Return on Innovation, Part 1: Commercialization Services

A Multi-part Series on Outsourced Pharmaceutical Services

The outsourced pharmaceutical services sector provides a wide range of opportunities for strategic acquirers and private equity investors. Motivated by the need to become more efficient in drug development and maximize returns on approved therapies, pharmaceutical companies are turning to outsourcers to drive efficiency across their value chains.

In this article, Paul Hepper, a managing director in the Harris Williams Healthcare & Life Sciences (HCLS) Group, discusses four specific areas within outsourced pharmaceutical services that offer opportunity for investors—and the strategy that can unlock their full potential.

Key Takeaways

  • Pharmaceutical companies are increasingly using outsourcing to be more efficient and effective in drug development, reducing time-to-market and boosting the commercial success of their products.
  • There are four especially promising segments within outsourced commercialization services: reimbursement and patient assistance programs, hub businesses, health economic outcomes businesses and physician engagement organizations.
  • Each of these segments is attractive in its own right. In addition, there is substantial opportunity to build end-to-end platforms of scale. Three key characteristics set the highest-potential companies apart from the rest.

The Catalyst to Outsource

Pharmaceutical companies are facing substantial financial pressures as research and development (R&D) costs rise and reimbursement processes become more complex. Multiple factors are contributing to rising R&D costs, many of which are outside the control of pharmaceutical businesses.

For decades, manufacturers have reaped great success targeting therapeutic areas with large patient populations, in which a new drug could capture a sizable market and be easily supported by payers. Lipitor, Hepper points out, is a classic example of such a blockbuster drug.

“It was very easy for payers to support the treatment by putting these drugs in their formularies or even in a preferred tier within their formularies,” notes Hepper. “They could clearly see that reducing cholesterol in their patient base was going to reduce overall health care costs."

Now that these big opportunities are largely addressed and many blockbuster drugs face patent expirations, manufacturers have to find more specialized therapeutic frontiers, which can be a costly and challenging process (Figure 1).

Figure 1: Rise of Specialty Drugs in the Market 

Figures in billions. 1

pharmaservices-graphic-100118_3.png

Such specialized areas typically feature smaller patient populations and involve more complex diseases, thus making effective therapeutics harder to develop. As Hepper explains, it takes more research to find the compound that's going to be efficacious, and it can be more difficult to find patients for clinical trials due to scarcity and more complex medical conditions. In addition, while easing recently, the FDA's quality assurance thresholds for drug approval have steadily increased over time, making it more complicated, complex and lengthy to get a drug approved.

As a result of these dynamics, the cost of developing a new drug is skyrocketing to as much as $2.6 billion—three times more than the estimated $802 million it cost in 2001.2  As costs rise, longer clinical trial periods and slower drug approval processes are shrinking the time available for recouping costs under patent protection. Since 20-year patent protection begins when the drug is invented, a 10-year effort to get through the R&D process and bring a new drug to market leaves just another 10 years to recover astronomical development costs.

Once a drug is in the market, its manufacturer must continue to invest time, money and effort in demonstrating its long-term efficacy and cost-effectiveness. Payers and providers are demanding more data on these measures, leading manufacturers to conduct clinical trials long after drug approval, amassing additional data to show that the drug is working—and, ideally, reducing health care costs.

“With more and more real-world patient data,” says Hepper, “pharmaceutical companies can continue to make their argument to payers that they should be paying for the drug because it's doing what they said it was going to do. Thus, they remain in a favorable position from a reimbursement perspective.”

With these dynamics threatening their profitability, pharmaceutical companies are increasingly using outsourcing to be more efficient and effective in drug development, to help reduce time-to-market and boost the ongoing commercial success of their products.

Areas of Investor Opportunity

A rich variety of outsourcing providers serve the pharmaceutical industry, providing components of the drug discovery, research, manufacturing, IT and drug commercialization processes.

“It’s an exciting space with attractive growth,” says Hepper. “There are many good investment opportunities, particularly in outsourced commercialization services, which are focused on maximizing return on R&D investments.”

In Hepper’s view, there are four especially promising segments within outsourced commercialization services. Each supports the essential goal of helping pharmaceutical manufacturers—and, in particular, brand managers—more completely realize a drug’s commercial potential over its full product lifecycle.

Reimbursement and patient assistance programs

Patient assistance programs manage the patient’s interaction with the pharmaceutical company, including facilitating payer authorization when the patient is prescribed a new drug. The focus of these programs is to help patients with limited or no insurance or financial means obtain access to medications. If insurance will not cover the therapy or the patient is unable to, the pharmaceutical company’s patient assistance program works with patients and their providers to subsidize patient access to the drug.

“While far short of a retail price point, pharmaceutical companies can use these programs to contribute toward positive cash flow, gross profit and ROI,” says Hepper. “But assistance requires a complicated patient qualification and enrollment process,” he adds. Reimbursement and patient assistance outsourcing services manage this process on behalf of pharmaceutical companies.

Hub businesses

Hub businesses sit at the nexus of patients, providers, payers, pharmaceutical sponsors and pharmacies. Funded by pharmaceutical companies, hub businesses serve a broad coordinating role across all of these parties to facilitate the administration of specialty drugs to specialty patient populations, such as those taking intravenous chemotherapy in a clinic or physician’s office. “The logistics of getting the drug paid for, delivered to a clinic or physician’s office and administered are complex,” Hepper notes.

There are many possible breakdowns in the drug delivery chain, with a range of stakeholders working to deliver the right therapy at the right time to the right patient. The hub serves a coordination role, making sure that all elements of the process are working as they should. “It’s similar to a concierge service,” says Hepper. “The pharmaceutical company pays for the service to ensure the ecosystem of involved payers and providers can administer the drug effectively, and that the manufacturer receives appropriate payment.”

