English Transcript Biopharma Business Acumen.pdf

PROPRIETARY. DO NOT SHARE. Transcript: Biopharma Business Acumen Section 1: Biopharma Business Acumen Welcome to the Biotech Primer Course on Biopharma Business Acumen. This course will be broken into 4 sections. The first section will discuss the basic financing vehicles for obtaining funding for...

PROPRIETARY. DO NOT SHARE. Transcript: Biopharma Business Acumen Section 1: Biopharma Business Acumen Welcome to the Biotech Primer Course on Biopharma Business Acumen. This course will be broken into 4 sections. The first section will discuss the basic financing vehicles for obtaining funding for the drug development process. The second section will discuss management of Intellectual Property for drug products. The third section will explain management of the life cycle of the drug, and the last section will discuss the factors involved in pricing a drug. Section 1 - Financing a Cure Objectives At the end of this section you should be able to: • List the three basic financing vehicles used in the biopharma industry • List the financing sources and when, during the drug discovery/development process, they’re most likely to occur • Understand what each side- investors and companies seeking funding- gives and receives Basic Biopharma Financing Vehicles When discussing basic financing vehicles for pharmaceuticals there are three big areas. The first is grants and contracts. Next, there are equity shares, and lastly, there is debt or convertible debt. We will detail a little bit of all these different possibilities. Grants and Contracts: The Grantors Grants and contracts are used in the very preliminary phase of the drug development. Grants are given by government agencies, state economic development agencies, and nonprofit disease foundations. Each of these has their own motivation for giving grants and contracts. 1 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. The US government agency that gives the most grant money is the National Institutes of Health, the NIH. The purpose of these grants is to advance basic research for universities and to advance innovation for start-up companies. States give grants to entice companies to stay or relocate. The motivation here is to increase the workforce and in turn the tax base. Non-profit disease foundations are interested in finding cures for the disease for which they advocate. Grant Challenges, Advantages, and Requirements Grants have both challenges and advantages that must be addressed. Let’s begin with the challenges. First, grants have narrow topics and are not available for all the funding that is needed by an organization. Grants have specific dates of submission, so planning is important. It is important to have the data, contributors, and writers in place. Grants take time to be reviewed---up to six months for the review process and up to six months for the money to be transferred to the organization. Therefore, keeping an eye on cash flow is essential. Because of the cash challenges it is necessary to keep the management team apprised of how much cash is being spent, when it will run out, the amount of time the project can continue without additional funding sources, and the current plans and opportunities for further funding. The big advantage is grant funding doesn’t dilute share in the company. Nothing needs to be given up. That’s why, especially in the early days, grants are attractive. The only requirement is to stay within the scope of the grant and update the grantors on progress. The fund can be frozen if the terms of the grant are not met. Equity Equity is the most common way of financing most of the established companies. Equity is simply selling shares of a company. There are two types of equities: private equity and public shares in companies like AstraZeneca listed in some market. With public shares you 2 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. open the Wall Street Journal, or you go online, and you know every minute the value of the share of the company because it’s public. In private equity, shares are issued like public shares, however, the information of share price and so forth is not public, so nobody knows a lot of details. It can be more difficult to buy these shares because they can only be purchased privately from the shareowners. When public companies list shares, an investor can simply go to a bank and say, “I want to buy a million shares of this company,” and they will go online, say, “Okay, today the price is x,” an order is placed and once the cost is paid the investor owns the shares, much easier than with private shares. Additionally, only other investors that have a large number of shares in the company will know that someone made that large purchase. So, for the founders of the company, the challenge is always the same. Unless you are extremely wealthy, you will start the company and ask others to purchase shares of your company. But you would like to keep a certain control of the company, and not be totally squeezed out by others purchasing a large percentage of the shares. So, it can be a bit of a balancing act at the beginning of a start-up to set the value of the company. Equity As an example, at the beginning of a company, its value of course is zero. As the value of the company increases the amount of the company that investors receive is less per dollar invested. By calculating how many shares exist, and how much is paid, it is possible to try to keep a certain control of your company over time as its value increase. This is a complex topic, and we will not go into all those details, but the key message here is that when a company has a certain value that can be assessed by different rules. For the people who have created the company, it’s sometimes a struggle to keep control of the company they have created. That’s the principle of dilution. Dilution means that as the company sells equity to investors, the original company founders’ equity stakes are reduced, or “diluted”; this dilution varies and may depend on some premium agreements. Therefore, if the owner of the company brings in new shareholders who put money into the company, and if the owner is not able to put in equivalent money, the part of the company the owner controls will be diluted and reduced. 