Collaboration as a key to success in pharmaceutical R&D

Health Care Current | January 17, 2017

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

My Take

Collaboration as a key to success in pharmaceutical R&D

By Greg Reh, Principal and Life Sciences Sector Leader, Deloitte Consulting LLP

Biopharmaceutical companies are increasingly partnering with other health care stakeholders to address scientific and technological challenges, create greater efficiencies in research and development (R&D), and accelerate the development and delivery of new treatments for patients.

In fact, approximately 9,000 new biopharma R&D partnerships were formed between 2005 and 2014 at an annual growth rate of four percent during that ten-year period.1 Many of these partnerships have been focused on fueling scientific discovery. Now, many biopharma companies must expand the mandate of this ecosystem to help ensure products meet the needs of an evolving health care delivery and payment system. Earlier and more robust collaboration with key stakeholders is likely required to sustain returns on innovation.

Every year since 2010, Deloitte has tracked 12 leading biopharma companies to estimate the return on investment they might expect to achieve from their late stage pipeline. And every year, their R&D returns continue to decline – the latest analysis indicating returns have dropped from 10.1 percent in 2010 down to 3.7 percent in 2016.

The analysis indicates that R&D costs and sales have become unbalanced, producing an equation that is no longer set to deliver sustainable returns on investment. Moreover, biopharma companies face an extremely challenging external environment. Pricing is a very publicized issue, as political and public scrutiny has intensified.

In 2015, we began tracking R&D returns of four additional mid-to-large cap biopharma companies. For this extension cohort, the analysis found that 2016 was a strong commercialization year, as the four companies combined successfully launched nine assets with total forecast sales of $187 billion. But, we see signs that this cohort may be starting to experience similar issues as the larger companies.

Collaboration has gained speed in the health care industry. From value-based care arrangements to greater transparency and a focus on patient-centered care, biopharma organizations cannot afford to stay behind. Companies should recognize that they need to balance the changing demands of many stakeholders – including health plans, patients, providers, and regulators.

So as we enter the New Year, what changes can companies make to deliver new drugs at a cost that is acceptable for these stakeholders, and also generates a sufficient return?

Interviews with leading biopharma organizations found that they have made several critical decisions that led to the successful commercialization of products, balancing these demands. The common thread among all of them is collaboration. Key insights are:

Develop an explicit therapeutic area (TA) focus: Having an explicit TA focus allows companies to develop deep TA expertise and understand target populations and increase value for these patients. Moreover, a greater TA focus can allow organizations to leverage relationships they have developed with key stakeholders such as academic researchers, clinical investigators, key opinion leaders, and patient advocacy groups. Manufacturers can tap these relationships early and often to provide input to refine development programs and increase the value of assets.

Position products for success: A key theme from leading organizations is to define a specific and differentiated treatment approach for products against the standard of care. Some have found a biomarker strategy to be effective for a targeted product. One important consideration that came to light was that biomarker strategies can impact stakeholders downstream. For example, companies may consider working with provider partners to understand how diagnostics may impact physician workflow. Working with providers to understand how existing treatments operate may also help companies differentiate their products from others – both current and future treatment products. In turn, a more differentiated product is more likely to receive favorable reimbursement.

Create a thoughtful program design: A robust R&D program design can bring each external stakeholder into the fold in a way that may help biopharma companies get faster regulatory approval and demonstrate value to payers, providers, and patients. For example, a recurring theme among the interviewees was that success depends on an early start to discussions with regulators and aiming to submit data to different regulators at the same time. Some even said that regulators make good partners and that early and regular conversations helped the speed to market.

Another strategy is to move reimbursement discussions beyond price to focus on value. Manufacturers increasingly should understand how payers define value and then design their drug development programs to demonstrate this value. Some interviewees also acknowledged that payers have grown skeptical of the ability for randomized controlled trials to translate to the real world. As such, some have begun to focus on the potential for data from digital strategies and real-world evidence. These new sources of data might help to advance the field of health economic and outcomes research and translate benefits to all stakeholders, including the patient.

