Can good health be good business?

Mark Leuchtenberger

The bacteria methicillin-resistant Staphylococcus aureus (MRSA) can cause life-threatening infections of the skin, bones, and bloodstream. The number of hospitalizations for MRSA has increased markedly over the last several years. The intravenous antibiotic vancomycin has been the final line of defense against MRSA, but bacteria relentlessly mutate into resistant forms. The number of infections that don’t respond to treatment with vancomycin is on the rise, and annual U.S. deaths from MRSA infection now number more than 18,000 — greater than the annual deaths from AIDS.

Oritavancin is one of a group of new antibiotics designed to combat serious, multi-drug-resistant infections, such as MRSA. The drug is being developed by Targanta Therapeutics, which recently submitted a New Drug Application to the U.S. Food and Drug Administration, after completing 19 clinical trials and gathering data on 2,100 individuals. Targanta’s CEO, Mark Leuchtenberger, says that oritavancin has had at least $300 million invested in it already, and it will take hundreds of millions more to usher it through regulatory approval, establish manufacturing, build a sales force, and market it. But all that investment has the potential to save thousands of lives.

Q: I think a lot of people would think about drug pricing and development when they hear the question “Can good health be good business?”

In biopharma we live in a somewhat different world from the big pharmaceutical companies. Almost by definition, biotech products cost a lot to make and have to justify themselves in terms of being either excellent follow-ons or breakthrough therapies for targeted diseases. We’re at the opposite end of the spectrum from developing the fifth statin or the tenth ACE inhibitor and then pushing your way onto the market and crunching the price up 10% a year.

The larger a company gets, the more similarities there are with big pharma. But certainly in the smaller, targeted biotech world, our business’s value proposition is completely different. I look at it this way: We’ve got, on average, ten years to develop a drug. By the time you get the drug out, you have an average of seven years to actually charge what you want for the drug. At the end of seven years it’s genericized. And the value that you’ve created from that ten years of development — the average is now up to $800 million to develop a drug, taking into account the failures — is consigned to the public forever. That step-function change in well-being, whether it’s survival or life extension or increase in quality of life, is essentially the public’s forever. In a nutshell, that’s why I’m biased about this industry that I’ve been in for about 20 years.

You can see a dramatic improvement in the health and welfare of the world over the last 25, 30 years since biotech has been around, even though it’s been said in various articles that the net inflow of investment cash to biotech on the whole does not equal the outflow, in terms of revenue. It is a game, if you will, that has not, on average, returned its investment.

But the result of the relentless competition of all these companies looking to develop the next breakthrough is that the health of the public is ratcheted up in an extraordinary way, in a way that never would be happening if the biotech model didn’t exist. We’re all the beneficiaries of that. My mother, who died last year, had her life extended for, probably, four years because we were able to get the anti-cancer drug Herceptin for her breast cancer. Four more years for my mom to be around, four more years for her to be with my daughter.

Q: Even if you don’t manage to recoup your investment in oritavancin in seven years, the benefit is going to go to society.

You know, the market cap of the company is about $180 million right now, and we have somewhere between $90 and $100 million in cash. The investors will achieve a return. But what we’re doing is basically trying to make this drug available and help change the treatment landscape for these life-threatening diseases.

I was incredibly fortunate at Biogen to be part of a transformation of the MS treatment landscape from no therapies in 1993 to, now, millions of people all over the world having their ambulation and their cognitive functions extended. It’s just a complete transformation. And once you’re lucky enough to participate in that, you want to do it again. So I want to focus on life-threatening and disabling conditions and see if we can’t get lucky again.

Q: Getting through the regulatory process is key to your business.

Yes. It’s an industry that a lot of people, I think, wouldn’t have the patience to work in. Any government-regulated industry is going to subject businesspeople to a sense of lessened control.

There are various risks you’re taking throughout the process: The risks inherent in running a clinical trial and almost defining a disease’s mechanisms by developing a drug that fights the disease. Every time you develop a new approach, if it doesn’t work, then you know that that wasn’t the pathway to attack the disease. If it does work, you’ve identified one of the key mechanisms of the disease. You’re essentially pushing science forward when you’re developing these therapeutics. But once you get done with that, then obviously you’ve got to pass the therapeutic index test with the FDA — the combination of safety and efficacy has to be right and compelling, in order to get the drug on the market.

Q: Your company had an IPO recently. What was the strategy behind the timing of that?

The strategy was just to raise enough capital to get through our registration process. And we have done that. We believe we have enough funds now to submit the NDA [New Drug Application] and the MAA [European Marketing Authorization Application] and to get the responses back, after which we would need to raise capital again to launch the drug.