3 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. Financing Sources: An Overview So different types of financing will not always apply at the same time in the lifecycle of a drug product. At the beginning, during what we call the discovery phase, you have target identification. For instance, a company might identify a gene of importance in causing a disease, and if the gene is switched off, the patient will be cured. This is a very simple example of target identification. This is usually done in universities or research centers, and they often have financing through NIH grants, as I explained, or with collaborations between the university and a certain pharmaceutical company. As the company progresses other funding could be introduced such as disease foundation grants, start-up/biopharma partnerships, venture capital, and public markets. This will be discussed in a bit more detail over the next few screens. NIH Grants and Contracts As mentioned before early funding is often from NIH grants and contracts. NIH grants are the primary basic research funding for non-profit investigators and include seed funding from Small Business Innovation Research SBIR and Small Business Technology Transfer or STTR grants for start-up companies. These grants are distributed as funding with few strings attached, provided that the investigators or start-up company agrees to pursue the aims outlined in their funded grant. The advantage of this type of funding is that funds are non-dilutive, meaning existing owners’ equity is not reduced. The disadvantages of this type of funding are the review and approval cycles are slow, the funding is more geared toward early-stage research than development, and with the exception of SIBR and STTR the uses of funds are controlled largely by academic labs. Biopharma-Academic Collaborations Another early funding method is biopharma and academic investigators partnerships that help to advance basic research. These collaborations involve a biopharma company 4 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. providing funding and/or resources to academic drug discovery programs. The biopharma company usually receives an option to license any results of the collaboration. The biopharma receives IP rights from the university in exchange for future royalties and/or a percentage of equity. The advantages of this type of funding are that they are low risk for both parties and create goodwill between the biopharma and the university. The disadvantage of this type of funding is that there can be a potential for perceived conflicts of interest if participants and investigators are not careful to disclose their stake in the company or university. Disease Foundation Grants Next there are disease foundation grants. These are foundations that fund research and development in specific therapeutic areas. Examples include foundations focusing on a specific disease such as ALS or muscular dystrophy. Or campaigns for the breast cancer research foundation. Each foundation collects money for a very narrow purpose. Another example is the Gates Foundation, which does not focus on specific disease, but on funding projects that are related to the developing world such as prevention of malaria, zika virus, and so forth. These foundations provide grants or equity to reach specific milestones. The advantages of this type of funding are that it gives the company validation and support from the patient community, which should always be of importance for people who are creating products for patients in need. Additionally these funds are nondilutive. The disadvantage of this type of funding is that foundations often have a sense of urgency that is difficult to satisfy given typical drug development timelines and regulatory constraints. It is always great to want the product as soon as possible, but the company must work with the foundation to ensure that realistic timelines are established. Biopharma/Start-Up Partnerships In addition to biopharma/university collaborations, collaborations between small start-up biotech companies and larger biopharma companies can be created. These collaborations 5 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. involve the larger biopharma company providing funding to the start-up in exchange for an option to purchase the program or company at a future date. The advantages of this type of funding are in many cases more freedom for the start-up to develop the project, capital that is non-dilutive, and the fact that the company being willing to invest provides validation for the approach of the project. One disadvantage of this type of funding could be that the agreement might not allow the start-up to partner with any other potential partners, which could lead to missed opportunities to increase funding. Venture Capital Investors Another source of funding could be venture capital investors. Broadly these are funds from professionally managed partnerships that have received investment from large institutions. Such as pension funds or university endowments. There are many different VC groups of varying size. These venture capital investors could also include that is know as “angel” investors; individuals that have enough money that they like to take risk a little bit to help people developing new companies. These investors could invest small amounts or even up to millions of dollars. In most cases these venture capital investors invest larger amounts two million dollars plus of capital and co-invest with other venture funds in syndicates. The advantages of this type of funding are a large amount of capital, and this capital is generally needed for clinical development of a drug, additionally, the involvement of wellknown investors can lend validation and credibility to the drug. The downside of this type of funding is that the venture investor in many cases will try to take a controlling stake in the company if it succeeds, and they are usually looking to achieve significant multiples on their initial investment. Large Private Equity Funds Yet another method of funding are large private equity funds. These are larger funds that invest both in private and public companies, typically at later stages of development. 