As biopharma companies face a most uncertain market and regulatory outlook, collaboration may be the key to success. Companies that understand that their future success partly lies in the hands of their allies and partners may be more prepared to face these future challenges head on.

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1 EvaluatePharma, Consortapedia, Deloitte Analysis, 2016.

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Implementation & Adoption

Exchange enrollment slightly ahead of last year as open enrollment deadline nears

As of December 24, 2016, more than 11.5 million people signed up for 2017 coverage through the public health insurance exchanges, according to the latest US Department of Health and Human Services (HHS) enrollment report. This is 286,000 more enrollees than signed up last year around the same time. The report covers enrollment in all states. Key findings are:

  • Approximately 8.9 million people returned from last year, and 2.6 million are new enrollees. 
  • Among the states using the platform, more than 8.7 million individuals signed up for 2017 – including 6.6 million returning and 2.1 million new enrollees.
  • More than eight in 10 individuals who signed up (9.3 million enrollees or 81 percent) qualified for advanced premium tax credits.

Open enrollment ends on January 31, 2017, but Sunday, January 15 was the deadline for coverage beginning on February 1.

(Source: HHS, “Health Insurance Marketplaces 2017 Open Enrollment Period: January Enrollment,” January 10, 2017)

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Study: Site of care drives variation in post-acute care spending in Medicare

A study published in Health Affairs found that the most significant factor in cost variations in post-acute care (PAC) is the care delivery site. The study looked at cost differences across the four most common PAC providers: home health agencies (HHAs), skilled nursing facilities (SNFs), inpatient rehabilitation facilities (IRFs), and outpatient rehabilitation facilities.

Using data from the Medicare Provider Analysis and Review, Part B outpatient records, and HHA files, researchers looked at three cohorts of patients enrolled in fee-for-service Medicare:

  • 232,744 total hip replacement patients
  • 218,950 coronary artery bypass grafting patients
  • 189,229 colectomy patients

The researchers tracked patients for 90 days after discharge from an acute care facility; 90 days is a timeframe commonly used in bundled payment models. They then calculated the total cost of care, controlling for price (which accounts for geographic variation) and case-mix (i.e., the severity of cases treated). Finally, the researchers investigated whether the remaining spending variation was explained by care intensity or PAC setting.

Overall, the study found that the setting of care explained most of the variation in spending, even when adjusting for geographic price differences and case mix. High-cost hospitals tend to be the most likely to use SNFs and IRFs, the highest-cost PAC settings.

Analysis: Acute care hospitals have had few financial incentives to coordinate care across PAC settings, often leading to higher costs and readmissions to acute care hospitals. But, policy levers, such as the Improving Medicare Post-Acute Care Transformation Act, the Hospital Readmissions Reduction Program, and bundled payment models could change the way that PAC services are paid for. As explained in Medicare changes in post-acute care payment, a unified Medicare payment system for PAC, combined with the shift to value-based payments, quality improvement, and reduced readmissions, would emphasize patient acuity and preference over the care setting. As a result, hospitals may need to establish stronger policies and processes around patient referrals to PAC to emphasize the most appropriate setting and strengthen alignment with high-quality PAC providers through acquisitions or strategic collaborations.

Forthcoming research from the Deloitte Center for Health Solutions explores how health care organizations approach post-acute care under bundled payments programs. Two main findings are that:

  • Many leading organizations are investing in data and analytics to identify cost-saving opportunities
  • Post-discharge providers who have good patient outcomes and can manage length of stay are reducing use of SNFs after orthopedic procedures by sending patients directly home or by decreasing the length of stay at SNFs

(Source: Chen et al. “Spending On Care After Surgery Driven By Choice of Care Settings Instead Of Intensity Of Services,” Health Affairs, 2016)

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Study: Employing physicians has little to no effect on care quality

According to a recent study published in the Annals of Internal Medicine, employing physicians through a hospital system has no effect on care quality in comparison to hospitals who contracted or were unaffiliated with their physicians. Hospitals have increasingly been employing physicians through acquisitions of physician practices.

