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Bridging gaps

Pharma companies are using licensing agreements increasingly to help plug the holes in their ailing pipelines

PipelinePharma companies have significantly increased R&D spending in recent years yet they are still under continued pressure to fill gaping holes in their product pipelines. Companies are not launching enough new drugs each year while many no longer have the capability to take products from discovery to market and others do not have sufficient pipeline products to provide a smooth flow of new drugs.

Deal-making provides an important alternative for pharma companies to meet near-term product requirements: an alternative that has increased in popularity. The number of deals has more than doubled in the last seven years with 1,350 reported deals in 1997 compared with 3,100 in 2004, according to PharmaVenture's PharmaDeals Agreements database.

While these numbers also include mergers and acquisitions and other non-product-focused deals, the key value drivers to fill pipelines and therapeutic portfolios are product-focused agreements and drug delivery deal-making activities.

Most of these deals take place while the relevant products are still under development, particularly before pivotal phase III studies have taken place. Pharma and biotech companies now seem to prefer licensing agreements over the formation of collaborative research-based alliances, with at least 45 per cent looking at deals that cover Western Europe and, increasingly nowadays, Eastern Europe.

Essentially, companies engage in agreements with the intent to develop and launch drugs for the whole European market. The challenge is to launch new drugs into an increasingly competitive market which has high cost constraints and is strictly regulated by almost monopolistic healthcare buyers.

Healthcare systems in Europe are still extremely diverse and operate nationally, but there is a common theme. National systems providing insurance coverage for their populations have become one of the most important stakeholder groups for R&Dfocused lifescience companies. They have a vested interest in the quality and price of the drugs they pay for. Operating under severe cost constraints, they decide which prescription medicines and patient populations will be covered under the insurance and reimbursement arrangements.

Healthcare systems are using many measures to control the price of pharma products, in particular increased patient contribution and treatment efficiency, which in turn translates into such regulations as price or profit control, reference pricing, or introduction of formularies.

Firms have to accept that pricing and reimbursement regulations are not a temporary phenomenon and, more importantly, understand the impact that health economics and health technology assessments (HTA) will continue to have through:

- Systematic, repetitive analysis of the HTAs of drugs already available in a therapeutic class or indication, which will act as a benchmark for with which to compare new launches

- Further establishment of treatment guidelines for individual indications, including guidance for specific sub-populations within an indication (eg, chronic conditions and elderly patients where first-line treatments have failed)

- Requirements to submit formal value dossiers containing health economics information before gaining reimbursement approval at a given price.

Pricing pressure, parallel trade and reimbursement will all have a major part to play in getting drugs to market. There is likely to be further convergence of prices across Europe and ongoing pressure of parallel trade and reference pricing may reduce the price level in higher price countries such as the UK and Germany, while low price markets, such as Italy, Spain, and Eastern Europe will hopefully raise their average price level.

For most therapeutic classes, the days of achieving a 20-25 per cent or above premium price for branded treatments have long gone. Companies will find it difficult to gain market access at acceptable target prices unless they prove the comparative value of their therapeutic offering over existing therapies in accordance with the national health economics/HTA requirements, and through exhaustive documentation of the clinical, economic and social benefits of a drug.

Futhermore, reimbursement will often not be applied to a whole patient population, but to sub-populations where particular clinical and economic benefits can be shown. However, most ethical products will still have to gain reimbursement if they are to become successful in the marketplace with a sufficiently large patient base.

Most companies do not already have a market, unless the drugs are part of the reimbursement system and companies have negotiated a reimbursement price with healthcare organisations. While most deal makers are aware of the technical risks and attrition rates of pipeline projects along the drug development pathway, they must shift their attention to the commercial risks of deal opportunities.

A 2001 report revealed that just one in eight approved drugs yielded a satisfactory rate of return on investment (RoI), while 70 per cent of marketed drugs failed to recover their R&D costs. While this figure for commercial failure could be deemed to be too pessimistic, particularly when applied to new formulations, low reimbursement prices and/or delays in achieving reimbursement are increasingly the reason why many marketed products do not recoup their investment costs without a considerable time delay, or at a lower RoI rate.

For many compounds, the costs of development are increasing while profit margins are falling. Lower prices require larger patient numbers to compensate for the reduction in operating profits. This relationship implies that lower prices are riskier in niche indications, as the patient base is smaller than the market for common indications and market share can seldom, if ever, be increased sufficiently

In traditional project valuations, price is often dealt with rather haphazardly; for example by putting a defined mark-up on the estimated cost of products, simply choosing a reference price from a drug already on the market or by addressing price uncertainties using price bands. This approach is in stark contrast to the keen observation made many years ago by the late Professor E Raymond Corey from Harvard Business School.

