The Art of Acquisition

The Colorado BioScience Association presented their monthly BioBreakfast this morning covering the trials and rewards of selling your company. The panel consisted of Bonnie Vivian, former CEO of Denver Biomedical, Harry Ross, former CEO of RxKinetix and Bill Freytag, former CEO of Myogen, all of whom had been involved with selling their respective companies within the last year. Each situation was unique; two of the companies had been private and one public, two were revenue generating and one was in the R&D stage, one was a medical device company and two were pharmaceuticals. They also all had different reasons for being acquired although maximizing investor value was the general theme. Dr. Ross, who admitted to having the least pleasant experience of the three, suggested three conditions that will greatly enhance the sale value of the company:

1. Revenue generation
2. Cash in the bank
3. Multiple suitors

These conditions will not only increase the company's value but increase the options open to the selling company; in fact even the option to sell or not sell. All three panelists agreed with these points.

Dr. Freytag also added that a prospective seller would be wise to expose all of their company's warts up front and not wait for prospective buyers to find them, which they eventually will. "Concealing the warts will only breed distrust between buyer and seller leading to more contentious negotiations." Dr. Ross agreed but added that prospective buyers may find warts the seller wasn't even aware of, or worse, didn't exist at all.

Each one of these CEO's has certainly written and explained their exit strategies to investors many times over, particularly Ms. Vivian and Dr. Ross. Did they ever imagine that those few paragraphs would come to pass in the experiences they recently went through? I would guess that the next time they enter those words in a future business plan they may give it more than a passing thought.

Healthcare's Portion of GDP

The U.S. Centers for Medicare and Medicaid Services recently published their health expenditure data for 2005 indicating what we all expected; that healthcare costs continue to rise. But what is perhaps even more pertinent is the rise in the percentage of the GDP healthcare consumes; 16% in 2005 up from 15.9% in 2004 and 13.7% a decade ago. At 16%, the U.S. leads the world in the percentage of our GDP we spend on healthcare, second place Germany spends 10.5%. This means we either have the absolute best healthcare in the world or a pretty inefficient way of providing healthcare to our citizens. The Organization for Economic Cooperation and Development which monitors metrics in determining the health of a country, such as life expectancy and infant mortality, do not indicate the former.

The implication then is that the healthcare system is inefficient. This of course is the topic of many a debate in the government and healthcare industries but what is not under debate is the aging of the baby boomers, now reaching their 60's, and the ensuing increase in demand for healthcare services that they will require. With the healthcare system in its current state I see healthcare costs per capita continuing to rise at least for the next decade. Justin Lahart in his column Ahead of the Tape in the WSJ has suggested that Washington and state capitals will focus on the problem and thus bring the price down. How? The White House plan is to move toward the free market approach; allow the consumers to pick up a higher share of the costs of their healthcare which will in turn put pressure on providers to become more competitive. This entails the reduction in tax breaks on generous healthcare plans provided by some employers to their employees. Economists point out that this encourages these people to use excessive amounts of healthcare which drives up the overall costs.

Under the White House plan health benefits would be considered income and subject to income and payroll taxes. There would, however, be a deduction of $15,000 per family per year or $7,500 per individual. The same deduction would be available whether the coverage came from an employer or the individual.

Although many details still need to be worked out in this plan, making the consumer more responsive to healthcare costs is certainly the free market approach to controlling ever increasing healthcare costs. In a true free market of course, the consumer would negotiate the costs directly with the provider thus putting pressure on the provider to keep costs in check. But with the high costs of healthcare and its extremely variable distribution among the population, a third party payer system seemed like the most reasonable way to handle the situation. This system has short-circuited the free market checks and balances which has reduced competition among healthcare providers and thus reduced their need in seeking efficiencies in keeping costs down. The result is as expected: costs in healthcare have risen faster than the of costs in the economy as a whole without a commensurate rise in healthcare quality. Although providers may be assumed to have the best of intentions, only economic pressures will force them to make the hard choices required to reduce waste and improve efficiency.

New Funding Sources for Drug Development

In Sharon Begley's column Science Journal in today's WSJ she discusses the difficulties in bringing therapeutic technologies generated in academic research to the market. Because pharmaceutical companies require large returns to justify their investment and risk in drug development they are understandably reluctant to fund the development of a drug that has a small market. Although there are many obstacles to translational research; bringing laboratory research results to the patient in need, financial barriers may be one of the most significant. As in all technology transfer, if the numbers don't work it is difficult for a for-profit drug company to get approval for drug development.

So this is where the non-profit research foundations are now stepping in. Foundations such as the Juvenile Diabetes Research Foundation, Michael J. Fox Foundation and Families of Spinal Muscular Atrophy who have been active sponsors of basic research in the past, are now stepping up to fill the gap left by drug companies unwilling to fund some or all of the drug development process. This is a new world for these foundations that have developed administrative systems geared more for dealing with academic institutions than with private pharmas.