Researchers looked at mortality rates, hospital readmission rates, average length of stay, and patient satisfaction scores to assess if hospitals that employed physicians provided better quality of care. They followed 803 hospitals that transitioned to employment models and 2,085 hospitals who contracted or were unaffiliated with their physicians for two years and found that hospitals with employment models saw no significant improvement in quality. Though the benefits of this model might take longer than two-years to appear, the findings suggest that employing physicians is not enough to improve a hospitals’ care quality.

Background: In 2003, 29 percent of hospitals employed physicians. By 2012, that had grown to 42 percent. Moreover, a 2016 study estimated that 38 percent of US physicians were employed by a hospital or health system. This growth primarily occurred as hospitals acquired medical practices. Since 2009, hospital-employed physicians has become the most common physician-hospital affiliation model. Researchers found that hospitals that switched to hospital-employed physicians were more likely to be large or major teaching hospitals and less likely to be for-profit institutions.

(Source: Scott et al., “Changes in hospital–physician affiliations in US hospitals and their effect on quality of care,” Annals of Internal Medicine, 2017)

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On the Hill & In the Courts

Congress passes budget resolution and begins the process of repealing the ACA

Last week, the Senate passed a budget resolution to begin the reconciliation process, through which Congress plans to repeal parts of the Affordable Care Act (ACA). The vote came after seven hours of voting on amendments to the resolution, known as “vote-a-rama.” While several lawmakers introduced amendments, such as one to continue allowing children to stay on their parents’ plans until age 26 and another to prevent Congress from repealing Medicaid expansion, all of the amendments were defeated and the resolution passed 51-48. One Republican senator voted against the measure, and one Democratic senator missed the vote due to medical reasons. The resolution then went to the House for a vote on Friday, where it was approved 227 to 198. The measure does not have to be signed by the president.

As explained in the January 10, 2017 Health Care Current, the resolution establishes the congressional budget for fiscal year (FY) 2017 and budgetary levels for FY2018 through FY2026. The resolution also instructs the Senate Finance and Health, Education, Labor, and Pensions committees and the House Energy and Commerce and Ways and Means committees to draft deficit reduction legislation. Those committees must submit their draft legislation to their respective budget committees by January 27, 2017.

From here, it is unclear what the next steps are. The reconciliation bill is expected by many to be the major pathway that lawmakers use to repeal the ACA. However, it is less clear how and when Congress might pass a replacement plan. President-elect Trump has said that he plans to have a replacement plan around the same time that his nominee for HHS Secretary, Tom Price, is confirmed.

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Final 340B rule introduces price ceilings, civil monetary penalties

Earlier this month, HHS finalized new rules for the 340B drug pricing program, including the calculation of ceiling prices for drugs and civil monetary penalties for drug manufacturers that overcharge the program.

Under the 340B program, drug manufacturers enter into pricing agreements with HHS for certain outpatient drugs as a condition of their participation in Medicaid. HHS agrees to cover the manufacturers’ drugs, while manufacturers commit to providing 20 to 50 percent discounts on outpatient drugs for 340B covered entities (e.g., safety-net and disproportionate share hospitals).

Under the final rule, drug manufacturers should calculate ceiling prices for 340B covered drugs using the Average Manufacturer Price minus the Unit Rebate Amount for that drug. They must update ceiling prices every quarter. HHS will penalize manufacturers who “knowingly and intentionally” charge a 340B covered entity more than the ceiling price for a covered drug. The monetary amount of the penalty will be determined by the HHS Secretary, but cannot exceed $5,000 for each instance of overcharging.

The rule goes into effect on March 6, 2017, and HHS will begin enforcing it on April 1, 2017.

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Part D catastrophic coverage spending tripled from 2010 to 2015

Federal spending on catastrophic coverage under Medicare Part D increased from $10.8 billion in 2010 to $33.2 billion in 2015, according to the HHS Office of the Inspector General (OIG). Increases in drug prices and growth in the number of beneficiaries enrolled in the program have driven this trend. The catastrophic program is now the most expensive part of Part D.

