Drug Discovery Cost Rise 145% — You are Catching a Break

The premier study on drug development costs was released and the results will astonish—costs have increased by 145% in the past decade (1). In 2003 the Tufts Center for the Study of Drug Development released what has become the financial benchmark for comparing drug development costs. In 2003 the average cost was estimated to be $800 million. The new cost--$2.6 billion. But I'll explain below, why consumers are actually getting a great deal on what they pay at the pharmacy for drugs.

—Overview of the studies—

The study breaks down costs into four buckets (2)(3):

1. Pre-clinical/pre-human discovery costs
2. Clinical study and trial costs
3. Failure rates
4. A “cost of money factor” e.g. monies that could be invested elsewhere

The total costs for the discovery, trial and failure rates equals $1,395 million. The total time costs (cost of money) equals $1,163, in sum totaling $2,558 million.

The 2003 study, used product data that entered human testing during 1983-1994. The 2014 study, used product data that entered human testing during 1995-2007.

—My Take: Consumers are Getting a Fair Deal —

Comparing the Tufts study to the macro environment of inflationary costs bears out the relative stability of drug cost increases passed onto the U.S. consumer. The Consumer Price Index (CPI) represents a “basket of essentials” most U.S. households purchase each month—things like groceries, gasoline, electricity, shelter, medical necessities, etc… During the past decade the CPI has increased by 2.1% per year (4). This means on average you and I paid 2.1% more each year for our essential goods and services.

The CPI also tracks medical specific costs, both health services and health products. Since 2005, you and I are paying 35% more for medical services and drugs. Comparatively, if you choose to believe in the merit of the Tufts study, drug manufacturers have incurred a 145% increase in costs to discover and develop new drugs before those drugs are manufactured, marketed, sold, and then supported for safety and phase 4 research. Include these additional necessary support functions and costs grew closer to 200% since 2003.

If not for the continuous technological, process, and cost-saving efficiencies of drug manufacturers and health payers—you, myself and the rest of the country would have felt a much greater impact in our collective wallets with every filled prescription.

Navigate Your Company to Health, visit www.compassx.com

Kyle J. Heppenstall

—How can we help you in 2015? —

1. You are a leader in the Health and Life Science industry
2. You lead or support one of these functions: Project Management Office, Sales and Marketing Operations, Corporate Supporting Functions (Finance, Legal, HR, Compliance, Procurement), or Technology Projects
3. Have technical pains in: SalesForce.com, Business Intelligence, Mobility, HRIS, or Cloud/SaaS strategy
4. Need to flawlessly execute a strategic project in the next 90 days
5. Feel like your overpaying the “Big Box Consulting Firms” and want a better alternative

If you answered "Yes" on 3-out-of-5 questions — We should talk, please email me at kyleh@compassx.com

—Resources—

• (1) Press Release http://csdd.tufts.edu/news/complete_story/pr_tufts_csdd_2014_cost_study
• (2) Slide deck presentation via webcasthttp://csdd.tufts.edu/news/complete_story/cost_study_press_event_webcast
• (3) Background of the Study http://csdd.tufts.edu/files/uploads/cost_study_backgrounder.pdf
• (4) Bureau of Labor Statistics 2014 CPI summaryhttp://www.bls.gov/news.release/cpi.nr0.htm

Health Sector Logs Big Gains in 2014 -- Four Predictions for 2015

2014 has concluded and it was very kind to the portfolios of Health and Life Science executives. During 2014 the Dow Jones U.S. Healthcare broad industry index returned 25% (second only to Utilities +26%). Healthcare also ranked first in three year annualized returns (+27%). The Dow Jones U.S. Healthcare index includes: Providers, Equipment, Supplies, Biotech and Pharma (1). The companies featured in my blog have done even better, returning on average +82% this year. Here is a recap of our featured stories and how those companies performed in 2014. I also provide four early predictions for 2015.

-2014 Featured Blog Stories in Review-

February 2014, Gilead Sciences Inc. (GILD) +26% - I actually wrote two featured articles about Gilead and their game changing product - Sovaldi. The first feature discussed the incredible upside revenue predictions, the second was a follow up with expected headwinds they would face during the year, namely Sovaldi's U.S. cost per treatment (~$80,000-90,000). The pressure on costs came from all directions: U.S. Law makers, foreign governments, physician groups, patient class action lawsuits, health insurance payers and finally from a direct competitor AbbVie, who signed an exclusive deal with one of the largest PBMs--Express Scripts to exclusively use their Hep C product Viekira Pak. Gilead has recently lost -20% of its' stock price, but I still like their long term prospects (see my 2015 predictions below).

