Trends Influencing Fee for Service Arrangements & …Trends Influencing Fee for Service Arrangements & Key Fair Market Value Considerations Prateep Menon, Principal Deloitte Financial

Trends Influencing Fee for Service Arrangements & Key Fair Market Value Considerations

Prateep Menon, Principal Deloitte Financial Advisory Services LLP 212-436-6510

Yogesh Bahl, Partner Deloitte Financial Advisory Services LLP 917-306-7882

November 7, 2012

AgendaBackground / Regulatory Overview

Industry Trends: Specialty Pharmaceuticals

Fee for Service Arrangements: Fair Market Value Considerations

Transparency: Fraud and Corruption Considerations

Introduction: Background / Regulatory Overview

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Definition of “bona fide service fees” and key regulatory considerations

• Fees paid by a manufacturer that represent fair market value (“FMV”) for an itemized service that a manufacturer would otherwise contract for or perform.

• FMV is defined as the value in arm’s length transactions, consistent with the general market value. “General market value” means the price that an asset would bring as the result of bona fide bargaining between well- informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. – Physician Fee Schedule - 42 CFR Ch. IV (October 1, 2006 Edition)

• These fees cannot be passed on in whole or in part, regardless of whether the entity takes ownership of the product

What are “bona fide service fees”?

• For any manufacturer that participates in government programs (i.e. Medicare, Medicaid), there are certain requirements, in the form of legislation, regulation, and other guidance, that dictate how bona fide service fees should be calculated

• Provisions in existing regulation mention that bona fide fees can be excluded from the calculation of best price (“BP”) used to calculate rebates that manufacturers pay on a quarterly basis; government entities are entitled to pay BP

Key Regulatory Considerations

How manufacturers interpret the terms of a bona fide service fee is an important consideration toward ensuring that government pricing is accurate as correcting errors can be costly; FMV

analysis is key.

Copyright © 2012 Deloitte Development LLC. All rights reserved.

Industry Trends: Specialty Pharmaceuticals

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Common examples of fee-for-service arrangements

GPOs, MCOs, PBMs1 Wholesalers & Distributors1

• Maintain customer lists• Notify customers of changes in contract

prices or terms• Data / event reporting • Program oversight and contract consulting• Audit wholesaler data• Resolve billing, chargeback, and rebate

issues• Provide members with contract modeling

tool(s)• Conduct contract modeling for member on

manufacturer’s behalf• Provide promotional activities such as e-

mail blasts and webcasts• Exhibits and meeting attendance• Sponsorship• Focus groups/ad boards• Speaker programs• Market research

• Inventory management • Customer service levels • Information and data service fees • Indirect contract administration • Range of service associated with generic

introduction:• Marketing materials• Rapid product introduction• Promotional events• Distribution of free product

1 Not meant to be an exhaustive list

FFS Arrangements are evolving due to the shift to specialty products


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Understanding the key differences between “retail” and “specialty” products

Retail Specialty

Products • Small molecule, general medicine products • Oncology, vaccines, infusions, niche/orphan drugs

Customers • Patients have stronger influence• Payer formularies drive utilization

• Patients have less influence• Providers make product utilization decisions

Reimbursement model

• Managed as part of pharmacy benefit • Patient costs rising but surmountable

• Managed as part of medical benefit • Costs can be prohibitive to patient if not covered

Buying process • Distributors & retail pharmacies buyers • Buy and bill to providers• Specially Pharmacy distribution

Care Setting • Patient self administer • Clinic, office or hospital setting

Supply chain • Relatively low cost, higher volume• High cost, low volume• Cold chain, specialty logistics

Patient populations • High prevalence disease state • Minimal provider assistance

• Life threatening niche indications• Higher need for patient assistance

• Lower cost, lower demand for evidence • High burden of proof to substantiate high cost

• Predominantly though GP sales forces • Smaller, specialist / institution focused sales forces

Customers

Products

Reimbursement

Buying Process

Care Setting

Patient Populations

Supply Chain

Evidence Base

Demand Generation


8

Increasing market share of specialty pharmaceuticalsWhile the overall size of the U.S. market is predicted to grow steadily through 2015, product mixes are expected to dramatically shift.Patent cliff: $88B of branded drugs will hit loss of exclusivity (“LOE”) over the next 5 years Shift to specialty: Branded specialty product revenue will grow (6.5%) while branded non-

specialty will shrink (-5.1%)Coverage expansion: Healthcare reform is expected to add 34M covered lives, increasing

demand for drugs U.S. MarketU.S. pharmaceutical market sales ($B)

