Perspectives

Health Care Current: May 5, 2015

A beautiful strategy is nothing without results

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.

A beautiful strategy is nothing without results

To paraphrase a famous expression from Winston Churchill, no matter how beautiful your strategy is, you should occasionally look at the results. The saying has never been truer for life sciences firms that are reshaping the industry through mergers and acquisitions (M&A).

There are plenty of M&A examples to look to. In 2014, deals among companies in the life sciences industry represented more than $200 billion—a number greater than the revenue of the entire US fast food industry.1 This is a remarkable figure, especially given that there were no big pharma “mega-mergers” last year.2

M&A is the topic of the panel discussion “Growth and Transformation Strategies at the Intersection of Change: M&A and Beyond" that I will be moderating at the Financial Times (FT) US Healthcare and Life Sciences Conference in New York City on May 6, 2015.3 While traditional M&A has occurred to enable some businesses to achieve scale economies, boost market power and generate cost-saving synergies, I expect the discussion at the conference will center on the fact that this recent round may have been different. The “new world” of transactions is enabling companies to create value through focus and solidify their positions in preferred therapeutic areas.4

As I explained in Beyond M&A: Alternative arrangements appear to be reshaping the life sciences landscape, companies are continuing to invent new and exciting ways to do this:

Transacting a merger or an acquisition is not a strategy—it is a tactic that can be used to accomplish an organization’s strategic business objectives. At the end of the day, all of this activity is about achieving the desired results: acquiring needed new skills, capabilities and assets, while sharing risk as effectively as possible.

To ensure these strategies succeed, companies will likely need to break down internal barriers and look outside themselves for sources of innovation. They may also need to surmount hurdles that can get in the way of achieving these desired results. Consideration of these strategies may mean taking a keen eye to the following hurdles:

  • Political realities and the limits of geography: Regulatory factors that can impede a company from expanding may be out of your control. This is particularly true when it comes to cross-border transactions. In addition to regulatory matters, increased competition and the ability to identify a target may be significant challenges to international expansion.
  • Brand recognition: Some companies are spinning off new enterprises and businesses that are targeted to specific therapeutic areas or types of customers. Others are forming separate standing companies. It may be wise to consider whether a company’s brand recognition is crisp enough in the given therapeutic field to out-perform the competition. 
  • Tolerating risk: Organizational leadership should consider performing a sufficient risk assessment before making any moves. This may include developing a heightened awareness and increased focus on regulatory compliance risk as well as the affinity for cost-effective alignment and integration of compliance programs and quality systems. Firms that learn how to embrace change, move faster and tolerate risk will be most likely to flourish.
  • Organizational factors: Leaders may need to consider whether there is enough capital available to sustain any transition and whether the leadership committed to making this change in competitive approach is in place. 
  • New conversations: The shift from a volume-based to a value-based approach to care has provider and health plan organizations seeking the necessary skills and tools to manage populations. As such, life sciences firms may be critical partners along the journey if they are able to speak the same value-based language. Organizations should consider whether these new collaborations, colleagues and partners can help them do that.

M&A, in the broadest sense, should remain a major force in reshaping the life sciences landscape. With the cost of developing and launching new drugs in the billions, players will likely continue to look for ways to diversify their risk while acquiring unique skills necessary to develop today’s drugs. While some consolidation is likely to continue, we may see more new arrangements – swaps, spin-outs, partnerships and collaborations – as the industry transforms itself.

The ultimate test of these new strategies will be whether or not these new arrangements are achieving those desired results, the most important of which is better aligning with the needs of the patient.

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Sources:
1 Statista, “Revenue of the United States fast food restaurant industry from 2002 to 2018 (in billion US dollars),” http://www.statista.com/statistics/196614/revenue-of-the-us-fast-food-restaurant-industry-since-2002/
2 Pharma & Biotech 2014 in Review, EvaluatePharma, March 2015. EvaluatePharma classifies “big pharma” as companies with a market value of more than $25 billion and which includes 21 global drug makers.
3 The FT US Healthcare and Life Sciences Conference is hosted by the Financial Times, in association with Deloitte.
4 Pharma & Biotech 2014 in Review, EvaluatePharma, March 2015