The public markets are usually a lower cost of capital than our friends the VCs. God bless them, but they ask for a much higher return than the public markets. And they’re in a position to do so, because no one else is going to give you the money at that stage. So when you can go to the public markets, you do.

Q: So $300–400 million was already invested in this drug, but you needed another significant amount of money to move it forward?

Right. We raised $120 million last year — a $70 million series C and net proceeds of more than $50 million from the IPO. And that will be enough to get us past registration and well into 2009. But it certainly won’t allow us to do the full launch. We’ll have to raise money again.

Q: Is it an exciting time, to be as close as you are to getting a drug out?

It is. It’s very exciting, nerve-wracking, anxiety-producing. But that’s all part and parcel of it. It’s exciting to see drugs that have a chance to save lives. You know, biotech’s an easy business to wake up in the morning and drive into work in, because you’re always looking to do something that will push the edge of medical science and do something that no one has ever been able to do before.

Mayumi Fukui

The University of Chicago Medical Center is like a small city devoted to healthcare. The numbers reflect the scale of the enterprise. In the last fiscal year, the hospital had more than 26,000 admissions, 85,000 emergency room visits, and nearly 400,000 outpatient visits. Each number represents a moment of intense, human experience — a life saved, a death, surgery, healing.

Another number reveals the challenge of delivering healthcare: the cost of care exceeds reimbursement by about 25% for the portion of the medical center’s activity that is government sponsored. “Since we are the largest private provider of indigent care in the state, we need other revenues to support our clinical, educational, and research missions,” says Mayumi Fukui. She emphasizes that the medical center is a place of ideas, producing innovations in research, diagnosis, treatment, and models of care. Fukui’s job as vice president for managed care is to figure out how to secure the clinical revenues from the non-governmental sector that help make all the other numbers possible. She negotiates contracts with the managed care companies, including setting pricing formulas, and advises clinical faculty on program development strategy.

Q: How big a piece of the hospital’s business is the revenue from managed care contracts that you negotiate?

Last year, managed care represented 38% of the medical center’s activity and provided the bulk of the operating margin. Due to the substantial losses from governmental activity, negotiating appropriate managed care contracts is critical for our financial stability.

With the current state of healthcare financing in the United States, providers need to charge commercial insurers more in order to cover the shortfalls from Medicaid, Medicare, and the uninsured. Needless to say, private payers are not happy about the cost-shifting but find the alternatives less appealing — lobbying for higher taxes, advocating for a single-payer system, or not contracting with destination hospitals.

A few payers did terminate contracts with us because they found our pricing proposals unappealing, but we did reach an agreement ultimately with each of them. Many of their beneficiaries insist on coming to us even if we are not contracted because of the extraordinary care we provide. The University of Chicago Medical Center has teams of physicians and scientists who develop breakthrough therapies and create individualized treatment plans based on each patient’s unique situation.

We have been at the forefront of medicine for more than 75 years. We’re the only Illinois hospital ever to make the U.S. News & World Report Honor Roll, with eight clinical specialties ranked among the top 25 programs nationwide. We were awarded Magnet status in 2007, the highest level of recognition for nursing care. Our excellence makes us an important provider to have in managed care networks. One might say that we are trying to corner the “price-inelastic” part of the healthcare demand curve!

Q: How does the hospital take advantage when you’re able to provide a unique service?

Academic medical centers across the country incur increased costs from teaching and research. This means they need to secure appropriate reimbursement, often higher than community hospitals. Patients and their insurance companies are often willing, and even eager, to absorb some of that cost because of the leading centers’ market position and innovative care.

We also serve as a major safety-net provider. While many hospitals derive at least half of their activity from government-insured patients, very few academic medical centers do as much as we do. So we have a huge, huge shortfall that we have to make up somewhere else. Managed care contracts make a significant contribution to closing the gap.

Q: Are there concerns around how you set prices?

While there has been negative publicity about hospitals’ pricing tactics, I don’t think we need to be concerned as long as we deliver value and demonstrate that we are reinvesting wisely. Our vision is to steward the resources entrusted to us and focus our efforts on those areas where we can bring the strongest comparative advantage: advancing and transmitting biomedical science and delivering superior complex care. We are also committed to attaining top performance on quality, safety, cost, service, and satisfaction.

Q: Does the fact that the University of Chicago is a nonprofit institution affect how you make decisions?

Absolutely. First of all, we have been here for 75 years through the vicissitudes of urban transformation and intend to remain firmly planted on Chicago’s South Side.