CAGR: 1.1%

Total: $300B

Total: $320B

CAGR: -5.1%

CAGR: 12.2%

CAGR: 6.5%


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Underscoring the shift to specialty products

DescriptionBranded Specialty product revenue is expected to grow at a significantly faster rate (~6.5%) in comparison to branded non specialty (approx. -5.1%) increasing their share of the market to ~34% by 2015

Key Facts

Implication Given the high distribution cost per unit, raising distribution fees could cause manufacturers to go direct (e.g. Prevnar)

Specialty products typically require some sort of special handling (e.g. cold chain) or special services. Majority of these products are used to treat chronic conditions and are prescribed by specialists (e.g. rheumatologist, ophthalmologists)

Source: IMS, Standard & Poor’s, Specialty Pharmacy News, Evaluate Pharma, Pharmalot, Deloitte Consulting LLP Analysis.

Specialty Drugs vs. Non-Specialty Drugs

Specialty drugs haveSignificantly higher list price per unitSignificantly higher distribution cost per unit

($/each)Potentially lower distribution costs as a % of

revenue

CAGR:~6.5%


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Pricing pressure is expected to influence specialty products

Number of High Priced Products on the U.S. Market

Branded drug prices grew by 9.6% vs. 19.6% for specialty-drugs1 in 2010

The number of products priced above $30,000 / year is increasing rapidly

The UK has reviewed most of the high priced products (excluding orphan drugs) from a cost effectiveness standpoint and restricted access to many

Pricing pressure in the US is mounting despite historical reluctance to considering cost in making reimbursement decisions for serious diseases

U.S. Revenue of High Priced Products

Premium ($10,000-$20,000 / year)

Super-Premium ($20,000-$100,000 / year)

Ultra-Premium (>$100,000 / year)

$38.6B revenue (16.4%)

$17.4B revenue (7.4%)

$2.4B revenue (1.0%)

HemophiliaMacular Degeneration

Neutropenia

Oncology - MABs

Multiple Sclerosis

Rheumatoid Arthritis

Immunosuppressants

Pulmonary Arterial Hypertension

Respiratory Syncytial Virus

HIV

Cystic Fibrosis

Growth Hormone

Gaucher Disease

Fabry’s Disease

Pompe Disease

Oncology – Enzyme Receptor Inhibitors

Paroxysmal Nocturnal Hemoglobinuria

Hunter’s Syndrome

Maroteaux-Lamy Syndrome

Hereditary Angiodema

Cryopyrin-Associated Periodic Syndroms

Hurler Syndrome

Fertility Agents

Dru

g M

arke

tsU

S R

even

ue

1 2010 Growth vs. 2009 according to Specialty Drug market report from Express Scripts


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Patient SupportExamples

Personalized service from nurses and pharmacists24/7 clinical supportComprehensive educational

informationDedicated support team working

directly with physician and patientIndividualized counseling servicesReimbursement supportMonitoring and measurement of

service qualitySpecialized therapy management

programsIn-home training (if ordered by

physician)Patient adherence solutionsPatient outreach centerPatient acquisition programsAlternative samplingCo-pay discount card program

Physician Support Examples

Customer rep to assist with order entry, price quotes, order tracking, problem resolution, and return sReal-time pricing w/online orderingAccess to full product portfolioPrior authorization determinationDelivery to place of adminClinical counseling/supportPatient-specific billingHome injection trainingIn-home infusionsLocal nursing support24//7 supportePrescribingFormulary / drug lists Clinical drug informationGenerous return policyMedical-surgery supplies and

servicesPractice/claims management

Physician Patients

Manufacturer

SpecialtyDistributor

Unique Offerings

Specialty fee-for-service arrangements provide high-touch services that can serve as an important customer interaction with physicians and patients

Dedicated product line mgrConsumer patient mktg Communication and promotional strategiesNew product launch solutions/supportAlternative sampling options Patient adherence and acquisition programsReimbursement hotline

Clinical training support –specialized pharmacists provide training to providers, patients and caregiversPayer contractingPBM pull-through opp’ysShipping protocol adherenceNext-day refrigerated delivery Data analytics and reporting

Manufacturer Support Examples


Fee for Service Arrangements: Key Fair Market Value Considerations

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Key FMV Methodologies

Methodology DescriptionMarket Approach:

The market or sales comparison approach is a general way of estimating the value of a business, business ownership interest, or a tangible or intangible asset using one or more methods that compare the subject to similar investments or assets that have been sold or offered for sale. Sales and offering prices for the comparable investments or assets are adjusted to reflect differences between the investment or asset being valued and the comparable investments or assets, such as historical financial condition and performance, expected economic benefits, time and terms of sale, utility, and physical characteristics.