April 2014, Allergan Inc. (AGN) +93% - I explained why Valeant's initial proposal had no legs (too low an offer, too heavily reliant on Valeant stock, and not enough upfront cash involved). I suggested Valeant needed to focus on managing their own debt levels before taking on more leverage "How does Valeant spell R&D? D-E-B-T". I also predicted the likely "White Knight" scenario, but admittedly didn't have the eventual suitor Actavis any where on my radar. Valeant has retreated for now to focus on "cutting debt and increasing their own stock price."

May 2014, Exact Sciences Corp. (EXAS) +127% - My most timely call of 2014; EXAS left most companies in the dust from June onwards (currently trading at $27).Exact Sciences brought a game changing colon cancer screening test to market, a test that is much less invasive and almost as accurate as the current "gold standard" in colorectal cancer screening.

--What will 2015 bring? Four early predictions--

1. Healthcare sector outperforms the S&P 500 (2).

I like our sector again to churn out street beating profits, dividends, and new products. I'm predicting beating the S&P 500 index in 2015.

2. Health Providers finish as one-of-the-top-twenty-percent Dow Jones sub-sectors(3).

Providers continue their momentum, with a strong tailwind from Obamacare more and more patients now have health insurance. Insured patients mean paying patients for providers who have a heavy fixed cost model (buildings, equipment, payroll). Every additional paying patient drives higher net profits.

3. Biotech finishes as one-of-the-top-twenty-percent Dow Jones sub-sectors (3).

Currently already riding a three-year-annualized-return of 47% (second only to...would you have guessed...Airlines? +66%) biotech is going to continue its' charge. My play in this space is simple-cheap money allows more innovators more swings. Or stated another way, low interest rates and a surge in overall wealth allows money to be invested in this traditionally risky space. More money allows more companies to take products to market.

4. Gilead Sciences beats the S&P 500.

I believe the recent -20% correction (see above) is more pullback opportunity than continued decline. Gilead still has the premier product with Sovaldi, has first mover advantage, an incredible pipeline and a forward PE of only 10. Even with a price reduction and increased rebates on the flagship product Sovaldi, my bet is a broad market beat in 2015.

Hoping you all have another great year in 2015!

You can follow my blog here: http://www.compassx.com/knowledge-center/blog/

Kyle J. Heppenstall | Managing Director | CompassX Consulting

--About CompassX--

Health & Life Science is Our Passion

Hard fought results, perfect project execution on strategically aligned assignments, this is what we do best. Founded in 2009, CompassX Consulting serves Health and Life Science clients on the West coast.

--Notes & Disclosures--

Note: I've tried to make these predictions include specific metrics to measure against next year. My goal is to win 3-out-of-4. This article was originally published on 04-Jan-2015.

Disclosures: My blogs and articles are intended to provide Health and Life Science executives broad industry news and trends not investing advice. I am not a professional analyst, broker, or financial advisor. I currently hold shares in Healthcare and Life Science mutual funds & ETFs and Gilead Sciences.

-Footnotes-

(1) DJ Health Care index places Health payers (e.g. health insurance) into their Financial broad industry index.

http://www.djindexes.com/mdsidx/downloads/Sector_Classification_Structure_Definitions.pdf

(2) Based on the Dow Jones U.S. Total Market Industry Groups >> Health Care Index (DJUSHC) http://www.djindexes.com/sectors/

(3) Top twenty percent is equivalent to a finish of twenty-three or less out of the 114 sub-sectors in the Dow Jones U.S. Total Market Industry Groups

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Calling the CA Real Estate Market

A special update for those living in California and interested in our state's real estate picture.

Those of you who know me a little, know I'm passionate about investing.  Stocks, bonds, commodities, real estate...this is my idea of golfing on the weekends.

Only a few of you, who know my deepest secrets, know I have man crush on the Newport California based bond company PIMCO.  In short, the company is run by two of the best fixed income minds in the game today, Bill Gross and Mohamed El-Erian.

In last weekends Barrons magazine, their top manager was interviewed.  "Top manager" might be a bit of an understatement, Mark Kiesel was Morningstar's 2012 Fixed Income Manager of the Year.

You see, Mark has written a couple of prescient articles on the housing market. He has also put his money where his mouth is, and in 2006 literally packed up all his belongings, sold his home, and rented.  He summed up the reasons for his exit, in his paper entitled "For Sale."