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My Take

By Reynold W. (Pete) Mooney, Deloitte Touche Tohmatsu Limited (DTTL) Global Managing Director, Life Sciences and Health Care

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House E&C releases second 21st Century Cures discussion draft

Last week, the House Energy and Commerce (E&C) Committee released an updated discussion draft of the 21st Century Cures bill. The new draft incorporates comments the committee received from many stakeholders across the system. It is also nearly half the length of the first discussion draft (see the February 3, 2015 Health Care Current), which has some analysts believing the parts of the legislation that remain are those with the greatest likelihood of passage. It garnered support from Representative Dianna DeGette, who did not sign on to the first discussion draft, and three new sponsors, Representatives Joe Pitts, Frank Pallone and Gene Green, making this version bipartisan. The draft focuses on policies and programs administered by three agencies and would create new programs and incentives. The main goal of the legislation is to spur discovery, development and delivery of innovative cures and treatments:

The second version of the bill would boost funding for the NIH, but includes no additional funding for the FDA. Also dropped was policy on expediting drug approvals and granting exclusivity provisions to certain drugs. Some consumer organizations and generic drug manufacturers expressed their disapproval of the original language. Sections concerning interoperability and telemedicine were lacking details, but many analysts remain optimistic that the placeholders were kept.

The E&C Committee’s Health Subcommittee held a hearing on Thursday, April 30 to discuss the bill. The FDA’s Director of the Center for Drug Evaluation and Research, Dr. Janet Woodcock, NIH Deputy Director for Science, Outreach and Policy, Dr. Kathy Hudson and the FDA’s Director of the Center for Devices and Radiological Health, Dr. Jeff Shuren testified at the hearing. Also last week, the Senate Health, Education, Labor and Pensions Committee held a hearing about the legislation on medical innovation that is working its way through that chamber. It remains unclear how differences between the House and Senate versions will ultimately be resolved.

Analysis: The 21st Century Cures legislation continues to ask, “How can the US continue to build on opportunities and keep our footing as a global competitor in the area of life sciences innovation?” The human genome project that began more than two decades ago was a breakthrough in medicine. In recent years, it has led to game-changing technological advances. But, the health care industry’s quest to harness genomics and analytics to support researchers and providers so they can discover new ways to get the right treatments to the right patients at the right time is not over. There are still many unknowns about the underlying causes of many serious diseases, what treatments work best for what individuals and why individuals with the same disease can progress at different rates. At this stage, it is still difficult to gauge the financial impact that these proposed ideas may have on government and the health care industry. A key question moving forward is, “What will the return on investment be from these potential recommendations?” (See more in the March 3, 2015 Health Care Current)

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Implementation & Adoption

NAIC task force publishes cybersecurity principles

The Cybersecurity Task Force of the National Association of Insurance Commissioners (NAIC) developed and adopted twelve principles for what it describes as effective cybersecurity regulation. NAIC aims to use the following principles to approach future health care data breaches and to create a sense of accountability.

Background: Health data breaches have been growing. Numerous news outlets have already dubbed 2015 the “year of the health care hack.” The attacks have affected over 90 million consumers since 2009. In April 2015 alone, there were 24 data breaches that affected 500 or more consumers, according to the HHS Office of Civil Rights.

(Source: NAIC, "Principles for Effective Cybersecurity: Insurance Regulatory Guidance,” April 17, 2015)

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Study: One quarter of marketplace enrollees received refunds after tax season

H&R Block analyzed tax return data to find that two-thirds of consumers who enrolled in health plans in the federal or state marketplaces had to pay back an average of $729 of their advance premium tax credit (APTC). This figure marks a substantial increase from H&R Block’s earlier predictions in February. One-quarter of tax filers received a refund after filing because their APTC was too low. Back then H&R Block found that slightly over half (52 percent) of consumers that received APTCs had to pay back an average of $530. Other notable findings:

  • While two-thirds of consumers insured through a marketplace and receiving subsidies had to pay back part of their APTC, approximately one-quarter of tax filers received an average additional APTC of $425.
  • Thirteen percent of those receiving APTCs did not get an additional refund or have to pay a portion of their APTC back.
  • The average “individual mandate” penalty for lacking health coverage in 2014 was $178; penalties are scheduled to rise next year (the minimum fee will rise from $95 to $325).