Income Approach:

The income approach measures the value of a business, business ownership interest, or a tangible or intangible asset by analyzing the present worth of the economic benefits it is expected to produce. These benefits may include earnings, cost savings, tax deductions, and disposition proceeds from the asset. An indication of value may be developed under this approach by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation over the asset’s holding period, and the risks associated with realizing the cash flows in the amounts and at the times projected. The discount rate selected is typically based on rates of return available from alternative investments of similar type and quality as of the analysis date.

Cost Approach:

The cost or asset approach is a general way of estimating the value of a business, business ownership interest, or a tangible or intangible asset by quantifying the amount of money required to replace the investment or asset with another having equivalent utility, sometimes described as future service capability.

The following table illustrates common valuation methodologies typically considered in estimating fair market value.


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Key FMV Considerations

Supply Chain / Distribution Model

Ensure an accurate and thorough understanding of the manufacturer’s supply chain and distribution model to:

Develop a framework for the FMV analysis

Identify where the services tie into the overall supply chain and distribution model

Confirm level of FMV assessment (i.e. activity, service, bundle).

Confirm that the services are, in fact, bona fide services that would otherwise be performed

Inform the selected valuation methodology and analysis process

Consider whether a range of FMV (vs. a point estimate) might be appropriate

Contract Terms Approaches to Value

Overarching FMV Considerations

Ensure an accurate and thorough understanding of the contract terms to:

Confirm and benchmarkagainst payment arrangements and fees specified contractually

Determine whether price calculations are itemized and properly linked to payment

Ensure consistency across contracts

Ensure an accurate and thorough understanding of the nature of the services, data available, and key drivers of value to inform an appropriate approach to value

Collect and analyze the appropriate data sources to develop key assumptions

Ensure FMV conclusion is consistent with payment structure i.e. % of WAC, $$, etc.

Policies and procedures regarding identifying fee for service arrangement and assessing whether fees are bona fideEnsuring proper and adequate pricing committeeEnsuring proper communication between contracting and distributing groupsDocumentation of FMV analysis, including process and assumptions

Key FMV Considerations


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Example: FMV of Inventory Management Fees

Inventory Management Fee

Replacement cost of the physical inventory storage costs along with applicable P/P/E, overhead and stewardship allocationFinancial cost of carrying finished product inventory, consumption of carrying cost

Estimated physical inventory storage costs based upon existing cost structureCalculated increased Days of Supply (“DOS”) required based upon dismantled distributor networkCalculated financial carrying cost of holding increased inventory

Underlying contractRoll-up of invoice paymentsFinancial statementsExternal industry and cross-industry benchmarksCost of capital

Key Data SourcesFee Component Analysis Framework Analysis Process

Customer Set-Up

Inventory Storage

Order Processing Pick/Pack Shipping

Invoice/ Customer Service

Payment /AR Management

Reverse Logistics

Base Distribution -

Product

Base Distribution -

Service

Inventory Management

Overhead / Stewardship

Order to Cash Process

• Assuming that a “replacement cost method” was utilized to estimate the FMV of inventory management fees, the following would be key considerations in the valuation analysis:

• Understanding the necessary increase in inventory on hand as a result of handing distribution internally (if any)• Calculating applicable inventory storage costs • Understanding and estimating the costs necessary to replace and/or replicate third party distribution chain• Assessing whether any additional overhead or stewardship allocations are required

Key Considerations for FMV Analysis


Transparency: Fraud & Corruption Considerations

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Managing Risks Our Interconnected Global Industry

United StatesState and Federal Sunshine regulationsHealthcare Reform / ACA

Ex-US Transparency Laws:BelgiumFranceGermanyItalyNetherlandsSlovakiaSpainUK

Effective compliance management will continue to requireGlobal, scalable, information management (make IT your BFF)Meaningful and actionable metricsManaging information from vendors


18

CategoryU.S.A. U. K. France Slovakia Netherlands

Gov. body:

CMS PMCPA LEEM NCHI & MOH Sep. Foundation

Timing: • Data coll. begins 1st Jan 2012 - Reporting begins 1st Jan 2013

• Starting w/ pmts made in 2012, annually declare total amount paid per calendar year

• Subject to gov. decree being adopted, latest 1st Aug 2012

• Applicable to the benefits given and fees paid as of 1st Jan 2012

• Effective 1st

December 2012• Eff: 1st Jan 2012• 1st discl: 2013• Jan 2013: data

collection• Feb-Mar 2013:

feedback HCPs• Mar-Apr 2013:

public disclosure

Scope: • Applicable manufacturer s

• GPOs

• Promo of meds to UK HCPs & approp. admin. staff

• Interactions w HCPs & certain non promo activities

• Info made avail. to public re: scrip only meds

• Rships w/ patient orgs

• Companies producing or marketing products for human or cosmetic use, or providing associated services

