Pricing and reimbursement: Knowing your value up front is key to future dealmaking
Increasingly healthcare providers and payers are called upon to cut their costs. This means that innovative medical products are not scrutinized just for safety and efficacy, but also for the impact they may have on payers’ top and bottom lines. In the past, many life science companies waited to consider pricing and reimbursement until shortly before they went to partner or market. But in today’s changing health economy, that strategy is no longer workable.
Patrick Terry, Principal at Scientia Advisors
“It is imperative that companies incorporate pricing and reimbursement strategies into the earliest stages of the product development cycle,” said Patrick Terry, Principal at Scientia Advisors. Terry, who co-founded the publicly traded personalized medicine company Genomic Health [Nasdaq: GHDX] and a variety of private biotechnology companies, now heads Scientia’s pricing and reimbursement practice.
According to Terry, 80% of new life science ventures fail, often because their founders do not adequately evaluate the factors of market access, pricing, and reimbursement challenges at the product concept stage. Some of these companies spend multiple years and tens of millions of dollars developing a product, only to find that there is no sustainable market for it. Others lose out in the partnering process because they do not have solid information about their products’ value or because they learn in the partnering phase that the product is not reimbursable.
“I have seen many great business plans and commercialization strategies simply break down at the partnering step. Sometimes, founders want to develop products for altruistic reasons—that is, to help patients and improve healthcare—which I wholeheartedly support,” said Terry. “But they may feel uncomfortable discussing business aspects in early stages and, as a result, adhere to an outmoded model in which the research and development group passes products off to the sales and marketing group, to be treated as a clear and distinct organizational function. But certain decisions made in the R&D phase can actually kill off an otherwise viable product by making the product costly or unreimbursable. This can make it difficult to find customers—and impossible to find a partner.”
Evaluating product viability is key
To evaluate a medical product’s viability in the marketplace, Terry said, a company must fully understand the clinical care pathway, the “disruptive” impact the product could have, and the economics that will be involved. And the company must answer four fundamental questions early on:
(1) Will introducing the product add costs to care?
(2) Will it reduce costs?
(3) Will it be cost-neutral?
(4) What impact will it have on patient outcome?
Statistical analysis of the answers will dictate the company’s reimbursement strategy, inform a partnering approach, and allow price negotiation based on a product’s value rather than its cost.
In 2000, for example, in developing Genomic Health’s Oncotype DX®, a diagnostic test quantifying a breast cancer patient’s risk of recurrence, Terry and his partners carried out research not only to determine the diagnostic’s effectiveness, but also to ascertain the economic impact it could have. Whereas traditional reimbursement would pay USD 800 per test, Genomic Health provided evidence that the test would keep approximately 50% of patients off of expensive chemotherapy—reducing the cost of care by USD 50,000 for each of those patients. As a result, Terry and his partners were able to negotiate an average payment of USD 4000 per test—a win-win situation for both the company and payer. Today, with a market cap of USD 750 million, Genomic Health brings in some USD 200 million a year in revenue instead of the USD 40 million it would otherwise have earned with pricing at traditional levels.
Terry said that to be successful smaller companies need good information in order to focus on the value the company or product is creating and avoid getting caught in cost considerations. “Without your own data and a strategy to define and communicate your value, you will always be at a disadvantage.”
How can a company avoid a bad fate?
“It’s important to review why companies failed—and to know how successful companies in your product area proceeded,” Terry said. “You can conduct research from within your company or hire outside experts to compile and evaluate data to determine the potential value of products, price points, and who your customers, payers and partners should be.”
Terry noted that it is also possible to obtain funding from federal agencies or health-based organizations to study a potential product’s economic impact or to ally for this purpose with a company that might ultimately license, distribute, or acquire the product. And, increasingly, academic and other not-for-profit institutions are developing analytic and performance metrics to enhance product development. “In the current economic climate and changing reimbursement system, we’re seeing a broad range of creative alliances,” he said.
The bottom line: Life science companies need to make decisions based on realistic, fact-based information, be certain of a product’s value, and clearly understand the synergies or opportunities for potential payers, partners, and investors. Terry said that it’s this full understanding of its own value proposition that allows a company to control its future: “This will prevent misaligned expectations, and avert situations in which potential partners drop out of a deal based on their own late-in-the day evaluations or have the power to negotiate terms or discounts detrimental to the young company’s interests.”
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