Beneficiaries who exceed the $4,950 cap on out-of-pocket prescription drugs costs are considered to be under catastrophic coverage. Under this program, beneficiaries are responsible for a five percent coinsurance payment for prescription drugs. The federal government covers the remaining costs.

Using data from CMS’s Payment Reconciliation System, HHS OIG determined how much the federal government paid for catastrophic coverage from 2006 to 2015. The largest increases occurred in 2014 and 2015, increasing $8 billion and $6.1 billion, respectively.

OIG also examined trends in spending for high-price drugs — ones that cost more than $1,000 per month. Spending on high-price drugs increased nearly sevenfold from 2010 to 2015, from $5 billion to $33.4 billion. In 2015, high-price drugs accounted for nearly two-thirds of the catastrophic coverage government spending. Moreover, ten high-price drugs were responsible for 30 percent of all drug spending under catastrophic coverage in 2015. Four of the ten were new to the market.

Also driving increased costs were the total number of beneficiaries getting catastrophic coverage, which increased by 53 percent from 2010 to 2015. In 2015, 28 percent of all beneficiaries with catastrophic coverage took high-price drugs, compared with 14 percent in 2010. High-price drugs mean higher out-of-pocket costs for beneficiaries, especially for those who do not receive a low-income subsidy, bringing them into the catastrophic coverage program sooner.

(Source: OIG, “High-price drugs are increasing federal payments for Medicare Part D catastrophic coverage,” HHS, 2017)

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Senate introduces bipartisan drug importation bill

Last week, Senators John McCain and Amy Klobuchar reintroduced a bipartisan bill to allow drug importation from Canada. The “Safe and Affordable Drugs from Canada Act,” would instruct the HHS Secretary to create a pathway to allow for this. Under the legislation, drugs would have to be:

Biologic products, controlled substances, infused or intravenously injected drugs, and photo-reactive drugs or drugs that must be refrigerated at any time during manufacturing, processing, or holding would be excluded. The HHS Secretary would establish criteria for Canadian pharmacies to participate in the program, including length of operation, participating in quality assurance programs, and having a process for resolving grievances.

This legislation comes as both the outgoing and incoming administrations have said that drug pricing and reducing the cost burden on patients and payers in the US should be a top priority. National health expenditure data put 2015 US prescription drug spending at $457 billion, or 16.7 percent of overall personal health care services, and costs are expected to increase (see the 2016 Deloitte analysis, Managing prescription drug prices).

The bill was referred to the Senate Health, Education, Labor, and Pensions Committee on January 8, 2017.

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Around the Country

Report: Increased economic activity covers cost of Medicaid expansion in Michigan

Medicaid expansion in Michigan led to a boost in economic activity in that state, according to a recent analysis in the New England Journal of Medicine. Researchers calculated that Medicaid expansion:

  • Contributed to a $235 million decline in state spending on mental health and correctional health programs
  • Created 39,000 new jobs in 2016, two-thirds of which were outside of the health care industry 
  • Added between $145 and $153 million annually in new state tax revenue by allowing enrollees to redirect money they would have spent on insurance premiums to pay for household goods, transportation, food, and more

Researchers used a dynamic economic forecasting model to generate annual forecasts and simulations of socioeconomic and government fiscal behavior under different scenarios. They concluded that the new jobs, freed up state and private resources, and additional economic activity by new enrollees would cover the state’s costs for Medicaid expansion through 2021, and likely beyond.

Background: Michigan’s Medicaid expansion program covered approximately 600,000 low-income adults and cost $3.6 billion in 2016, which the federal government primarily funded. The federal share of expansion decreases to 95 percent in 2017 and to 90 percent in 2020. When Michigan approved Medicaid expansion, the state legislature required that the state come up with new savings or revenue to cover the five percent of expansion costs ($152 million) between 2017 and 2019 and then 10 percent ($399 million) in 2020.

(Source: John Ayanian, et al., “Economic Effects of Medicaid Expansion in Michigan,” New England Journal of Medicine, January, 2017)

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States seek amendments to 1115 waivers and applications

Alabama: Last year, CMS approved Alabama’s 1115 waiver application, which allows the Medicaid program to contract with regional care organization (RCOs), Alabama’s version of managed care organizations. Last week, the state applied for an amendment to delay moving the contracts to RCOs. The waiver provides up to $748 million in federal funding over five years. The state is seeking more time to appropriate additional state funding for the Medicaid program and complete readiness activities.