Health economic outcomes businesses

Health economic outcomes businesses use big data to understand and document a drug’s efficacy and impact on health care costs. Doing so enables pharmaceutical companies to promote the drug’s value to payers and providers, and maintain its favorable market position. To achieve this outcome, these organizations tap into data, such as health plan claims data, to gather real-world evidence on the impacts of specific drugs.

As Hepper explains, “It’s a challenging task to analyze individuals in various disease states, some taking the targeted therapeutic and others not, all with various other health complications. It’s a huge data mining effort and a specialty of certain healthcare IT organizations.”

Physician engagement organizations

In a sense, physician engagement organizations represent the next generation of pharmaceutical sales. They are responsible for closely tracking and managing physician engagement, both to stay in compliance with regulations and to maximize the value of sales and marketing investments.

As competition among drugs intensifies, more effective physician engagement becomes essential. Information provided by these firms can fuel analytics on the productivity of individuals, events and marketing strategies for continuous improvement in ROI. At the same time, through the Physician Payments Sunshine Act, regulators are increasing scrutiny on interactions between pharmaceutical companies and providers. This places heightened importance on the types of sales activities conducted by pharmaceutical companies and their associated record-keeping.

“This trend has resulted in some novel businesses,” notes Hepper. “One, for example, helps pharmaceutical companies manage all of their physician interactions and the payments associated with it. They actually process the payments and help ensure things are done in the right compliance-driven way.”

Each of these segments is attractive in its own right. In addition, there is substantial opportunity to build end-to-end platforms by acquiring multiple small outsourcing companies in each segment. This is an attractive proposition to pharmaceutical companies that are quickly realizing the need to consolidate the partners they work with in each of their business areas.

“Those private equity groups that can find businesses that have unique capabilities and put those capabilities together into a full-service solution should quickly garner the attention of brand managers overwhelmed with the large outsourcing provider pool they now manage,” says Hepper.

Three Characteristics of the Most Promising Targets

As investors consider opportunities in outsourced commercialization services, they should consider the following three characteristics.

Customer base/customer profile – There are two distinct customer strategies in this segment, each offering pros and cons. In either approach, the most important consideration for investors is that the outsourcer is effectively executing against a clear strategy to serve its targeted customer base.

A “top-20” customer strategy is focused on deep relationships with the biggest pharmaceutical firms. This strategy enables valuable cross-selling opportunities across divisions and product lines. At the same time, serving a small number of large pharmaceutical companies introduces some risks related to customer concentration. Investors considering targets with such a strategy should look at the outsourcer’s track record of selling additional services into pharmaceutical companies, and the longevity of customer relationships across multiple outsourcing contract cycles.

The second customer strategy is to target a larger number of small-to-mid-sized pharmaceutical businesses. With this approach, outsourcers don't have as much customer concentration risk, but typically experience more customer churn. These outsourcers’ customers also typically have greater needs and dependency on their outsourcers since they rarely have internal resources to manage or supplement their commercialization services. Outsourcers will find less competition in this more fragmented market, but must be adept at identifying and winning new business.

Unique technologiesAny time an outsourcer has technology that allows it to execute more efficiently than its peers, it has market advantage and sustainability. For example, a technology-enabled call center can often process client calls faster, with better client outcomes than one that is not as technology-centric. Outsourcers with advanced technology also typically can scale more easily as their clients’ demands increase, which is an essential capability given the rapid ramp-ups associated with new drug approvals.

One physician engagement business’s technology enabled it to sustain and grow its business when the Sunshine Act required greater focus on compliance. Its technology was able to process reimbursements, provide an audit trail and, importantly, prevent reimbursement for those items that are out of compliance. As the complexity and competition of the commercialization space continue to grow, technology will continue to be an important differentiator.

Customer return on investment (ROI) – Today, many commercial services outsourcers are challenged to capture the data required to demonstrate return on investment. Those that can do so have a strong lever for client retention and a powerful selling proposition to attract new clients.

Hepper cites the example of a co-pay card administrator that leverages data analytics to deliver greater value for its client. “The outsourcer’s technology allows them to adjust the co-pay assistance on prescription orders in real time, which helps patients choose branded drugs instead of switching to generics.” Hepper explains that the company retrieves data when the pharmacist swipes the co-pay card, and an algorithm determines what pricing to offer in terms of co-pay assistance to make the patient indifferent between the prescribed drug and alternatives. The objective is to match the patient’s out-of-pocket cost for alternative drugs while protecting profitability. Since the outsourcer gathers data at the time the prescription is being filled, the company can tell its client exactly the return on investment it is getting from its co-pay business.

Conclusion

The more time a new drug spends in clinical trials, the less time the pharmaceutical company has to monetize its research and development. Under pressure for their drugs to perform in the market – and do so efficiently ­– brand managers are turning to outsourcing for commercialization services. These include patient assistance reimbursement, hub services, health economic outcomes and physician engagement. Strong demand for these services signals investor opportunity, particularly for those able to build platforms to serve multiple brand manager needs.

“There’s a lot happening in this relatively new sector,” recaps Hepper. “Most segments, from drug discovery and contract manufacturing, to safety and pharmaceutical IT, offer attractive investment opportunity. But tying them together into comprehensive platforms seems like the most differentiated strategy.”

Published October 2018

See Return on Innovation Part 2: Contract Research Organizations and Return on Innovation, Part 3: Pharmaceutical Safety and Risk Management.

Sources:

1. Millman, Jason, “Does it really cost $2.6 billion to develop a new drug?” The Washington Post, November 18, 2014.

2. The 2016 Economic Report on Retail, Mail and Specialty Pharmacies, Drug Channels Institute, January 2016