Nonprofits may be filling the translational research gap for drugs specific to their disease of interest, but the issue of small target markets for drugs is not limited to rare diseases; this is the future of pharmaceuticals. The day of the blockbuster drug is over and the day of personalized medicine has dawned. In order to improve medical outcomes, drugs will become more targeted, thus decreasing their potential markets. Pharmaceuticals will have to adopt to this new paradigm or face a continually diminishing pipeline of blockblusters.

EMRs in Private Practice

I went in for my annual physical exam last week at my local doctor's office. Although I knew they were implementing an Electronic Medical Records (EMR) system there, I wasn't expecting too much, it is a relatively small practice and most EMRs are beyond their price range. As usual, I was given the obligatory paper sheets on which I attempted to record my medical history as well as that of the rest of my family. Fortunately, I don't have to remember too much although I couldn't tell you when was the last time I got certain shots.

I noticed that the nurses were carrying notebook computers around with them, not exactly handhelds but they appeared comfortable enough to carry. The whole office was apparently on a wireless network pulling up patient records from a central server and editing them on the notebooks. The paper form I had filled out earlier had been entered into the electronic record and the interviewing nurse simply ran down the list on the notebook and filled in other information using a scribe on the touch screen. What was even more impressive was the lab tests that were done earlier in the week by Quest Diagnostics had been integrated into the record and were available right there on my chart.

This practice is part of Integrated Physician Network (iPN) Avista; a Regional Health Information Organization (RHIO) including Avista Adventist Hospital and 14-private physician practices in the Boulder, Colorado region. The network uses an EMR from NextGen Healthcare Information Systems. The software will integrate with the hospital information system from Meditech Inc. The network has also completed a laboratory interface with Quest Diagnostics Inc.

Not only could my doctor order prescriptions directly to local pharmacies, he could also order lab tests and schedule consults with other practices, even those not on the iPN network (albeit using the lowly faxing capability). In the end the reduction in the amount of support services by switching to electronic records will be tremendous not to mention the reduction in number and cost of errors. This didn't come cheap however; the U.S. Health Resources and Service Administration has contributed $2.3 million over the next three years and the physicians and hospitals have put in another $1.5 million.

Those of us who are technically inclined may have a hard time getting excited about less than cutting-edge technologies such as wireless networks, and integrated systems, but for healthcare, and especially small practice healthcare, this is no less than earth shattering.

My doctor did point out a slight flaw in the system; back when they were still paper based the screening nurse would place a red card in the paper tray outside of the examination room indicated that she was finished and that the doctor could continue the exam. Now that they were paperless, the trays had been taken down and the doctors could no longer tell which patients were ready to be examined. EMRs have brought the practice of medicine a long ways, but some low tech information systems may still be superior.

Biomedical Research

After discussing basic and applied research, I thought I'd stick with this theme and discuss a domain specific type of research, in this case biomedical research. The biomedical domain refers to the knowledge associated with the application of biological and physiological sciences to clinical medicine. Biomedical research can be either basic or applied according to the definitions already given. Since the goal of biomedical research is to advance the treatment of disease in humans, humans are a necessary component of the research. But don't get the idea that any experimental drug can be fed to some unsuspecting subject in the interests of science; the FDA regulates this type of research quite closely. Biomedical research can be divided into preclinical research and clinical trials; preclinical research includes the initial discoveries and studies leading up to the specific treatment and clinical trials involve the administration of the treatment in humans.

Any basic research in this process will be conducted in the early stages of preclinical research where novel technologies and drug targets are revealed. When a promising technology has been discovered, the more directed process of applied research is employed in order to bring the technology through the remainder of the preclinical research and clinical trials. As this process proceeds each stage requires and ever greater investment of resources and expertise culminating in Phase III clinical trials; large scale trials with human subjects.

An analogy has been made between biomedical research and a funnel in which 10,000 drug candidates have been introduced at the top and a single drug emerges at the bottom approved for use in humans. The funnel is about 15 years long and costs about $1 billion to get through, not an enterprise for the faint of heart or under funded. One key to reducing costs is to curtail the process when failure appears certain. The further along in the process failure occurs, the more expensive it becomes.

Although the end goal of biomedical research is to find treatments for human disease, humans are the last in line to be experimented with, reassuring to potential recipients of experimental treatments. Biomedical research can be conducted in a range of environments from in vitro; in a laboratory or controlled environment outside a living organism to in vivo; in a whole organism such as an animal or human. A relatively new environment of in silico represents computer modeling and simulation. If in vivo represents the most accurate, and expensive, environment to experiment in and in vitro represents a lower cost environment, in silico offers the potential for an even further reduction in cost. This has long been recognized in engineering where computer models are an essential component of the design process. However, due to the complexity and lack of mechanistic understanding of biological systems, computer modeling has been difficult and of limited validity. With drug development costs increasing rapidly and pressure to control prices putting pressure on the drug companies a new paradigm in drug development is sorely needed.