H&R Block based its figures on the estimated 20.5 million tax returns the firm helped file this year. In response to this report, the Internal Revenue Service (IRS) estimated that only around one half of individuals who received an APTC had smaller refunds because they were overpaid. It also predicted that the number of consumers affected by tax liabilities or penalties related to the Affordable Care Act (ACA) will decline over time as consumers become more accustomed to the system.

Background: APTCs are subsidies issued on a sliding scale to low and moderate-income consumers who enroll in a health plan through a public health insurance marketplace. The ACA grants subsidies to consumers with annual incomes between 100 percent and 400 percent of the federal poverty level (approximately $24,250 to $97,000 for a family of four). The government calculates the subsidies based on the consumer’s self-reported prospective income for the coming year and the premium for the second lowest price silver plan on the marketplace.

(Source: H&R Block, “H&R Block’s Final ACA Stats: Refunds Impacted for Most Who Received Advance Tax Credit,” April 27, 2015)

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Study: Antibiotic prescribing rate similar among retail clinics, physician offices and EDs

A study published in the American Journal of Managed Care found that retail clinics do not have higher rates of prescribing antibiotics, even though they are often in drug stores that might profit from higher use of drugs in general. The researchers found that retail clinics have a similar antibiotic prescribing rate as primary care practices and emergency departments (EDs). It also found that retail clinics prescribe fewer broad-spectrum antibiotics—medicines that are often associated with antibiotic resistance. Researchers analyzed data on patients who visited one of the three largest retail clinic chains for acute respiratory infections (ARIs). ARIs, such as bronchitis, are the most common condition causing individuals to seek health care in the US.

The researchers found that prescribing rates were comparable among retail clinics (58 percent), primary care practices (62 percent) and EDs (60 percent). Primary care providers prescribed the most antibiotics in diagnoses where antibiotics were never appropriate, and primary care practices were more likely to prescribe broad-spectrum antibiotics than retail clinics.

Related: ARI diagnoses are associated with the use of broad-spectrum antibiotics, which target a wide range of bacteria with little specificity. Broad-spectrum antibiotics are not necessarily more effective than other antibiotics and can lead to antibiotic resistance. Earlier this year, the White House included $1.2 billion in its 2016 budget to combat antibiotic-resistant bacteria. The administration has made this subject a priority and has issued an executive order and a report to unite efforts that may address antibiotic-resistant bacteria (see the February 3, 2015 Health Care Current).

(Source: Mehrotra, Ateev, Gidengil, Courtney, A., Setodji, Claude M., Burns, Rachel M., Linder, Jeffrey A., The American Journal of Managed Care, “Antibiotic Prescribing for Respiratory Infections at Retail Clinics, Physician Practices, and Emergency Departments,” April 2015)

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FDA outlines stepwise process for demonstrating biosimilarity

Last week, the FDA finalized its guidance for how manufacturers can demonstrate that a proposed therapeutic protein product is biosimilar to a reference product. The FDA will generally allow a biological product submitted under section 351(k) of the Public Health Service Act to be licensed if the information in its application “is sufficient to show that the biological product is biosimilar to the reference product.” In the guidance, the FDA outlines a stepwise process for demonstrating biosimilarity:

The FDA emphasized that the guidance “represents the current thinking of the FDA on this topic” and is not binding. It also encouraged manufacturers to work with the FDA to cultivate the development program for their proposed products. This guidance was released just one month after the FDA approved the first biosimilar product under the 351(k) pathway that was created by the Biologics Price Competition and Innovation Act of 2009 (see the March 10, 2015 Health Care Current).

(Source: FDA, “Scientific Considerations in Demonstrating Biosimilarity to a Reference Product,” April 2015)

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On the Hill & In the Courts

ONC chief summarizes three key steps to interoperability in health care

In a blog post from April 24, National Coordinator for Health Information Technology (IT) Karen DeSalvo outlined what her office views as the key steps needed to achieve interoperability in health care.

DeSalvo also made reference to the work that the Office of the National Coordinator for Health IT (ONC) has done thus far to enact the policies it laid out in its roadmap to interoperability. The ONC released a report on information blocking in the health care sector earlier this month and is actively working with state governments to make privacy regulations more consistent. The ONC has stressed that interoperability is a priority and will help achieve better health care through health IT.

