Contract Development & Manufacturing Organisations (CDMOs) increasingly need to differentiate and establish their competitive advantage to effectively cater to the growing demand and to enhance their profitability. There is a greater demand for CDMOs offering broad-based best practice technologies, staff competencies and reliable delivery.
PharmaVentures is recognised as a leading transactions advisor and has advised on the strategic direction of over 40 facilities offering CRO/CDMO services and completed the sale of 14 operations globally.
In this white paper, we harness the knowledge from our extensive cross border transaction experience and industry research to look at the value drivers in the CDMO market that companies should keep in mind when they cultivate their strategies.
by Ralph Hughes, Vice President, PharmaVentures.
What is a cost offset narrative?
A key economic principle that all healthcare systems are founded on is the concept of opportunity cost. In an efficient system, if costs can be reduced without sacrificing quality (safety and efficacy), it is a benefit; and if the quality can be improved as well, it is even better. The term “cost offset” is a commonly used phrase for this underlying principle.
Payers, especially those focused on the value for the entire system, will consider these cost savings and balance them against the cost of a medicine. Having a robust cost offset story and data can help justify a higher price.
There are two ways medicines can create cost offsets:
By comprehending the expenses that payers are concerned about, constructing a compelling narrative around cost offsets, and gathering data to back it up, the value proposition, pricing, and positioning of a drug can be enhanced. This also enables a developer to understand how perceptions towards the drug may evolve, giving them a solid bargaining power when dealing with major pharmaceutical companies.
How can cost offsets help drugs with infrastructure challenges?
The Chief Medical Officer from a large US Accountable Care Organization (ACO) offered a noteworthy illustration of this concept. They described the evolution of attitudes towards CAR-T therapy as the understanding of its potential cost offsets has changed:
For this payer, we can see that the cost offset discussion has become an issue of the total cost of care, not just the cost of the medicine: “I want to map the patient journey and the total cost of care and put CAR-Ts where they can have the greatest impact… It is the providers who are the challenging ones, not the payers in this situation.”
Lessons for another drug class with infrastructure challenges: Psychedelics.
The issue of infrastructure is a particularly sticky one for psychedelic treatments, as the cost of patient care, such as observation and counselling, will likely be covered through fixed fees or Diagnosis-Related Group (DRG) systems. DRGs assign a pre-determined tariff for each inpatient “episode of care,” which serves as the reimbursement amount for the centre providing the care. If a hospital is able to deliver the DRG at a lower cost than the tariff, they keep the difference. On the other hand, if the cost exceeds the tariff, the hospital bears the additional expense.
According to the vice president of a major US Pharmacy Benefit Manager: “Most psychiatry offices are not set up to do very much medical stuff, the don’t have space for this kind of thing.” This sentiment was echoed by a payer from an ACO who stated, “There is a [psychedelic treatment] where you have a provider talking to the patient and monitoring the patient for like 5 hours or something. And I said no one’s going to do that. And my value-based system when I pay these people capitation [fixed fee], no one is going to do that.”
The DRG system means that clinics will receive reimbursement for an episode of treatment e.g., for depression, they will not be reimbursed for any extra time they spend with the patient or the specific drugs they use. This creates an incentive for clinics to deliver care as cheaply and as quickly as possible and then discharge patients on generic medications which will be paid for by the insurer.
“Spending 4-5 hours monitoring a patient, in addition to the cost of the drug, will be difficult to justify,” the insurer said, emphasising that “the fee schedule would have to be adjusted to allow for that kind of therapy to occur.”
What is noteworthy is that the challenge isn’t solely about the cost of the drug, but also the cost of delivering care. The ACO payer suggested that psychedelic treatment could only be feasible “after hospitalisation for suicide to get the patient started and then transition.” This, she believed, was the only opportunity to provide the treatment, as it requires sufficient time and the patient population is small enough.
So how can cost offsets be applied to psychedelics to overcome these issues?
Interestingly, it is this final payer comment that provides a potential solution to the infrastructure issue. Just as with CAR-Ts, it may be possible to reframe the issue in terms of cost offsets, for example, Psychedelics should be used initially for suicide prevention in a more severe patient population:
Why are these issues important at the early stage?
Pharmaceutical companies are aware that no drug is the perfect solution its creators envision it to be. All drugs must navigate the complex and ever-changing healthcare system with its distorted incentives and unclear funding pathways. It is the responsibility of pharmaceutical companies to manoeuvre these obstacles. Early drug developers must understand this if they hope to attract pharmaceutical companies to partner or license their product. Drugs that rely solely on their efficacy and safety to justify their price are likely to face difficulties due to the intense competition, numerous generic options, and pressure on the system. According to Deloitte: in 2020, nearly 40% of drugs that failed to meet projected expectations did so due to inadequate market access.
Understanding payer attitudes, funding pathways, and establishing a persuasive cost offset narrative can help drug developers proactively address partner’s market access and pricing concerns. This will give confidence to potential pharmaceutical partners that they will be able to secure a favourable price and market access when bringing the drug to market.
Find out more about Pricing and Market Access from our website or contact us.
PharmaVentures Podcast Series, Edition 5
Listen as Jansen Jacob and Steve Garland discuss how the future role of CDMOs in biopharmaceutical manufacturing will be affected by the challenges of cost, new modalities and new innovation; cell and gene therapy (CGT), and personalised medicine.