A year later Kiesel wrote "Still Renting," showing he still was betting against the housing market.  We all know what happened from 2008-2011.

Well now Mark is back, figuratively and literally.  In May of 2012 he purchased a house in Newport and wrote his latest housing paper called "Back In." He says, "the way to make money is to be as overweight housing as you can, because we are going to see the beginning of probably a four-to-five-year upcycle in housing."

He also points to data saying, "today there are 36% fewer homes for sale in the state of California than when I bought my house a year ago...so where people want to live, there is almost no supply."

I'm not in Mark's league, so I don't try to predict market cycles.  But I do now have Mark's blog page bookmarked.

Where do you think we're headed?  Hit reply and let me know.


Notes:

Mark's article "Back In" written about this time last year.

http://www.pimco.com/EN/Insights/Pages/Global-Credit-Perspectives-May-2012.aspx#

I can't bookmark the article to Barron's, but you can Google "barrons, kiesel" and find the full article.

Using Consulting Resources Effectively - Part 2

In our last post we helped categorize your projects.  Today, let's look at the characteristics of external consultancies.

Consultancy Types:

Big Firms - Bring to bear resources across a broad spectrum of industries, technologies and functional areas.  Can meet the needs of the largest of large inititiatives domestically and globally.   Big firms will primarily focus only on these large initiatives to move their "revenue meters”.

Mid Sized Firms - Directly can compete with Big Firms in all but name (branding) and the largest initiatives. Often possess a core strength upon which they were initially founded; be that industry, functionally or technology. 

Management Consulting & Technology Boutiques - Typically made their name in a specific industry, functional area or technology.  Great work, word of mouth and/or a hot technology have allowed growth into larger team based deliveries.

Software/Platform Specific Vendors - The professional services division of a software vendor.  They possess a very high degree of knowledge in their own product and often the specific business functions their product aligns to.

Staffing / Placement Agencies - Focused on augmenting teams, and single resource placements.

Independent Consultants -  Independents are typically used to augment projects or fulfill gaps in on-going operational activities. Specialities, acumen, and skill sets will vary tremendously. Note: in the context described here are truly independent workers, not joined to or aligned with any of our previous categories.

Internal Resources - Although not part of any external consulting organization, may at times augment 10-50+% of any given project's team size.  These internal resources are "do’ers” and officially allocated to a project, even if only part-time.  This category does not include business stakeholders that may provide input throughout a project.

Consultancy Characteristics:

Total Cost of Pricing - The total cost of doing business excluding travel (see below).  This includes: base consultant rates, over-time, over-head costs (partners, directors) and retainers.

Client Focused Flexibility - Willingness and ability to make common sense changes occur quickly for clients. Do small scope changes require a change order? Do legal contracts and statements of work take weeks to negotiate? Do you lack access to frequently interact with the firm's top management?

Team Focused Delivery - Turn key ability to resource all major aspects of a team’s makeup if so requested.

Lean Staffing Models -  Does the consultancy take an aggressive approach to lean project staffing?
Does the consultancy allow for its' resources to cross over into different roles simultaneously?  Are all resources efficiently allocated and being utilized to the fullest? 

Bench Strength - The ability to meet project resourcing demands with the appropriate talent level.

Travel Related Expenses / Out of Town Consultants -  Are >50% of project resources typically incurring out of town travel expenses?  Travel costs can quickly add up when an additional 10-20% is added to direct resourcing costs.

Stay tuned for our next post, where we'll match resourcing options with your project types.

Figure 1.  Consultancy Characteristics Summary Matrix

Figure 2. Consultancy Strengths

Figure 3. Consultancy Weaknesses

About Us:

At CompassX we know all about strategy implementation and project execution excellence. To learn more:

kyleh@compassx.com  |  www.compassx.com | © COMPASSX GROUP, 2013 All Rights Reserved.

Using Consulting Resources Effectively - Part I

You know how it goes...a whiteboard chock full of prioritized strategic initiatives and projects that all need to be implemented this year.  Annual spending budgets may have increased slightly year over year, but certainly not significantly and not keeping pace with business demands.

No longer can your internal business customers wait many months for delivered benefits and results.  The Lifesciences compettitive landscape has only become more and more competitive; patent expirations, generic competition, biosimilars, increased regulatory scrutiny and legal burdens and the higher costs associated with bringing new products and devices to market.

