Opinion: How Biotechs Can Prepare for the Next Decade by Rethinking Conventional Business Models
Pictured: Illustration of an open box with a light bulb emerging/iStock, Mykyta Dolmatov
Every industry, from technology to retail to healthcare to professional services, is confronting its own harsh economic realities in today’s inflationary environment, and this is particularly true of biotech. Tight margins and uncertain regulatory structures from country to country and region to region make for some worrisome nights for management teams in this sector. Add to that the time, money and effort it takes to research, develop, introduce and gain approval for a new treatment, and it is clear the process includes countless opportunities for disruption, delay and disappointment.
In short, biotech is a particularly risky industry. And the current environment has caused most investors to be exceptionally risk-averse. The traditional business model has become much more challenging to employ, so it’s important for biotech companies around the world to use creative ways to survive and thrive. Biotech companies should be looking at business models that limit and mitigate these roadblocks to improve the chances of success in both conventional and emerging markets.
As executives at Er-Kim, which partners with dozens of pharma and biotech companies looking to move into new markets where they choose not to establish a direct presence, we have observed many ways in which entities are successfully rethinking the traditional model. These include:
Focus on Cost of Goods Sold (COGS) from Day 0
One of the biggest differences we see between some small and medium-sized (SME) biotechs and larger pharmaceutical companies is the number of markets these SMEs are unable to enter because prices make the products unprofitable on the COGS level. By contrast, pharma companies tend to provide substantial confidential discounts to enable or accelerate entry into new markets. While SMEs may feel prepared to forego the revenue in lower-priced markets to maintain price, it’s important to keep in mind that the same limitation on COGS means they are foregoing gross margins in higher-priced markets. So when designing a manufacturing and supply chain plan, keep cost optimization as a key part of your strategic plan, particularly if you are likely to compete with larger pharmaceutical companies.
On the point of cost, also keep in mind that additional discounts beyond reimbursed price are rare outside the U.S., and sales, marketing and medical costs are also lower. This leads to a significantly better gross-to-net ratio outside the U.S.
Plan for Market Access When Designing the Clinical Program
Data rules, especially when it comes to reimbursement in European countries such as the U.K., Germany, and France. Health technology assessment (HTA) authorities look at a drug’s place in the treatment paradigm and its cost effectiveness. But unfortunately, the data that get the FDA or EMA to approve a product may not be sufficient to ensure reimbursement. The data provided to HTA authorities will impact the product’s de facto label as well as the topline with reimbursed prices. In other words, besides safety and efficacy, HTA authorities will look for the actual value to patients in relation to cost. What data is there to back these claims? Any gaps there will be filled by assumptions and models, and payors’ approach will be conservative. So while you are designing the Phase III trial, focus on what patient types you are targeting and how you can provide value across long term patient outcomes, safety and cost-effectiveness. Of course, there are regulatory and cost constraints, but doing this not only allows a better trial design but also helps establish gaps to be covered by real-world evidence or Phase IV trials.
At the end of the day, most payors are accountable to taxpayers to use their money most effectively. What we have seen is while companies with robust data sets supporting their value add sail through pricing and reimbursement processes with high prices, while others remain stuck on negotiations around cost modeling assumptions, utilization or net price.
Recognize and Seize Opportunities in Non-core Markets
When it comes to commercial geographic strategy, companies divide the world into two spaces: core markets (U.S.; the U.K., France, Spain, Italy and Germany; and Japan) and international markets. While most revenue in traditional business models comes from the more predictable, higher-priced core markets, other markets may represent significant, if not outsized, opportunities. It is important to be in tune with the trends of the market you operate in and prepare a long-term strategy.
As such, it’s vital that companies:
- Ensure they are nimble enough to recognize opportunities
- Endeavor to be organized in a way to capture those opportunities
- Understand that there is no “conventional wisdom” when working in any of these markets
- Realize the upside value of moving into international markets without taking on additional cost and operational risks
How? By building an agile partnership team to offload the risk and avoid taking on too many additional costs. Regional partners can help simplify the operational complexity for manufacturers by providing project management systems to help smooth out the process without creating additional burdens. They will also help guide you through the regulatory, logistical and reimbursement procedures that could hamper approvals.
Prepare for Competition
As a company that partners with SMEs to successfully compete with larger pharmaceutical companies, we’ve found that it’s never really budgets or large marketing teams that ensure success in our (non-core) markets, but rather smart, effective strategies. Such a strategy always starts with solid, actionable data, followed by competitive pricing and market access plans, then medical affairs, marketing, and finally, sales. It is a 3D chess game, but the good news is that the biotech industry has the innate agility, innovativeness and scrappiness to win.
Lastly, it’s important to always take stock of ebbs and flows in international relations, politics and economics. There are constant tensions arising in all corners of the globe, and staying abreast of these issues will help you make the right decisions for your company, stakeholders, employees and most importantly, your customers.
Economic times change constantly. While we have not seen this type of investment environment over the past decade or so, it has happened before and—thankfully—passed. In the meantime, it’s up to biotech leaders to constantly think outside the box for new strategic ways to do business, be prepared for both new opportunities and challenges, and seek out partnerships that can help them provide the best products and treatments they can at the best price.
Cem Zorlular is the CEO and Mert Zorlular is the CFO of Er-Kim Pharmaceuticals, a specialty pharmaceutical company that serves as a regional affiliate to small and large pharma and biotech companies to commercialize their medicines in markets that fall outside of the U.S. and Western Europe. Learn more at https://www.er-kim.com/.