North Carolina: Newly-elected Democratic governor Roy Cooper has proposed to expand the state’s Medicaid program. Governor Cooper posted the expansion proposal for public comment earlier this month. It would ask hospitals and other providers to pledge a 5 percent match to help fund the expansion. However, if Governor Cooper identifies a funding source, submits the proposal, and receives approval before January 20, he still could face legal challenges. The Republican-controlled state legislature has said it opposes this proposal. State law prohibits the governor from acting unilaterally, many lawmakers have said.

Governor Cooper’s proposal is an amendment to the 1115 waiver that North Carolina submitted to CMS in June 2016. The proposal would add 650,000 people to the Medicaid program, which now covers about 1.8 million. North Carolina’s Medicaid program costs about $14 billion. The federal government covers roughly two-thirds of those costs.

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Breaking Boundaries

What to watch for in 2017: Startups, entrepreneurs, and innovations

Every year Forbes holds a 30 under 30 in health care competition to highlight 30 young people who are founding companies, searching for treatments, and working to fix health policy. Headlining the list this year is 29-year-old Michael Martin, who after getting mugged, was inspired to come up with a smarter, more efficient way to alert emergency responders. Unlike the current system, which does not take advantage of recent advances in technology, his company, RapidSOS, offers an app that allows users to send their exact location and type of emergency to 911 dispatchers at the push of a button. To date it has raised $14 million from investors.

Another young entrepreneur featured started a company to enable drones to get medication to people in the developing world. Researchers are hoping that drones will be faster and more efficient at getting medications to people in remote areas with underdeveloped roads and infrastructure. Many of these people rely on methods such as motorbike couriers. Drones have been used for surveillance and assessments of disasters and are starting to be more widely used to improve HIV services and medical supply deliveries.

The Deloitte UK Centre for Health Solutions also identified 12 innovations that it believes will have the greatest impact on the continued transformation of health care in 2017. Included on the list is 3D printing, which is estimated to be worth $1.2 billion by 2020. The first 3D-printed prescription drug to treat epilepsy is on the market, and medical devices made from 3D printing now include instruments used for surgery or devices implanted into patients. End use parts, like surgical tools and device implants, will likely become more common in 2017 as sophisticated metal materials for 3D printing are refined and gain approval for human contact. By 2019, 3D printing is expected to be a central tool in roughly one-third of surgical procedures involving prosthetic and implanted devices.

Blockchain is another innovation that made the Deloitte UK Centre’s list. Blockchain can help organizations bridge traditional data silos, increase IT and organizational efficiencies, keep business and medical data secure, and streamline patients’ access to medical data. Blockchain offers "long data" as opposed to big data, capturing a full history of a patient's health. The greatest potential for blockchain may lie in the areas of clinical trial records, regulatory compliance, and medical records.

Related: Deloitte’s Top 10 health care innovations: Achieving more for less features survey results of leaders across the health care industry who were asked to determine what 10 innovations in health care were most likely to accelerate the transformation toward achieving the Triple Aim over the next 10 years. The paper defines innovation as activities or technologies that can result in getting more for less. More value, better outcomes, greater convenience, access, and simplicity all for less cost, complexity, and time required by the patient and the provider.

The report explores innovations that could help expand the frontier of health care, including virtual reality, artificial intelligence, biosensors, and trackers. These innovations will likely lead new care delivery models to proliferate at rates unseen before now. Incorporating innovations into business models may require changing how health care organizations currently prevent, diagnose, monitor, and treat disease. Industry leaders should consider building ecosystems that embrace non-traditional players and sources of knowledge outside their own four walls. Building pilots before expanding programs to scale, learning to embrace change, and evaluating new revenue sources can also help organizations succeed. And, organizations should strive to be agile in anticipating and adjusting their strategies as innovations continue to evolve.

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