Savvy biotech companies developing, say, cancer drugs, will have to do more in the future than just look at whether a new drug is safe and kills tumors, according to Roger Longman. They'll also measure things that really count for payers, like length of hospital stays, and -- set aside your bowl of Cheerios -- how much time it might save nurses from having to clean up vomit.

Longman, the CEO of Real Endpoints and former managing director of Windhover Information, made this point last week during a private dinner at Seattle's Four Seasons Hotel, which was hosted by Wilson Sonsini Goodrich & Rosati. He told an anecdote about a biotech CEO who's developing an oncology medicine that's somewhat better than the standard of care. Nurses, the CEO said, really like the thing because it doesn't cause patients to vomit as much as other treatments. That means the nurses save time, and their time can be better spent doing other things.

Smart biotechs, Longman said, had better start thinking along these lines. That's because it's not enough anymore to prove your drug is safe and effective enough to pass muster with the FDA. Now it's also about proving a drug can generate savings and value for the health care system in the new era of cost containment, a relatively new concept to most people now running biotech and pharma companies.

"Is the time nurses spend cleaning up vomit an endpoint in your studies?" Longman asked. "Are you even measuring it? If not, you should be."

This is really all part of the broader reckoning that's occurring at the end of period of hyper-inflation in drug pricing, Longman said. The pharmaceutical industry, seeing this shift, has started to decrease R&D spending on drugs for the first time in 20 years, while spending more on consumer products, generics, and vaccines, Longman said. Biotech companies, for the most part, don't offer quick fixes for what ails Big Pharma. As more and more of Big Pharma's top moneymakers lose patent protection and start facing competition from cheaper generics, biotech has got to start thinking about how it can really offer value that payers will pay for.

"Biotech's challenge is to solve Big Pharma's challenge, and Big Pharma's challenge is to show value to payers," Longman says.

Big Pharma has been stung lately by some costly cases in which it overestimated how much value it thought was bringing to the system. AstraZeneca (NYSE: AZN) and Bristol-Myers Squibb (NYSE: BMY) "spent a ton" on launching saxagliptin (Onglyza) to compete with Merck's (NYSE: MRK) sitagliptin (Januvia) in the same class of DPP4 inhibitors against diabetes. Johnson & Johnson (NYSE: JNJ) introduced golimumab (Simponi) to compete with Abbott Laboratories' (Nasdaq: ABT) adalimumab (Humira) in rheumatoid arthritis patients. And Eli Lilly (NYSE: LLY) poured huge resources into the launch of prasugrel (Effient) to challenge the $6 billion incumbent clopidrogel (Plavix) from Bristol-Myers and sanofi-aventis (NYSE: SNY) among anti-clotting therapies.

Each of the new drugs is expensive, and its backers each thought they had an advantage of some kind, like more convenient dosing. But that's not going to cut it in the era of cost-containment, Longman says.

Biotech and pharma companies should now expect more pressure from the payers, from people like Rob Epstein, the chief medical officer of Medco Health Solutions. Epstein, who Longman calls "one of the most important guys in the pharmaceutical business," looked at the new anti-clotting agent from Lilly as an option for about 15 to 20 percent of patients who aren't good candidates for Plavix. That's because most people do fine on Plavix. Since generic competitors are becoming available in 2011, there's a reason to switch them to a generic version of the same product, not another costly brand-name drug.

"They have an incentive to find people to take Plavix, not Effient," Longman says.

The really bad news is that if biotech and pharma companies complain about how the FDA is unpredictable, the territory is even more uncertain with payers, Longman says. Payers themselves are still trying to figure out which things they should be measuring, and what matters most in their decision to reimburse a product. Reducing physician time, nurse time, or hospital length of stay are just a few of the factors in this equation.

Some of these questions -- like quantifying nurse time spent cleaning up vomit -- aren't really easily answered in a clinical trial. You could practically hear some of the CEOs in the room groaning in their chairs about how their clinical trials are complicated enough to run as they are.

Still, Longman had some good news for his audience. Health care reform has provided special protection for companies that make drugs for rare "orphan" diseases, which is where biotech toils more often than Big Pharma. New rules on risk evaluation and mitigation strategies are likely to create more predictable regulatory pathways for biotech drugs. And the new path for copycat "follow-on" biotech drugs reduces the risk that a generic company will swoop in and steal away market share from an innovative company during the most lucrative phase of a product's life cycle.

Longman closed by quoting a line from GlaxoSmithKline CEO Andrew Witty about how to go forward in this new environment. The important thing, Witty said, is that big companies like GlaxoSmithKline come up with three to five different products per year, regardless of how much they sell, in order to create a situation "which in many ways creates the quantum of growth opportunity that you would anticipate from those one or two blockbusters in the past," Witty said at a Goldman Sachs investment conference earlier this month.

Where will those new products come from? As Longman put it, "The only place you'll get them is from biotech."


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