). They were cashed up and growing fast. But some pretty serious legal challenges put a stop to that growth. Cases with the FTC and others damaged their brand and relationships within the healthcare community, especially payers.

For the last couple of years however, they’ve been quietly rebuilding the company. They’ve replaced their leadership, overhauled their processes, slimmed down their operation and focused on cash-pay clients. Now, they are back on the offensive; they’ve rebuilt payer relationships, added their own therapy offering and with this deal, acquired a very interesting strategic asset, in Resilience Lab.

Resilience Lab looks to scale its supply-side solution

Resilience Lab was built to solve the supply-side challenge of mental health care. Founders Christine Carville and Marc Goldberg believed that clinician training was broken. We have good reason to believe they were right - according to a Motivo whitepaper, only 43% of Master’s level graduates achieve licensure.

We’ve got a huge shortage of clinicians, and yet, less than half of those with relevant Master’s level degrees get the required licensure to practice as a clinician. The Motivo white-paper shared an interesting breakdown of why these people didn’t obtain licensure.

Resilience Lab saw these problems and set out to solve them. To do so, they developed their own training institute, The Resilience Institute. The Institute provides in-depth training, supervision, support and adequate case loads to help more therapists become fully licensed and start practising. They wanted to make the process simple, whilst also increasing the standard and consistency of care delivered by the clinicians they train.

The Resilience Institute gave Resilience Lab a few important capabilities. First, it gave them the ability to recruit and retain clinicians. In a competitive clinician market, this is important. It also gave them better unit economics - early career professionals are less expensive. Finally, it allowed them to promise higher quality, more consistent care to patients and payers. Their clinicians are trained in and practice The Resilience Methodology, a clinical methodology unique to Resilience Lab that they claim improves outcomes.

They had a lot of success with this model, especially in the Northeast of the US. But training and retaining high-quality clinicians is hard to scale - you need a strong pipeline of clients to fill clinician case loads and also enough operating leverage to invest in all the learning and supervision support to train these clinicians.

Resilience Lab felt they had a unique and interesting model to solve important supply-side issues whilst also improving the standard of care. But they needed to find a way to get scale.

A deal to deliver high-quality, collaborative care at scale

Why is this deal happening, and how might it create value? Here’s my thesis;

• Combine Cerebral’s psychiatry and medication management with Resilience Lab’s therapy service to create a collaborative care offering.

• Implement the Resilience Lab Methodology to train all clinicians in a standardised, high-quality clinical methodology.

• Sprinkle in some of Cerebral and Resilience Lab’s technology to facilitate these collaborative care teams and to better measure outcomes.

• Use this combination of collaborative care + Resilience Methodology-trained clinicians to deliver high client retention, and ultimately, better client outcomes.

• Build a brand around these better outcomes and become a true, high-quality and consistent provider.

• With this care model, drive growth by;

  • Acquiring clients using Cerebral’s D2C muscles, combined with the high-quality brand

  • Acquire clinicians using the Resilience Lab Institute, combined with the high-quality brand

  • Acquire payers by demonstrating more consistent, higher quality care with better outcomes.

• Use this growth to reach a scale where they have enough operating leverage to be profitable.

On those grounds, I think this deal makes sense. It’s simple, sure, but that doesn’t mean it’s not a compelling story.

In the current market, neither business can sustainably operate as a sub-scale provider. And as care models converge, those without a collaborative offering will struggle to compete. And, even if you have scale and a collaborative care offering, the only way to really stand out is by differentiating on outcomes. This deal gives the new Cerebral the chance to deliver on all three. At least on paper.

Required: World Class Execution

Like most deals, creating real value here and delivering on the thesis relies entirely on execution. Let’s break down the key areas where Cerebral will need to execute effectively.

Delivering on Quality

Yes, Cerebral now have the workforce to deliver collaborative care. They are also acquiring a unique clinical methodology that has demonstrated strong client retention and outcomes. Resilience Labs’ technology (including that which they acquired from OptionsMD last year) will be added to Cerebral’s infrastructure. This will all support delivering better outcomes. But that does not guarantee that they will actually deliver the kind of care that can move the needle here.