Analysis: Earlier this year, the ONC released the initial draft of “Connecting Health and Care for the Nation: A Shared Nationwide Interoperability Roadmap” (see the February 10, 2015 Health Care Current). The draft calls for ONC to ensure that four important actions are completed in the short term:

  • Establish a governance framework for interoperability that includes “overarching rules of the road” and involves a public/private process for implementation
  • Improve standards and guidance so they are “scalable, high performing and simple”
  • Use policy and funding levers to create incentives to use common technical standards to share health IT
  • Protect privacy and security while helping health care organizations understand and abide by HIPAA rules

This roadmap is the first detailed vision the federal government has provided to the industry of a path toward system-wide interoperability. It also identifies where the administration believes the current issues lie and what may need to happen to allow the industry to get there. While the roadmap provides a number of answers, it also raises a number of questions. Stakeholders should consider whether EHR vendors will have to change their systems or even their business models, how the roadmap will be enforced and what the broader impact on the health care ecosystem may be.

(Source: Karen DeSalvo, “Health Information Technology: Where We Stand And Where We Need To Go,” Health Affairs Blog, April 24, 2015)

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GPhA and PhRMA propose alternative to FDA proposal on generic labeling

The Generic Pharmaceutical Association (GPhA) and Pharmaceutical Research and Manufacturers of America (PhRMA) have joined to support an alternative process for updating drug labels when new safety information about brand or generic drugs is discovered. The FDA has proposed using the Changes Being Affected process, which would require manufacturers to update their labels before the agency makes a final determination on the new safety information. GPhA and PhRMA have proposed the FDA should use an alternative process—the Expedited Agency Review (EAR) process.

The EAR process would be used if the FDA receives new safety information from a manufacturer or if the FDA reviews information on the Sentinel System – the reporting database for tracking the safety of drugs, medical devices or biologics – and determines that a label change should be required. At that point, the FDA would be required to decide within 45-60 days whether to update the label. If the FDA decided that a labelling change was needed, manufacturers would have 30 days to comply.

Industry representatives have stated that the EAR process would prevent confusion among consumers. They believe that if brand and generic drugs have different labels, consumers may not know what safety information to follow. Meanwhile, a group of 47 lawmakers sent a letter to the FDA urging them to finalize the initial guidance using the system it originally proposed. The lawmakers argue that generic pharmaceutical manufacturers should be required to have the same standards for labeling as their branded pharmaceutical counterparts.

(Source: GPhA, “Supplemental Comments of the Generic Pharmaceutical Association regarding Docket FDA-2013-N-0500: Supplemental Applications Proposing Labeling Changes for Approved Drugs and Biological Products,” April 27, 2015)

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States considering ways to increase pharmaceutical cost transparency

As new specialty drugs continue to reach the market, health plans and Medicaid programs are continuing to look for ways to keep costs manageable. In 2014, spending on prescription drugs increased by 13.1 percent, reaching $373.9 billion. At the same time, spending on specialty drugs increased 23 percent and accounted for one-third of drug spending. A number of state legislatures around the country are debating the merits of requiring drug companies to disclose their development costs in an effort to justify the high prices of certain pharmaceutical drugs. Proponents believe that increased transparency would pressure companies to reduce prices.

  • California and Oregon would require that pharmaceutical manufacturers selling prescription drugs in the state file a report if the wholesale acquisition cost of the drug is more than $10,000 annually or per course of treatment. 
  • Massachusetts’ legislature is debating not only requiring cost and pricing reporting, but also setting a maximum allowable price a manufacturer can charge. 
  • North Carolina is considering requiring all manufacturers of brand medications available in North Carolina to file a report on development costs. 

In general, consumer advocates, insurers and business organizations support greater transparency surrounding drug pricing. However, some drug manufacturers have made the point that development costs are not the only factor that should be considered in looking at prices. Drug manufacturers say that the price of successful treatments includes the cost of unsuccessful treatments that never made it to market and believe that these transparency proposals would “stifle innovation.”