• Pharma• HCPs• Events • HCP & HC

Providers• Expenditures• Clinical I-III• Clinical IV

• Pharma• HCPs• HCP-related

institutions

Transparency: Comparison Across Jurisdictions

Copyright © 2012 Deloitte Development LLC. All rights reserved.Draft

19

Category USA UK France Slovakia Netherlands

Disclosure/ Reporting Req.

• Agg. spend discl.

• Direct and indirect transfers of value

• $100 per HCP/O

• $10 per transaction

• Payments to health professionals and patient organizations

• Fees paid to consultants

• Sponsorship of meetings

• Donations & grants

• HCPs• Assoc. of

HCPs & HC Students

• HC Students• Hospitals• Foundations• Publishing Co.• Editors of scrip

& dispensing software

• Initial trainers of HCPs

• Benefits in kind or in cash

• List of HCPs attending events

• Expenditures on mktg & benefits granted to HCPs

• Amount and details of income received by HCPs

• Financial relations btw pharma & HCP or Institutions

• Service agreements & sponsoring agreements

AdoptionChallenges

• Timing of payment and transfer of value

• Data integrity• Cultural

differences• Stakeholder

perception

• Establishing legitimate need for consultant

• Ensuring donations & gifts do not constitute inducement

• Measuring significant support

• Threshold of benefits to be declared

• Threshold of benefits to be declared

• Fine –tuning” in impl. phase

• Discl. elements must be explained in positive manner

• Continuous PR support

• Initial question: Law or self- regulation?

• Abide by Dutch Data Protection Act

• Maintain good operating register

Transparency: Comparison Across Jurisdictions (cont’d)


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Enforcement involving Transparency is Growing

Number and Reach of Global Regulations GrowingUS FCPAUK Bribery ActOECD Guidance

Anti-KickbackU.S. Anti-Kickback StatuteCMS regulations, incl. overpaymentsGenerally prohibits payments of kickbacks, bribes or other remuneration for the actual referral or recommendation for a referral of an Rx productCould it be receiving value in exchange for NOT doing something?

Global information management connecting HCP/HCO activity and anticorruption efforts is essential

IFPMAGlobal PhRMA CodeCountry regulations (e.g. data privacy)


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Enforcement involving Transparency is Growing

Number and Reach of Global Regulations GrowingUS FCPAUK Bribery ActOECD Guidance

Anti-KickbackU.S. Anti-Kickback StatuteCMS regulations, incl. overpaymentsGenerally prohibits payments of kickbacks, bribes or other remuneration for the actual referral or recommendation for a referral of an Rx productCould it be receiving value in exchange for NOT doing something?

Global information management connecting HCP/HCO activity and anticorruption efforts is essential

IFPMAGlobal PhRMA CodeCountry regulations (e.g. data privacy)


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Overall Fraud & Corruption Considerations

Could the following be considered a kickbacks or improper payment?- Entertainment?- Free items?- Grants?- Advisory Board participation?

What is our relationship with Dr. Joe as a whole beyond the specific transaction?

How do you know that there is substance over form?

Does a legitimate transaction include a hidden improper payment or an inappropriate influencing component?

Do you really understand the culture in the local country?

- Honoraria?- Post Marketing Studies?- In-Kind Services below FMV?- International Trip for KOL?


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Overall Fraud & Corruption Considerations (con’t)

What was the intent?

Did you know or should you have known?

Was it de minimis? Does it matter?

Which government program could be impacted?

Are R&D and Commercial activities, from a Compliance perspective, sufficiently connected?

Do you have third and fourth parties identified or covered from a Compliance perspective?

You find a potential problem – now what?


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Fraud & Corruption Considerations: Engaging HCPs

Know your programPurpose?: CME vs. Promotional vs. Ad BoardCould the location be viewed as inappropriate?MSLs?

The Speaker and the AttendeesAre they or could they be considered “Government Officials”?Why are they attending the event?What is their role at the event?How many events attended?Relationships to other speakers or company representatives?

The AccountingHow is the transaction being recorded?Who is paying? Method of for international payments?


Questions?

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Documents

Trends Influencing Fee for Service Arrangements & …Trends Influencing Fee for Service Arrangements & Key Fair Market Value Considerations Prateep Menon, Principal Deloitte Financial