6 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. Private equity companies have been heavily criticized in some cases because as part of their process, they are loading the companies they have acquired with a lot of debt. If the business is developing wonderfully well, it may be okay, but if there is a downturn or a crisis, then it’s something that can kill the company. This funding can be later stage private equity investments (also sometimes called “crossover” investments) that can be structured as equity or debt, and typically involved investment amounts of twenty five million dollars plus. The advantage of this funding is of course the large amount of capital that allows companies to build infrastructure for multicenter trials and commercialization. The downside, as alluded to before, is that the funding can lead to dilution of the original owners’ stake in the company, and therefore loss of control for company management. Public Markets The last funding type is the public market. This involves raising money and listing the company on a major share exchange such as NASDAQ, Dow Jones, and so forth. This funding is a long process and usually involves later-stage companies that work with multiple investment banks to sell shares and fund development. The amount is usually 75 million dollars or more raised in a biopharma initial public offering, or IPO. The upside of going public is much broader access to capital and liquidity (ability to receive cash in exchange for their equity stake) for company owners and early investors. The downside is that there are significant reporting requirements for taking a company public, and public companies suffer for not meeting development timelines or milestones or just missing analysts’ expectations, both of which will affect share prices. Exit and Liquidity Events In addition to discussing methods of funding for pharmaceutical drugs and start-up biotech companies is also important to discuss how company owners can exit the company in order to cash in on an initial investment. There are multiple mechanisms for company owners to convert their equity into cash (either limited or complete exit of the venture). The first is the IPO, in which the company sells shares in a public stock market. This a very good 7 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. exit door for the previous shareholders. The company owners may then subsequently sell all or part of their own shares for cash. Another method is the sale of the company to a larger biopharma company. In this case, upfront cash milestones are paid and the biopharma company assumes all development responsibility for the product. Lastly, companies can license or co-develop their drugs with a larger biopharma company. The idea, in this case, is for the small company to be able to develop the product without having to use any of their own money, and for the large pharma company, it limits the risks. If the product fails, they just stop the collaboration. They will have lost some money, but they do not have to reorganize anything internally. In these agreements generally, the larger biopharma company either assumes responsibility for development (this responsibility could be limited to a certain indication or geography) or agrees to make payments to the company and the company retains some development rights and responsibilities. Section 1 – Financing a Cure Summary In summary: • The three basic funding vehicles used in the biopharma industry are grants and contracts, debt and convertible debt, and equity shares. • The financing sources differ depending on the size of the company and where they are in terms of the drug discovery and development process. For example, in the early stage of a small company grants and contracts are often used as a financing source. • The riskier the investment, the more incentives an investor will require. Section 2: Biopharma Business Acumen In this section, we will discuss how intellectual property (IP) is managed during the drug development process. 8 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. 9 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. Section 2 - IP Management Of A Cure Objectives At the end of this section you should be able to: • Compare and contrast patents and exclusivity • Explain the criteria used by the USPTO to determine if a claim is worthy of a patent • List and explain key patent concepts What Is A US patent? To begin this section, we first need to define a patent. A patent is a grant from the federal government for a limited time – that is 20 years from the date of the first filing – to exclude others from making, using, selling, or offering for sale the patented invention as defined by the claims of the patent. The claims in the patent are the most important aspect of the patent application, and the patent will be examined and evaluated based on usefulness, novelty, and absence of any obvious claims. Embodiments are a very important part of the patent, and embodiments are tangible expressions of the invention. That means that you describe as precisely as possible something that could be sold based on your invention. The patent application is extremely important for maintaining IP and all factors of the product must be carefully considered in order to ensure that no other company is able to create the drug while under patent. The more specific and tangible the patent can be the better for management of the IP. Key Patent Concepts: Criteria Upon a patent application submission, the patent offices assess whether the invention is acceptable or not based on: Utility: Is the invention useful? Does it appear to work? This criteria is rarely a barrier for new therapeutics, since the drug is naturally aimed at meeting a medical need and there is usually early-stage data to support its function. 