If we were to design the true gold standard for mental healthcare, it would likely also include integration with PCPs, as well as social workers and peer support services. Cerebral also plan to remain an almost entirely virtual care provider. I think that may have some limitations to the standard of care they can provide for all population groups - there’s a reason some providers are pivoting away from virtual-only services, back to hybrid offerings. Perhaps they will add these services in future, but that will require more investment. They’ll need to first demonstrate that they can deliver superior clinical outcomes with what they have today.

I like their ambition to push the bar on quality and outcomes, and they have some important assets to deliver on it. I’m very interested to see data on what they can actually do for clients.

THR Pro Membership

Quick one for you, we’ve recently opened applications for the next cohort of our vetted community, a space for those shaping the future of mental health. One member described it as “a way to get through the inevitable discouragement and exhaustion of a healthcare career”. Lol. This may be true, but it’s also full of lots of smart, passionate people, collaborating on important problems.

Applications are open to THR Pro members, so sign up today and apply. Of course, as a THR Pro Member, you’ll also get access to all of our Pro Tier content, analysis and events.

On the commercial side, Cerebral must be careful not to develop an upmarket cost base without upmarket pricing. Longer term, if they can deliver superior outcomes and ROI, the bet would be that they can translate that to better pricing. But in the short term, this is unlikely, especially given the current condition of the market. The challenge will be to deliver high-quality care with sustainable margins in the short term.

Reaching scale will help with that.

Reaching Scale (and better economics)

Cerebral now has over one hundred million covered lives. They plan to activate these using Cerebral’s D2C muscle and serve them using their new collaborative care offering. They are also betting that the improved retention from Resilience Lab’s Methodology will increase the Lifetime Value of these clients.

There’s a believable growth model. It has assumptions, sure, but it’s believable. The question is whether it can get them to scale quickly enough to start benefiting from the improved economics.

What sort of scale is actually needed to reach profitability? Well, we can look at some peers for clues.

This is Talkspace’s performance in 2024, delivering a -2.4% operating margin on $188M of revenue from one hundred and eighty million covered lives. In the last quarter of 2024, they finally reached profitability.

Sure, Talkspace could be more efficient, but how much more? They’ve already gone through substantial cost-cutting.

In 2025, Talkspace will deliver over $200M in revenue at a roughly 6% Adjusted EBITDA Margin, but based on recent quarters’ earnings, they’re actually back to making a net loss again. So even at this scale, and after all the efficiency measures Talkspace have implemented, they’re still struggling to eek out margin.

Lifestance is seven times larger than Talkspace, expecting $1.4B in revenue this year. They expect single-digit adjusted EBITDA margins and might just scrape an operating profit.

Both Cerebral and Resilience Lab have gone through cost-cutting of their own in recent years. If they both enter this new phase as lean, efficient operations that can get even more operating leverage as a combined entity, then perhaps their economics will look better than Talkspace and Cerebrals. Their challenge will be to maintain those economics whilst also driving growth.

Client Acquisition

You need scale to get decent economics as a mental health business. But to get to scale, you need to acquire customers. Acquiring customers costs money and is one of the biggest challenges for many mental health organisations right now, big or small.

Resilience Lab will bring some ability to drive PCP referrals, but they’ll need to find ways to scale this for it to be meaningful.

Cerebral’s main client acquisition strategy will come from leveraging its D2C muscle. Cerebral has acquired hundreds of thousands of clients over the years and have an ability to run paid ads that drive self-referrals. But unless they can create a truly differentiated brand, they won’t have much competitive advantage in these channels.

The brand will come from their ability to deliver superior outcomes and their ability to communicate that positioning to potential clients. I really think clients are fed up with low-quality care that doesn’t improve their lives in a meaningful way. This is the opportunity Cerebral can go after, and I’m quite interested to see how they package the Resilience Methodology for client-facing communications in the pursuit of this opportunity.

If you look at their home page, it now has this tagline: “Relief today, Resilience tomorrow”. This is clever and I like it.

But building a brand to drive meaningful improvements in acquisition takes time. Cerebral will need to drive short-term growth as it tries to reach scale. But they must also prioritise long-term brand building. That will take years.

Executing all of this will not be easy. But the Cerebral team might just be the ones to pull it off. Their new leadership has completed an impressive turnaround already. They strike me as having both strong clinical rigour and serious operating capabilities. Resilience’s leadership will add nicely to this mix.

For both teams, the real work starts now.

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That’s all for this week. As always, reply and let me know what you think about this deal.

Keep fighting the good fight!

Steve

Founder of The Hemingway Group