Pricing is the moment of truth - all of marketing comes to focus in the pricing decision. The price estimate for a product is the key output variable resulting from the strategic marketing analysis and decisions made during the drug development and commercialisation pathway.

Though prices retain a very high degree of uncertainty up to the very moment that manufacturers enter into negotiations with national healthcare systems, early strategic pricing is becoming a very important component when assessing the commercial viability and financial valuation of product opportunities.

Why is this strategic approach to pricing so important? Healthcare decision-makers in Europe take a conservative stance on new drugs. They want to have maximium product value at the lowest cost and they want to have proof of this value for the final beneficiary - the patient.

Companies should understand that a new product will not bear an automatic price tag. The achievable price depends largely on the interdependence of the indications and proof of clinical value. Value-based pricing should be seen in relation to the populations within the indications who are the final beneficiaries of the product benefits.

Just because a new drug is targeted to gain regulatory approval for a defined indication (eg, asthma, Parkinson's disease), this does not automatically mean that the drug will demonstrate sufficient health improvements over existing therapies in the overall population. This, in turn, makes it hard to achieve high reimbursement prices for products with broad indications.

Optimising the launch price is of utmost importance in Europe, when you consider that this is generally the highest price achievable during a product's lifecycle.

When valuing projects, deal makers must pay attention to the drug development programme and estimate what product benefits have been realised so far and which target population this relates to. They must analyse the delineated target product profile (TPP) and the existing plans on how to further demonstrate product value throughout clinical development.

Deal makers also have to assess which other options exist for further development activities (eg, phase III/IIIb trials) to demonstrate maximium product value at time of launch and optimise the financial returns to their companies. They have to consider if it is worth while differentiating the product further in view of the additional costs, and the likelihood of achieving this differentiation ahead of the pricing and reimbursement negotiations.

Not only are these negotiations essential, because they help shape a pipeline drug, they are also important to fully appraise the commercial value of the drug on the market as part of the overall deal valuation. Companies should include these product-shaping activities and their expected commercial outcomes as scenario analyses in the overall financial project valuation.

As European countries move continuously towards value-based pricing and restrict reimbursement increasingly to sub-populations, for which the product value can be proven, a clear price-volume relationship develops in the pharmaceutical market. Coupled with the fact that launch prices are the highest companies can achieve, strategic decisions have to be made to maximise the commercial value of a drug (see figure, below).

Ideally, companies want access to the largest patient base at the highest price. This is not always feasible when there are many effective and often moderately priced competitors in the market, and the new drug will only be able to deliver incremental benefits. Consequently, a lower price point might have to be accepted for an insufficiently differentiated product while the companies have to fight for market share with competitors and may also have to increase marketing spend.

Alternatively, it might be possible to prove a high significant value for defined patient groups (eg, severe diseases), which can then be associated with a much higher reimbursement price. Having a highly differentiated and desirable product often allows the company to quickly capture a larger relative market share of that sub-population without having to increase the marketing spend proportionally.

When evaluating these trade-offs, deal makers do not only have to consider absolute population sizes and the given prices, but also the achievable market share and the costs associated with reaching it. Additionally, options have to be evaluated on how, and to what degree, the companies can expand into the broader indication while being able to preserve the high launch price they have attained.

Financial valuation models must integrate two major components:

  1. Strategic development-oriented valuation
    This tackles product differentiation models looking at timelines, sub-populations, costs, the impact on improving price and market share, and the risks of achieving differentiation

  1. Market-based valuation
    This includes different price/volume scenarios, the impact of generic competition and parallel imports, delays in pricing and reimbursement approval (up to 18 months in some countries), or launch order sequence.

Pricing and reimbursement-focused decisions have an impact on the launch of a product on to the market. This will affect the achievable price level, as well as the target population for which reimbursement is given, which consequently determines the product's commercial success.

These decisions have to be contrasted with the expected impact of pricing and reimbursement dynamics and a constantly changing competitive environment. Pricing and reimbursement-focused drug development strategies and how these influence the market will impact significantly on the overall deal value.

Companies have to consider how to translate these findings from the project valuation into appropriate deal terms. This might mean the inclusion of appropriate risk-sharing agreements, the introduction of more flexible royalty rates, making allowances for adverse market conditions such as changes in price or reimbursement status, or generic competition.

Clemens Troche is based in Germany as director, consultancy group, at PharmaVentures

2nd September 2008


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