Market Risk

In a previous blog I pointed out three major risks a startup company faces: Management Risk, Technical Risk and Market Risk. I want to dig a little deeper into those risks and have selected Market Risk to start with. I further divided the Market Risk into three risk categories:

1. high risk market
2. lower risk market
3. transitional market

The high risk market would be a poor choice to enter unless there were changes in the market. The lower risk market mainly requires a marketing campaign to get the word out on the product. The transitional market would be a poor choice to enter unless modifications were made to the new product thereby transitioning the market from high to lower risk.

This outline was originally created with a software product in mind but other products may fit the same pattern.

1. It would be very difficult to enter a market with a new product if:

• An existing product meets the needs of the customers.
• Customers do not currently do what the new product does.
• The new product does not provide sufficient value to the customers for them to buy it.
• Customers find that building their own product to do what the new product does is more cost effective.
• There are not sufficient numbers of paying customers to make the new product commercially viable.

2. The new product can be successfully introduced to the market if:

• The new product will help customers but they do not understand the product.
• The new product will help customers with a task that customers are not aware of doing.
• Customers are not aware of the new product.
• Customers have invested in another product that does an inadequate job of satisfying them.
• Customers perceive that the new product won't help them.
• The new product will help customers but they have higher priority issues.
• The new product is not in use by a sufficiently large community.

3. The new product should be modified before it can be successfully introduced to the market if:

• There are regulations that the new product must meet.
• There are administration issues that the new product must overcome.
• There are integration issues that the new product must overcome.
• There are technology issues that prevent the new product from being used.
• The new product has not reached a sufficient level of development.
• The new product does not satisfy a sufficient number of the customer's requirements.

FDA Reclassifies IVDMIA

After much consternation on the part of the nascent genomic profiling industry, the FDA has (re)classified a gene expression test system for breast cancer prognosis from a Class III to a Class II medical device. When the Dutch company Agendia first applied to the FDA for approval of their MammaPrint test, they received a Class III designation by default. Class III requires premarket approval which would significantly increase the costs of developing these systems. Agendia petitioned the FDA for a lower classification and the FDA came back last week with the lower Class II designation. Class II requires the developer to file a 510(k) premarket notification that complies with the FDA's special controls guidance document.

MammaPrint is the first In Vitro Diagnostic Multivariate Integrating Assay (IVDMIA) to be approved by the FDA for the prognosis of breast cancer. These are a new breed of genomic profiling assays that offer the promise of personalized medicine and improvements in diagnosis and treatment.

Designation of these tests as Class III devices would seriously hamper the progress of this industry by increasing the regulatory costs. As a Class II device however, the FDA has reduced the regulatory burden but has still retained certain special controls such as a description of the algorithm used to analyze the results as well as a description of how the algorithm was derived.

This is critical since the algorithms are both the key ingredient in the tests and are proprietary. Without this control, there is no way of asserting the validity of the tests.

Although the FDA has indicated that a number of tests have been cleared as Class II devices for other tumors, this guidance has only been extended to IVDMIAs that apply to breast cancer prognostic tests. This may serve as a model for other IVDMIAs to be developed for other diseases in the future.

Price Pressure on Drugs

With patents giving drug companies a virtual monopoly on a drug treatment and peoples' lives on the line, what, if anything could put pressure on the companies to cap their drugs' prices? Shareholders are pressuring pharmas for higher profits while the cost of developing drugs continues to soar as does pressures from the government for safety. Isn't it only reasonable that a pharmas charge as much as possible for the few drugs that eventually do make it through to the market?

In a story featured in the WSJ last March, Dr. Steven Harr, an analyst at Morgan Stanley, says "no." Although drug companies may not be responsive to the complaints of a single patients, those patients have political representatives, representatives that can make life very difficult for drug companies if they choose to regulate drug prices.

Although the government has yet to step in to set price controls, there is some thought that the Democrat controlled Congress may do just that if prices grow too high. Prices for cancer drugs are increasing rapidly with five costing over $40,000 for a course of treatment. Cancer drugs accounted for 13% of the country's drug spending in 2002, in 2007 it will be 22%.

The reality of the situation, as Dr. Harr puts it is: the "market structure effectively provides no mechanism for price control in oncology other than the companies' goodwill and tolerance for adverse publicity." But this is the kind of incentive that companies need to undertake the risk of developing new drugs, right?

Although financial incentives of this magnitude certainly provide motivation for undertaking such risky ventures, they also lead to fairly inefficient and unproductive drug development processes, processes that won't change unless there are financial reasons. This is precisely what has been done in so many other industries; even though the complexity of the product has increased, costs have been kept under control and so too have prices to the consumer. If the computer and telecommunications industries can do, so can the pharmas.