10 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. Novelty: Is the invention new? This can be a difficult test for new therapies since scientific literature and other patents may disclose other similar approaches. Other pre-existing similar approaches are called prior art, and the patent applicant must show that the new therapeutic approach is significantly different. A common source of prior art is the investigators’ own previous publications and presentations. Non-obviousness: Given the related prior art, would the new therapeutic approach be obvious to someone who is trained in the field? This can also be a very difficult test for new products since most science is based on incremental improvements on existing work. Exclusivity In The US As mentioned previously, in the US, a patent gives 20 years of exclusivity for the product. Other countries, such Japan or European countries have different exclusivity rules, so these rules should be examined based on where the product will be marketed. A company can also obtain additional periods of exclusivity that go beyond the end of the patent exclusivity that covers a direct product and prevent others from selling generics for a period of time. Additionally, in the US there are other types of exclusivity that can increase the time period of drug patent protection. There is orphan drug exclusivity. An orphan drug is a drug for an orphan disease, which is a disease that targets a very limited number of patients. Because of the limited number of patients, it is difficult if you have several companies selling competitive products to cover the cost of the research, therefore seven years of exclusivity is added to the exclusivity of these products. Other additional exclusivity could apply if the molecule is totally new, if the drug is being tested in pediatric patients, if the drug is a biologic, and so forth. Key Patent Concepts So, to further discuss the key concepts of patents, we have already discussed patent criteria, we will now discuss Method vs Composition Claims, Freedom to Operate, and Ability to Block Others, these will be discussed in more detail over the next few screens. 11 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. Key Patent Concepts: Method vs Composition Claims Patent applicants can either pursue method claims and/or composition of matter claims, these claims differ in what they are attempting to patent about the product. Method claims describe the relationships between drug targets and diseases, new means of administering drugs, or selecting patients. Composition of matter claims on the other had focus on the chemical structure of the drug itself, or, in the case of biologics, the amino acid sequence of a protein. Composition of matter claims are considered more valuable, because the claims are more concrete and finite, versus method claims that are more subjective Key Patent Concepts: Freedom To Operate Freedom to operate, or FTO, is the ability to practice the new invention without violating claims of any other existing patent. If the new invention violates any claim of another issued and non-expired patent, it is blocked; in order to commercialize developers must obtain a license from the existing, blocking patent holder. In practice, the existence of blocking patents is often justification to not pursue a new therapeutic project, as a license may be very expensive or impossible to obtain. FTO is subjective and sometimes difficult to establish at early stages; FTO opinions from patent law firms are relatively expensive and nuanced. Key Patent Concepts: Ability To Block Others Ability to block others is “inverse” of FTO, this is the process of securing patent claims that provide barriers to entry that prevent other competitors from commercializing a similar therapy. Issued, broad, blocking patents are very valuable assets in developing products. Section 2 – Summary In section two we learned: 12 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. • A US patent is granted by the US Patent and Trade Organization. It gives a company 20 years, from the date of first filing, a legal pathway to exclude others from making, using, selling, or offering for sale the patented invention as defined by the claims of the patent. There are other types of exclusivities in the US that are granted by the FDA. These types of exclusivities go beyond the end of the US patent and cover a direct product and prevent others from selling generics for a period of time. For example, orphan drugs receive 7 years exclusivity. • The US Patent and Trade Organization assesses whether the invention is worthy of a patent by looking at the invention’s utility, novelty, and non-obviousness. • The key patent concepts are Method vs composition, freedom to operate and ability to block others. Section 3: Biopharma Business Acumen In this section, we will discuss life cycle management of drug products. Section 3 – Life Cycle Management Of A Cure Objectives At the end of this section, you should be able to: • Compare and contrast a supplemental new drug application and an abbreviated new drug application • Label the parts of a biopharma’s life cycle revenue curve from approval to off-patent /exclusivity • List and explain the various strategies used by biopharma to extend a drug’s life cycle Life Cycle Management And FDA Before discussing life cycle management, or LCM, from the perspective of the company creating and marketing the product, it is also important to note that the FDA also plays a role in regulating life cycle management. This oversight began with the Office of Pharmaceutical Quality or OPQ in 2015. 