A recent 2012 Accenture Lifesciences industry study states, "The revenue forecasts...reveals how starkly the future prospects have changed for several of the companies over the last three years. The four year forecast (2013-2016) remains low for some companies which continue to struggle to navigate a path back to growth after the worst of the patent cliff. A few even face the prospect of a second round of significant patent expiries and are forecasted to have negative growth. However, several companies are forecast to grow in line with the estimated global market growth of 4-5 percent, having articulated a clear path back to growth and making substantial strategic and operational changes.These companies are adjusting to a “new normal” where profitable growth is still attainable, although harder to achieve." 

Do you have a plan? How will you resource strategic projects this year? This buyer’s guide will assist you in navigating the hazardous landscape of buying consulting services.

Let’s first look at defining your project type.

Project Categories:

Strategy - Architecting new business and IT solutions by shifting previous thinking and adopting new approaches.  Here, our categorization of strategy projects is "pure strategy", it does not include the execution or implementation phases which would later fall into one of the below categories. 

Large Scale Transformational - Efforts attempting to deliver benefits across an entire organization, or multiple business functions simultaneously.  High degrees of business and IT complexity, organizational changes and many moving pieces equates to large:  program budgets, project resources and capital expenditures.

Large Divisional - Delivered benefits intended to impact a single large company division e.g. Research and Development or Sales.  Even the most straight forward implementation will be complex due to size and business criticality. 

Departmental - Vertically organized to produce results that impact specific business functions e.g. Legal, Compliance, Regulatory Affairs.  Smaller in scope and complexity of a Large Divisional program.

Ad Hoc or Incremental - The smallest of the project categories, often used to incrementally build upon previously delivered benefits, for example system enhancements or extensions, and continuous improvements to business processes.

In Part II of this series we will show you a behind the scenes "menu of consulting firms" available to fulfill these project types. 

About Us:

At CompassX we know all about strategy implementation and great project execution excellence.

Learn more: kyleh@compassx.com  |  www.compassx.com | © COMPASSX GROUP, 2013 All Rights Reserved.

No B.S. Time Management Book Review

Recently I finished reading Dan Kennedy's "No B.S. Time Management for Entrepreneurs, the Ultimate No Holds Barred Kick Butt, Take No Prisoners, Guide to Time Productivy and Sanity".  The title is quite a mouthful, and a bit flashy, but the author's content is worth the read.

Since many of my clients and friends are not business owners, I wanted to extract the bits most relevant to both leaders, employees, and business owners. 

• Kennedy takes you through a series of steps on how to value your time in dollars.  The punchline...your time is worth a lot more than you think, treat it as your most valuable resource.
• Increase your productivy by "getting lost".  Kennedy provides an example of a businessman who rented a small office neither at his home office or onsite work office.  In this example, the man was not productive in either of the typical settings because of frequent interruptions.  His third office provided him with the opportunity to harnesh his producitvty zone.  Find your "third office", whether this be home, a closed door office, conference room, library or coffee shop.
• Link everything you do to your goals - multiple times per day.  He recommends frequently asking yourself, "Is what I am doing, this minute, moving me measurably closer to my goals"?  A >50% "Yes" rate is your benchmark, strive to constantly push this percentage higher.
• Delegate and then keep yourself out of the way. Kennedy has a little saying when delegating, "Good enough is often good enough", meaning often the delegator will have a better way of doing things or at least believe he does.  By stepping out of the way, and letting the results materialize, you will often find the results are indeed good enough.
• Reasons why a year passes and no meaningful progress is made.  This final chapter is the most poignent.  Write down the 3-5 most important, highest value, daily tasks that will return big dividends.  Make yourself do at least one of these tasks every day without fail.  This may require some serious self-discipline, tossing out old ideas and re-arranging your daily routine, but Kennedy points this single disiplice out as the number one factor of personal and career success.

For more material on Dan Kennedy see www.dankennedy.com

Speaking Bureau: Life Sciences’ New Compliance Normal

Life sciences chief compliance officers are not taking many vacations these days.  Regulations are requiring compliance departments to delve progressively deeper into interactions with health care professionals (HCP’s) and health care institutions (HCI’s).  The physician speaking bureau is one such HCP interaction which has come under increased regulatory scrutiny.

Speaking Bureau → Training → Programs → Events.  Great compliance programs will ensure “compliance entry gates” are in place prior to each stage of a speaking bureau.  Long before a HCP has delivered on her speaking engagement, a series of best processes must be in place; they must be enforceable, repeatable and reportable. Not only will these procedures protect a high risk corporate work-stream, but these same procedures will serve as proof of organizational training that is aligned with your company’s compliance policies.