Analysis: While it remains unclear if these bills will pass, pharmaceutical companies will likely continue to face pressure to justify their prices. As policy makers continue to attempt to curb health care cost growth, the industry will likely continue to be asked to provide more information on their development costs.

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Around the Country

FTC warns New York that Certificates of Public Advantage could be anticompetitive

In a letter to the New York State Department of Health, the Federal Trade Commission (FTC) expressed concern that allowing providers to apply for a Certificate of Public Advantage (COPA) – which gives organizations “immunity” from federal and state antitrust laws – will lead to the sharing of sensitive information and joint negotiations with payers.

New York's Delivery System Reform Incentive (DSRIP) program aims to reform the Medicaid system, emphasize clinical management and improve population health. Last summer, as a part of its larger Medicaid delivery reform, New York offered providers the option to apply for a COPA as a way to collaborate with other organizations participating in DSRIP. However, the FTC says that these arrangements could increase costs for consumers and decrease access. On the other hand, state officials are optimistic that COPAs will allow providers participating in DSRIP projects to better coordinate care and share information, ultimately increasing efficiency and reducing costs.

Some insurance companies and business organizations are also concerned that allowing providers to join forces to coordinate care will give them more bargaining power to negotiate rates. The FTC letter reiterated these concerns and stressed that it will evaluate the changes to see when a collaboration between organizations becomes a monopoly. It will also review how these market changes affect patients.

Despite the letter from the FTC, New York’s health department plans to move forward with the $6.4 billion Medicaid reform proposal. The letter is advisory and it is unclear whether the FTC will take further action.

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Targeting overuse of routine lab tests may save costs and improve outcomes

Overuse of health care services can lead to patient harm and drive up costs. Researchers from Vanderbilt University tested an intervention involving clinician education and feedback that led to reduced unnecessary laboratory testing. The intervention targeted the number of daily blood tests ordered in the hospital.

The researchers presented results from their process-improvement initiative at the Society of Hospital Medicine 2015 Annual Meeting. The study started with the Choosing Wisely initiative, which lists repetitive complete blood counts (CBCs) and chemistry testing among common practices that physicians and patients should question. The Choosing Wisely effort, led by the American Board of Internal Medicine Foundation and supported by more than 70 specialty society partners, has a goal of advancing a national dialogue on avoiding wasteful or unnecessary medical tests, treatments and procedures.

The intervention at Vanderbilt’s medical center took two years. The researchers gave tailored presentations to clinicians in both house-staff teams and direct-care hospitalist teams. Both groups also received additional educational information, as well as displays reporting the price of lab tests at clinical workstations. Clinicians were not given specific guidelines on when to order CBCs or basic metabolic profiles, but were encouraged to consider each order carefully rather than routinely ordering tests. Clinicians were sent a weekly email with feedback on daily tests and basic metabolic profiles ordered by each team.

For the house-staff teams, the proportion of patients with no lab tests ordered on any given day increased from 2.6 percent at baseline to 9.1 percent. This reduction in tests led to an estimated cost savings averaging $20,288 per week. For the hospitalist teams, the proportion of patients with lab-free days increased from 12.8 percent at baseline to 27.1 percent, with an estimated weekly cost savings averaging $16,733.

The researchers compared the intervention teams with two control groups of different specialists. They found that during the intervention period, the number of lab tests ordered by the control groups declined, although not as dramatically as in the intervention groups. The proportion of patients with lab-free days increased from 1.6 percent to 3.3 percent in the house-staff control group, and from 13.0 percent to 17.0 percent in the hospitalists control group. The team is now investigating differences in the patient populations and possible temporal trends that could have influenced the results. They are also expanding the intervention to neurology and certain surgery services.

Analysis: This study demonstrated that raising awareness and proactively tracking and sharing data can significantly influence clinician behavior. Of note, this study did not measure impact on patient outcomes. The literature that supports the Choosing Wisely initiative argues against the need for routine daily testing. Physicians have sparse clinical guidance on when to test. Evidence shows that routine testing is related to increased anemia and associated mortality, and that outcomes appear to be similar in hospitals with different ordering practices. But, evidence does not support an optimal number of lab tests. To add to the research base, a next step may be to look at total hospital costs to ensure that reducing lab testing does not lead to increased costs in other areas.

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Breaking Boundaries

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