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Introducing a New Drug Into the Marketplace in the Lifecycle of a Pre-Sales Revenue Biotechnology Venture Destined for IPO Success

Insight Mark H. Mirkin Mark H. Mirkin · July 24, 2014

Mindful that this series of articles describes biotech ventures that are ripe for initial public offerings even before launching an income-producing drug product into the commercial market, the paramount objective for all such ventures is to manufacture drugs and commence marketing, sales and distribution thereof as soon as possible. As you read in the previous article, successfully completing the foreboding task of human clinical trials is in many respects just the start of the venture’s business life, notwithstanding the years of arduous struggle and expenditure of many millions of dollars raised privately from angel investors and venture capital companies. Ideally, statistically significant clinical results meaningful to the targeted medical uses or indications will translate into market demand, production, sales and distribution.

Most biotechs have no infrastructure or capability for manufacturing, marketing, selling or distributing their drug products. They face the choice of developing manufacturing capability and a marketing, sales and distribution organization or outsourcing such functions to third parties.

While many biotechs manage to collaborate with facilities – sometimes in a university lab or a pharmaceutical setting – to conduct preliminary manufacturing in the form of process development and scale-up activities, few opt to enter the capital-intensive and highly FDA-regulated world of drug manufacturing for either preclinical or clinical testing, choosing to outsource manufacturing to skilled, equipped, insured and FDA-accredited facilities. Quality assurance expertise is worth its weight in gold for a biotech venture looking to make a name for itself, and usually outweighs the concerns that the third party resource might not manufacture the drug product precisely to specifications or might not manufacture it according to the biotech’s schedule or might elect to stop manufacturing at just the wrong time once the drug is in the marketplace. Even those concerns are dwarfed by concerns that the biotech’s proprietary and confidential information including its trade secrets and know-how might be misappropriated by a third-party manufacturer. Still, most new ventures rely on outsourced manufacturers.

Recruiting, hiring and training a marketing and sales force, though not capital-intensive as is manufacturing, is similarly expensive and time-consuming, which could delay product launch. Delays in the launch arising from a host of other external reasons could result in the loss of newly-trained personnel who are ready to market and sell product but because of such external reasons find themselves without product to market and sell. Recruiting effective marketing and sales personnel is not easy, and having such valued team members gain access to adequate numbers of physicians and other prescribers is uncertain. Also, an in-house team inside a biotech start-up by definition lacks a portfolio of complementary products to offer customers, placing the team members at a disadvantage compared to either companies with broader product offerings or to distributors offering products of several manufacturers.

On the other hand, outsourcing marketing, sales and/or distribution cuts into the profitability of product revenues because of the need to compensate the outsourced third parties. And the element of control is practically lost, creating frustration arising from an inability to force a resource to devote what the biotech deems to be the appropriate energy, time and money needed to drive sales. Still, most new ventures take this route, at least for their initial products.

Over the last few years, insurance company and government agency reimbursement has risen to the forefront of issues in the context of drug sales. Government authorities and third party payors such as private health insurers and health maintenance organizations have discretion to decide which medications they will pay for and the rates of reimbursement that they will pay. Cost containment is the new prime objective. Government authorities and third party payors control costs by limiting coverage and reimbursement rates for medications. Often reimbursement rates are based on reimbursement levels already set for lower cost drugs. Third party payors often rely upon Medicare coverage policy and payment limitations – widely recognized as low by any measure – in setting their own reimbursement policies. To complicate matters further, eligibility for reimbursement does not mean that a drug will be paid for in all cases or at a rate that covers the biotech’s costs, including research development, manufacture, sale and distribution.

Pricing and reimbursement rules and regulations vary widely from country to country. Some countries require governmental approval of the selling price of a drug before it can be marketed, and in some countries drug pricing remains subject to continuing governmental control even after initial approval is granted. Regulatory approval does not ensure pricing approval.

In light of the above, it is easy to understand why the use of proceeds from a biotech’s IPO always devotes a significant amount of the invested capital raised to the manufacturing, marketing, sale and distribution of the venture’s drug candidates, allowing the company to focus on reimbursement issues, often aided by outsource reimbursement experts.