13 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. The FDA’s vision for life cycle management is “A maximally efficient, agile, flexible pharmaceutical manufacturing sector that reliably produces high quality drugs without extensive regulatory oversight.” The OPQ is a single unit in CDER dedicated to product quality throughout the life cycle of a drug product for all drug products. Specifically, it oversees the Supplemental New Drug Applications or sNDA’s for new drug indications. If granted sNDAs are good for an additional three-year exclusivity. OPQ also oversees the Abbreviated New Drug Applications or ANDAs for first generic to file, which is good for six months exclusivity. An understanding of the FDA’s entire role in LCM is beyond the scope of this course, but it is important to know that there is a regulatory aspect in the Life Cycle Management of drug products, and when planning the management of a product to keep these regulations in mind from the start of the process. Drug Revenue Post Launch When discussing LCM, we can see that drug revenue changes over the life of the product. Before the life of the drug of course there is drug development, pre-clinical Phase I, Phase II, Phase III, and then if you are successful, you can start to market your drug, and it becomes a commercial product. After that the life cycle of the product continues with introduction, growth, maturity, and decline, and then you have a moment where your exclusivity expires, and you can have new competition coming from manufacturers of generic products. Drug Revenue Post Launch Different products will have different life cycles, shown on this graph are a few different pharmaceutical products years after the launch of the product, and the evolution of the drug revenue. We can see that some products like Sovaldi grow in revenue very quickly, achieving above ten billion dollars a year in less than 2 years. Lipitor has also an incredible success, creating revenue of fifteen billion dollars per year before going down because of competition, and later because of generic competition. For other products, growth is slower at the beginning, but continues to grow for a longer time. 14 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. When a company begins to see revenue reaching a peak and declining, strategies will be developed to extend the period during which the product is creating acceptable revenue for the business. There are make ways to approach this problem, and these strategies will be discussed over the next few screens. Types Of LCM: New Indication One way to refresh a product revenue stream is to look for new indications for the drug. When initial clinical trials are performed, they focus on a specific indication that the drug is being used to treat a certain type of cancer or other disease. However, the company’s scientists or even the medical community may have other ideas on how to use the same molecule for other types of disease, or an extended group of patients. If this is the case, additional INDs can be filed to test the same molecules in other markets. The advantages of these new indications are an additional three years exclusivity, the creation of barriers to entry for generics because all drugs are approved by therapeutic area, and a diversified revenue base for any given drug. Another obvious extension is obtaining approval for the drug in other markets outside the country where the product was initially approved, such as expansion from the US to Europe and Japanese markets. Types Of LCM: New Formulation/Chemistry Another method for creating increased product revenue is the creation of a new formulation or chemistry. These could include formulations that: • Lower dosage of the drug to reduce toxicity or cost • Improve the bio-distribution or safety profile of the product • Improve patient compliance with less frequent dosing • Change the route of administration (ROA) for increased convenience or efficacy for patients Types Of LCM: Pediatric Market Exclusivity Another specific group that allows for an increased market for a drug is testing the drug in the pediatric population, because many products are only tested in adult patients. Use of the drug in for pediatrics gives an additional 6 months to existing patents/exclusivity, 15 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. however generally products with no patent life or exclusivity remaining cannot qualify for this extension so this is something to consider before the exclusivity of a product has expired. The advantage of this exclusivity is that it does not only accrue for the product that was studied in the pediatric population, it also attaches to all the applicant's formulations, dosage forms, and indications for products with existing exclusivity or patent life that contain the same active moiety. Types Of LCM: Authorized Generics In addition to new indications, markets, and patient populations for the product the company may also develop or partner with another company to create an authorized generic. Authorized generics are prescription drugs produced by brand pharmaceutical companies and marketed under a private label, at generic prices, these authorized