Beyond borders: biotechnology industry report 2013
How differentiated is your product
How differentiated is your product?, by Brian Edelman, Vice President, Corporate Finance and Investment Banking, Eli Lilly and Company
When we buy or partner with a venture-backed biotechnology company, we have traditionally been interested in three things: (1) the firm’s intellectual property, (2) its chemistry manufacturing and control data package and (3) its clinical data package. Over the last five years, however, we have become increasingly focused on a fourth critical item in every biotech acquisition we make: the pricing, reimbursement and access profile of the company’s clinical data package.
Building such a profile involves understanding how the company’s pipeline candidates are differentiated relative to the standard of care. Are they significantly safer or more effective? How do they compare to inexpensive products such as generics?
For this analysis to be meaningful, however, it needs to be based not on the current standard of care as much as the prospective standard of care a few years out. This might involve a head-to-head trial with a therapy that will become generic during the time frame in which the new product might hit the market.
At Lilly, our due diligence process has evolved to become much more focused on market access and reimbursement issues. We now include senior marketing and/or market research people in the process. Each of our business units has several people who conduct business development forecasting.
These forecasts are developed in close conjunction with our pricing, reimbursement, access and/or business-to-business components, so that their input is also factored into valuations.
Missing the mark
However, we frequently find that the venture-backed biotech companies we encounter in deal discussions have not spent any time thinking about the competitive landscape and are unprepared to differentiate their pipeline products. Biotech firms do best in situations where the molecule is a new mechanism of action or addresses an untreated disease — making the health economic benefit intuitively obvious. But when companies are coming into a crowded disease state where there are competing therapies, we tend to see clinical data packages that do not differentiate products relative to the standard of care.
Our due diligence often reveals that we will need to redo trials or conduct new studies on what was advertised as a commercial-decision- ready molecule. This inevitably reduces the valuations that biotech companies receive for their assets because of the additional delays and costs involved in developing the product.
Why are biotech companies so frequently unprepared to demonstrate the differentiated value of their products? I believe that underlying this development is a paradigm shift. Our society has decided that it’s only willing to pay for innovation up to a point. Effectively, this translates into a situation in which only one or two agents will be reimbursed in any area of care.
The logical shakeout of this is that there will be less venture capital invested in areas where it’s not intuitively obvious at the outset that a potential product could be dramatically differentiated from the standard of care. However, a lot of the substrate that is currently in the pipeline was not initiated with an appreciation for the new rules of the payer market.
In this environment, orphan drugs will continue to be attractive. If you’re developing a product in an orphan indication where there is currently no treatment, demonstrating the value of your product should be comparatively easy. Conversely, me-too products will become more risky. If you are developing the next SSRI antidepressant, your only hope of getting it reimbursed is through evidence that the product is truly differentiated — for instance, by providing better outcomes related to pain or sexual function. Making that sort of case will be very difficult.
We might lose something in the process. Lipitor, which was the seventh or ninth statin to get approved, went on to become the best-selling drug of all time, in large part because it was legitimately seen as a better treatment. In today’s industry, a product like that might never get payer coverage in the first place.