Entry Stage.  A speaking bureau allows for the organization of life sciences marketing objectives, key opinion leaders, speaking events, regions of coverage and all of their associated details.  Much the same as a folder is used to organize paperwork, the bureau is used to group similar topics with a specific purpose.   To maximize the bureau’s effectiveness, acceptance into the speaking bureau should be dependent on the following categories and the proper auditable documentation of the following:

1. Good professional standing. Includes verifying: state and federal licenses to practice, Office of Inspector General excluded individuals, and generally sound existing public relations.
2. Curriculum Vitae.   A potential speaker’s career should illustrate a consistent track record to be given the opportunity to present to highly skilled peer groups, including areas of specialization and clinical experiences.
3. Fair Market Value Compensation. A consistent method or tool used to calculate payment standards for honoraria both within the organization and pan-industry.  Notice should also be taken to ensure payment maximums are not exceeded and, when exceptions do occur, a clear supporting explanation with executive level approvals provided.
4. Contract or Agreement. A fully executed contract with the primary or secondary speakers defining: scope of services, expected dates of program performance and completion, honoraria (gathered through the Fair Market Value process described above), travel and lodging reimbursement policies.
5. Compliance Certification.  An additional but recommended step to clearly presenting your compliance department’s policy to your potential speakers.  This additional certification clause brings special attention to important matters such as: non-approved, or “off label”, questions and answers, mandatory use of pre-approved materials and slide decks, and procedures to ask clarifying questions prior to the actual event occurring.

Training Stage. Once a speaker or HCP has passed the entry criteria for a bureau, proper training is required to meet regulatory training guidelines and ensure the speaker is fully prepared to facilitate speaking sessions on behalf of your Life sciences organization. Proper record keeping and documentation of the following activities is a must have.

1. Attendance & Understanding.  A speaker must attend a training session (either live or web-based) and present an understanding of the materials covered through interactive feedback.
2. Pre-Approved Materials.  The importance of using only pre-approved materials and slide decks should be reinforced during training.  Deviations from pre-approved materials has proven to lead to an increase in speaking infringements.
3. “Off Label” Discussions.  Another priority of your training sessions with speakers will be to reinforce the proper dialogue and communication around non-approved, or “off label” questions and answers during actual events.  It should come as no surprise that this particular area has come under much regulatory scrutiny over the past several years.  The ability or inability to execute controls in this one area should be treated very seriously and given top priority by compliance organizations.

Program & Event Stage.   Only after meeting the above criteria and passing thru the Training Stage should a speaker be allowed to conduct or facilitate an actual event.  Now your policies and processes are put to the test.  This final stage represents a delicate balancing of your organization’s sales and marketing efforts with regulatory and compliance requirements.

1. Aggregated Spend. Spend must be tracked not only on honoraria for the speaking training and program participation but also, due to newly enacted regulation PPACA, expenses such as airfare, lodging, and meals will be reportable for speakers and attendees.
2. Monitoring. Sample or risk based auditing by field compliance team members allow a “boots on the ground” approach to learning about complexities, potential bottlenecks, compliance improvement areas and reporting issues, as necessary.  This monitoring exercise may also extend into other related areas of HCP interactions such as office visits, training and advisory boards.
3. Attendee Lists. In addition to the actual speakers, processes should also capture the participants’ attendance for the proper allocation and recording of items such as #1 above, Aggregate Spend capture.
4. Attestation & Feedback Forms. Your compliance reach will go only so far, and help from your field representatives who will be attending the speaking events provides an opportunity to push your policies to the level of direct daily interactions.  An attestation to the delivered program’s compliance effectiveness provides another level of ownership and buy-in.  This follow-through will enable your organization to react quickly to gaps and facilitates continued improvements in future sessions.

Due to their federal promotional categorization and direct interaction with HCP’s, speaker bureaus lie directly in the crosshairs of regulatory scrutiny, creating a high risk environment for Life sciences compliance departments.  Compliance officers need to orchestrate a symphony of risk mitigating processes with extremely varied departments such as: marketing, commercial, clinical, legal, and information systems in order to produce the elite outcomes necessary for meeting the “New Compliance Normal” of their speaker-physician bureaus.

This article was originally published on March 29, 2013 at Corporate Compliance Insights  http://www.corporatecomplianceinsights.com/speaking-bureau-life-sciences-new-compliance-normal/