generics must be identical to their brand counterpart in both active and inactive ingredients, whereas other generics created by other companies are only required to contain the identical active ingredients as the brand, other ingredients such as fillers can differ from the brand name product. Therefore, an authorized generic is the exact same formulation as the name brand drug that is created by the same company or that company in concert with another company and marketed without the name brand, therefore allowing the companies own authorized generic to compete with other generics in price, quality, and availability in the generic marketplace. Types Of LCM: Authorized Generics Marketing These authorized generics can be marketed to consumers during and after what is commonly known as “the 180-day exclusivity period”. This 180-day exclusivity is under the Hatch-Waxman Amendments which state that when the first generic (also known as the “first-filer”) challenges the brand’s patent, the FDA may not approve any additional generic competitors until 180 days after the first filer launches its product. 16 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. According to a 2009 Federal Trade Commission report, this use of an authorized generic triggers a slight price decrease for the product, but the name brand company retains revenue, and “first-filer” has reduced revenue. Types Of LCM: Prescription To Over The Counter (OTC) In addition to authorized generics, brand name companies sometime will also release a drug over the counter, or OTC. The advantages of this approach are that it makes distribution of the product more widely accessible, can sometimes be used in price negotiations for new drugs that the company is looking to bring to market, and may be effective competition against generics. Types Of LCM: Obstruct Entry To Biosimilar Or Generic Another way that was previously used to ensure longer revenue streams for products is through obstructing the entry of biosimilars or generics into the marketplace using what are known as “pay for delay” agreements. A pay-for-delay is when a company offers patent settlements that pay generic companies not to bring lower cost alternatives to market, these settlements effectively block all other generic drug competition for a growing number of branded drugs. These agreements have become much less common as they are aggressive, costly, and have a negative impact on the image of the company because they do not encourage healthy market competition. The FTC opposes the practice and since 2001 has filed lawsuits to stop these deals and supported legislation to end such “pay-for-delay” settlements. The first US Supreme court ruling in relation to these settlements came in 2013, in which the court ruled that the FTC can sue pharmaceutical companies for “potential antitrust violations" in the face of such settlements. Section 3 – Life Cycle Management Of A Cure Summary In summary: 17 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. • A supplemental new drug application and an abbreviated new drug application are both overseen by the office of Pharmaceutical Quality. Both are supplements to an application to allow a company to make changes in a product that has already been approved by the FDA. Supplemental new drug applications allow change to a label, to market a new dosage or strength of a drug, or to change the way it manufactures a drug. Abbreviated new drug applications allow an applicant to manufacture and market the generic drug. • Various strategies used to extend a drugs life cycle include new indications, new formulations or chemistry, approval for use in pediatric population, authorized generics, change prescription drug status to over-the-counter drug status, and obstruct entry of generic or biosimilar into the marketplace. Section 4: Biopharma Business Acumen The fourth and final section of our course will discuss the factors involved in the pricing of a drug product. Section 4 – Pricing A Cure Objectives At the end of this section you should be able to: • Discuss the factors involved in drug pricing in the US • List some US drug price influencers • Describe some ways to strategically price a drug product. US Drug Pricing Drug pricing, for many in the biotech industry, is the most difficult topic to discuss. The pharmaceutical industry is view negatively by more Americans than many other industries including oil and gas and the airline industry. This is due in large part to the general public believing that pharmaceutical drugs are overpriced in the US. While there is some merit to the suggestion that products may be overpriced in some cases, it is important to understand the factors involved that require drug prices to increase in order for the company that developed the product to get a return on their investment. 18 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. The US does not have a government-sponsored health insurance plan. Therefore, the Federal government does not regulate drug prices, but allows drug prices to be determined by the free market. Additionally, prescription drugs are often priced differently for different individuals because price is based on an individual’s health insurance coverage. This leads to a very complex system of dug pricing which must be examined in order to strategically price a drug so that the price in beneficial to the company, but also allows access to the product for as many patients as possible. Some factors that determine drug pricing are: • Competition between rival drugs • Market size • Level of drug differentiation and innovation • Costs of drug research and development (R&D) • Cost of drug production US Drug Pricing: Low And High Ends In addition to understanding the factors involved in the list price for a drug product, it’s also important to understand