For many US life sciences and health care companies, 2017 was a year of market and legislative uncertainty. Much of the year was dominated by on-again-off-again efforts to repeal and replace the Affordable Care Act (ACA), which has now turned to discussions about reforming the tax code. For some life sciences companies, this uncertainty created a wait-and-see approach to investments – particularly mergers and acquisitions (M&A).
However, 2017 was also a year of regulatory, scientific, and technological progress, which I expect will continue to create some favorable tailwinds for life sciences companies in 2018. The year-old 21st Century Cures law, for example, is already helping to further innovate drug-approval processes. We also saw regulatory approval for a first-of-its kind CAR-T (Chimeric Antigen Receptor T-cell) therapy. The treatment, for certain children and young adults with leukemia, uses a patient’s own T cells, which are extracted, cryopreserved, transported and modified before being returned back to the patient through infusion. A second therapy was approved two months later.1 Moreover, an advisory committee from the Food and Drug Administration (FDA) recently recommended approval for the first gene therapy in the US.
As life sciences companies look ahead to 2018, it can be important for them to determine how to effectively monitor and manage strategic risk – and hedge their bets – particularly across these four key areas:
- Regulatory enhancements: The FDA has indicated its intention to update the regulatory framework to accelerate research and development (R&D) – a positive sign for the industry. Continued investments around curative therapies – especially drugs that treat or cure rare diseases – could result in additional approvals in 2018. There is an even more favorable outlook when it comes to how much faster therapies can move from the clinic to patients. The FDA’s Innovation Initiative aims to build upon Cures to modernize the drug development process. One example is the use of computer models and simulations to support the evaluation of new therapies. Another is the potential use of real-world evidence, which could be gathered through natural history databases (i.e., a collection of data from people who have a rare disease), as the control arm for clinical trials.2
- Value-based contracting: Pricing, along with securing market access, will continue to be a top priority for life sciences companies in 2018. Both biopharma and medtech companies are likely to expand efforts around value-based contracting. As a result, we could see more examples of manufacturers that enter into deals with health plans, providers, or government payers. Value-based contracting allows risk-sharing between companies and health plans or providers, making payment contingent upon evidence that a product works in a specific patient population. I think there will continue to be an interest and a need to design these kinds of contracts.A big challenge for drug manufacturers may be in determining what their curative therapies will cost and how to pay for them. Curative treatments are given as a short course of therapy, typically only once during a patient’s lifetime, and have the potential to not just treat disease but eradicate it. For these high-value, high-cost treatments, some value-based contracting models could amortize costs over a longer timeline. We are likely to see more experimentation with alternative funding models, such as performance-based annuity payments for treatments. Public payers are beginning to experiment with these payment models. The manufacturer of a novel immunotherapy recently inked a risk-based arrangement with the US Centers for Medicare and Medicaid Services (CMS) where the agency will tie payments to the drug’s performance. If the product does not work for a patient, CMS will not pay the drug manufacturer. Medtech companies are also in the early stages of value-based contracting.
- Emerging technologies: Life sciences companies will likely continue to take advantage of emerging technologies such as artificial intelligence (AI), robotic process automation (RPA), and predictive analytics to speed innovation, enable precision medicine, support the development of new therapies, and address productivity challenges. Consider this: In November, our colleagues in the United Kingdom released a paper that looked at some of the technologies life sciences firms could be relying on by 2022. Life sciences companies could use predictive analytics, for example, for market research to help improve the consistency and impact of product launches. The report also suggests that leading life sciences firms will have automated up to 95 percent of regulatory filing by then, which could reduce launch-cycle time by about 12 months. The transformative opportunity created by emerging technologies is significant, and companies should consider investing now to take advantage.
- Policy changes: Legislative efforts to reform the health care system, and discussions on how to curb rising health care costs, will likely continue well into 2018. M&A activity in 2017 was tempered in part by last summer’s efforts to undo the ACA and, more recently, an attempt to reform the tax code. If enacted, tax reform could create some tailwinds for life sciences companies by stimulating M&A activity.
Specifically, life sciences companies could see changes in the following areas:
Repatriation of overseas cash: Proposed changes could let life sciences companies repatriate cash held overseas at a lower tax rate
New taxes on foreign income: Proposals also include new taxes on the foreign income that US companies generate from patents and other intellectual property, regardless of where that IP is held
Reduction in orphan-drug credits: Proposals call for reductions in the orphan-drug credit that was originally created as an incentive for rare disease research
Repeal of the medical device excise tax: This 2.3 percent tax, a provision in the ACA, is set to be reinstated on January 1, 2018. Eliminating the tax has been part of repeal and replace discussions, but recent tax-reform proposals do not specify any changes.
Strategic risk management can help counter uncertainty
There are many unknowns as we head into a new year. During such periods of uncertainty, we advise our life sciences clients to focus on effectively managing strategic risk. Strategic risk management is how a company identifies and prepares for a variety of possible scenarios relative to its business objectives. Being aware of legislative, technological, scientific or regulatory risks is different than being prepared to respond to them, and the best prepared companies could wind up with a competitive advantage.
Within a life sciences company, people in regulatory affairs, business development, product development, R&D, or manufacturing may not necessarily work together or share information. But they should – particularly when it comes to improving a company’s strategic positioning. That is strategic risk management.
No one knows which way the political and regulatory winds will blow in 2018. While I expect political uncertainty will continue to be a headwind for 2018, some of the tailwinds we experienced this year could blow stronger in 2018.