About the Presenter:
Adrian Dawkes is a Managing Director at PharmaVentures and has been with the company since 2007. Adrian has led multiple consultancy, licensing and M&A mandates.
During his professional career, Adrian has significant multi-discipline expertise spanning research and development through to sales, marketing and business development. Adrian has over 30 years’ experience in the pharmaceutical, biotechnology and consultancy services sectors. Adrian holds a BSc in Biochemistry and a PhD in Immunochemistry.
About the Interviewees:
Jansen Jacob is a Vice President at PharmaVentures.
Jansen is a healthcare transactions professional with nearly 20 years in the life science sector with expertise in M&A, licensing, business strategy, commercial due-diligence and deal structuring. At PharmaVentures, Jansen has played a key role in the divestment of manufacturing and R&D businesses on behalf of top 10 large pharmaceutical companies, resulting in multi-million dollar deals. Over the years he has also worked on a diverse range of assignments including licensing, valuation and strategy projects.
Steve Garland is an Expert Advisor at PharmaVentures.
With over 35 years’ experience in the biologics industry Steve’s career has covered the manufacturing, process development, business development and general management of vaccine (human and animal), recombinant proteins, monoclonal antibodies and cell and gene therapy product supply. Steve has worked in both the CDMO and multi-product organisations and has extensive experience of microbial, yeast and mammalian cell culture systems ranging from less than 500mL to 12,000L scale using single use disposable and purpose designed and built stainless steel equipment.
A microbiologist by education Steve has lived and worked in the Netherlands. He has led technology transfer projects into, out of and within the UK, has worked as a process expert on facility design and build within and without of the UK and has been process/facility lead on several M&A assignments.
by Ralph Hughes, Vice President, PharmaVentures.
In his book, The Price of Global Health, Ed Schoonveld provides a brilliant analogy of what a payer is. He describes a dinner party in which one person orders the meal (the physician), another person eats the meal (the patient) and a third person picks up the cheque (the payer). This analogy does a great job of capturing the essence of the health system and enables us to see the how perverse incentives and behaviours might emerge from such a setup.
In reality, the payer system is orders of magnitude more complicated and so are the incentives and behaviours. Understanding what drives different types of payers and the different funding flows that they must contend with, helps us to build a picture of how an asset might be paid for or reimbursed. This can have a big impact on the value and price of a development asset.
Payers are not a homogeneous group:
There are many ways of characterising payers, e.g., by the regions they cover, or the populations they cover or the perspectives they take. There are so many different types of payers in the US as it is such a fragmented health system, but what is important is the risk that payers take, what they can do about that risk and therefore the view they take on drug coverage:
Understanding the difference between these key groups helps us understand the incentives at play and how they might impact on a drug in development.
Different payers have different views:
A payer conveyed to me a compelling illustration of the significance of getting different views. One of the major challenges with gene therapies in the US is the portability of patients under outcome-based or amortisation schemes. This means that an arrangement for spreading the high, one-time cost of a gene therapy over several years with one insurance company may be made, but in the US, people typically switch insurance companies every 1-2 years, making it difficult for the scheme to follow them to the new insurance provider. However, with the prevalence of accountable care organisations, the frequency of switching is much less, occurring only every 4-5 years, which makes patient portability a lesser concern and makes these types of payers more willing to enter into amortisation agreements.
Another instance that showcases all three perspectives well is the recent launch of an antibiotic that requires weekly dosing, eliminating the need for daily IV administration of vancomycin by a nurse through Outpatient Parenteral Antibiotic Therapy (OPAT) and demonstrating similar effectiveness for severe infections. When speaking with payers, I encountered three vastly different views on the value of this product and how the incentives are structured:
It’s not to say that payers always disagree. There are many aspects that payers consistently agree on, and this applies across the innovative spectrum from gene therapies and 505(b)(2) products and across the geographical spectrum from Australia to the USA. One such issue is the importance of choosing the right comparator for an asset: what is your price and efficacy compared to?
A good example of this is with the gene therapies for muscular dystrophy compared with those for haemophilia. An insurer explained that for muscular dystrophy; certain assets have been launched with weak data on surrogate endpoints with no comparator “only adding new costs”. These are contrasted with assets launching for haemophilia that will replace the extremely expensive blood clotting factors, which can cost up to $1 million annually. “Ultimately, you can divide gene therapies into two categories: those that bring new costs and those that can offset costs.” It was clear that there was a much higher willingness to pay for assets that avoid significant existing cost. This is highly relevant for drug developers, as the comparison and offset costs are crucial for the acceptance of a price by payers and potential partners.
Why is this important to do early?
Whether you’re developing a gene therapy or a value-added drug, it’s crucial to consider the various payer perspectives as it can help you evaluate the significance of these issues to your asset, the potential blockers to progress and the ways to overcome them. From these examples alone we can see:
It is certain that major pharmaceutical partners will understand these barriers. For early developers looking to get deals with those pharmaceutical companies, taking steps early on to reveal obstacles and the method for overcoming them can result in better-than-expected pricing outcomes. It enables smaller biotechs to enter important negotiations on a more equal footing with larger pharmaceutical partners and add value to their asset in the mutual valuation.
Find out more about Pricing and Market Access from our website or contact us.