that different prices are paid by different customers in different situations. For instance, on the low end of pricing hospital, institutional, and managed care customers usually pay well below the drug’s list price through their significant purchasing power. Government organizations such as Medicaid, Medicare and the Veterans Administration also pay lower drug prices when they register for the Medicaid Drug Rebate Program; if registered then the registrant’s drugs are included in the Medicaid formularies. On the other hand, drugs sold directly to wholesale distributors and pharmacy chains for individual physicians and patients often pay higher prices. Again, this added complexity makes it difficult to determine the revenue company will see from the sale of the product. US Price Influencers In the US, drug prices are influenced the demand for the product, negotiations with large buyers and the reimbursement level. This is because when a drug is fully reimbursed companies do not need to overcome a higher cost barrier to prescribing. This means 19 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. companies do not have to expend additional efforts to convince physicians and patients that partially reimbursed or non-reimbursed drug should be preferred. Pricing can also be influenced by which hospitals include or exclude drugs from their formularies based on price. How Is Drug Pricing Optimized? There are different ways to optimize the pricing of a drug product. The two main cases are the cost effectiveness case which demonstrates good clinical data, and that the product improves quality of life for patients, or utility data that demonstrates that the product works particularly well in the clinical setting to treat a specific disease. These could all be used to increase the price of the product. Secondly data can be used to make a value case for the drug. In this case data is used to show the cost of non-treatment, and the total cost to the patient including the cost of the drug as well as social care and so forth. These data are used to show that using the drug product may actually be cheaper than an alternative treatment due for instance to more time spent in a hospital or more money spent on doctors’ appointments because of the less effective or less optimal treatment plans compared to the use of the drug. Let’s look at this value-based pricing in a little more detail. Value-Based Pricing (VBP) Value-based pricing, or VBP, involves pricing a product based on the value the product has for the customer and not on its costs of production or any other factor. Value is a function of the price of the best alternative treatments (a reference price) plus the net value of the perceived differentiation of the drug from other treatments. In the context of medicines, VBP reflects both clinical and economic benefits of the drug product. Value based pricing of drugs is an every evolving field and can often be subjective, and the definition of and weight given to clinical and economic benefit varies worldwide, however this is the type of pricing that must be used in the future to determine how a drug will impact the market as well as patients’ lives and be priced accordingly. Drug pricing is a very difficult and complex problem, and it must be addressed and managed very carefully. 20 Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. Strategic Pricing: Specialty Pharmaceuticals Lastly, as the innovations involved in creating new therapeutics continue to explode, specialty pharmaceuticals are becoming more and more common. Specialty pharmaceuticals are used to treat rare and chronic diseases and are both expensive as well as complex. The key characteristics of specialty pharmaceuticals are: • Complex treatment: chronic or rare conditions • Expensive: often exceeding $10K a year • Limited availability: exclusive, restricted distribution • Special requirements: storage, handling, or administration • Ongoing monitoring: for safety and/or efficacy • Risk assessment: have risk evaluation mitigation strategy (REMS) Strategic Pricing: Specialty Pharmacies Specialty pharmacies are pharmacies that were created to account for the increased amount of specialty pharmaceuticals in the industry. These pharmacies are many times needed due to the requirements for these products regarding storage, handling, or administration. Specialty pharmacies offer a number of services including: • Dispensing specialty pharmaceuticals • 24hr access to pharmacists • Benefits investigation • Communication and follow-up with physicians • Coordinates shipping • Patient education • Patient monitoring • Proactive patient outreach for prescription refill and renewal • Prior authorization assistance Strategic Pricing: Specialty Pharmacies Common disease states managed by specialty pharmacies include: • 21 Oncology Copyright 2024 Biotech Primer PROPRIETARY. DO NOT SHARE. • Multiple sclerosis • Rheumatoid arthritis • Crohn disease • HIV/AIDS • Hepatitis C • Rare diseases Section 4 – Pricing A Cure Summary In the final section of the Biopharma Business Acumen on-demand class we learned: • The factors involved in US drug pricing include competition between rival drugs, market size, level of drug differentiation and innovation, costs of drug research and development, and cost of drug production. • US drug influencers include demand for the product, negotiations with large buyers, level of reimbursement, which hospitals and insurance companies include or exclude the drug from their formularies. • Drugs pricing is optimized by cost-effectiveness which demonstrates the drug increases the quality of life for the patient or the drug works better than the current standard of care and value which demonstrates that using the drug will be less expensive than alternative treatments. 22 Copyright 2024 Biotech Primer