We are also stepping up our commitment to improving the health of our community. We’re trying to figure out how we can be the best resource for the entire community. It’s really not good care if people use our emergency room because they don’t have a medical home. As a big teaching institution, we could never attain the cost structure of a community hospital. We are partnering with community hospitals and other local providers to optimize society’s scarce resources for healthcare on the South Side. As an educational institution, we are also creating new knowledge and developing new models for improving the health of urban populations.

Ephraim Heller

Frequently checking blood glucose levels helps people with diabetes better manage and control their condition. For years this meant that patients had to stick themselves in the fingertips with a lancet four or more times a day. In 2000, a company called TheraSense, cofounded by Ephraim Heller, introduced the FreeStyle monitor, which, because it could use a much smaller amount of blood to get a reading, allowed people to draw blood from their forearms or palms, resulting in less pain for many users.

TheraSense was bought by global medical company Abbott Laboratories in 2004, and Heller moved on to cofound a company that produces innovative balloon catheters for angioplasty. He is now working with other companies in both diabetes and interventional cardiology. “I look for
opportunities to make a significant impact on the well-being of people,” says Heller. “The companies that I’ve been involved with, so far, have been solving significant issues.”

Q: Looking at the TheraSense story, what are some of the challenges to making good health good business?

I started the company with my father, who is a professor at the University of Texas at Austin. We struggled along for several years, unable to raise money to commercialize a continuous glucose monitoring system, which had the potential to really revolutionize the treatment of diabetes. We were turned down by plenty of venture capitalists. Then we conceived of the FreeStyle system, which is more of a conventional glucose monitoring system. The venture capitalists were willing to fund that. We were very successful in delivering a product that was more accurate and less painful for patients. The company went public in 2001. We were the second IPO after 9/11. And the company was ultimately purchased by Abbot in 2004 for about $1.3 billion.

There are plenty of challenges in making a medical device startup successful, such as hiring a high-quality management team and getting the tens of millions of dollars of capital that are needed. Probably the biggest issue is execution. It’s pulling together a team and managing that team so that they execute to schedule and to budget, which most startups do not do.

Q: When you conceived of the FreeStyle approach, was that a scientific insight or was that more of a business insight?

It was both. There were other companies that had recognized that reducing the pain associated with glucose monitoring would be very attractive to people with diabetes — and also to the venture capitalists — but they had problematic technical approaches. Based on our expertise with continuous sensors, I sat down with the technical team, and I asked them if there was a way for us to solve that problem — to measure the glucose in a very, very small sample. They were able to come up with the solution. So it was a joint effort, clearly.

Q: Why did that product succeed?

The most straightforward answer is that it was simply a better product than the competitors’ products. It was better in the sense that it was more accurate and it was easier to use.
Now, we were going up against four tremendously large companies that dominated the market. Those were Johnson & Johnson, Roche, Bayer, and Abbott. It was widely predicted that, even if we were successful in developing a product, that they would crush us in the marketing.

These kinds of glucose monitoring systems are marketed both directly to consumers — they are an over-the-counter product — and to the diabetes professionals, nurses and doctors who specialize in the treatment of patients with diabetes, and who are very heavy influencers of which products are adopted.

So the challenge for a startup company like ours was not only to reach several thousand medical professionals with a direct sales force, which is an expensive proposition, but also to penetrate the retail channel, and make sure that our product was carried in all the major pharmacies. And it was widely predicted that we would not be able to do that, because the four big players were so firmly entrenched. We really surprised people.

But there’s no question that the big companies have much larger sales forces than we could have hoped to have had. Ultimately, that’s why we ended up selling the company. We launched in the summer of 2000 and did about $5 million in shipments that year. And then in 2001 we did about $100 million in shipments. In 2002 we did roughly $170 million in shipments, which was phenomenal growth. At the same time, the market was about $4 billion worldwide. So we had less than 5% market share, and it was evident that we were not going to be able to put in the resources and build the infrastructure to fully penetrate the market on a worldwide basis.

I’ve observed again and again in the medical device field that the large companies are incapable of real innovation. They rely on startup companies to develop the product, prove its feasibility, and prove its market acceptance, and then the large companies buy the startup companies and move the product through their marketing channels. So the big companies are really marketing companies.

Q: Is diabetes a good business to be in now?

I’m reminded of a class that I took many years ago at Yale. It was a business strategy class, and Sharon Oster was the teacher. Sharon asked the question, “What is the best predictor of how profitable a company will be?” And people guessed all the things that you would typically guess — the quality of the product, the quality of the management, the efficiency of the manufacturing. It turned out it was none of those. The best predictor of the profitability of the company is really the profitability of the industry.

The diabetes business has been remarkable over the years, in that it has maintained very high levels of profitability, along with very high levels of innovation. And the two, in my mind, are clearly linked. It is the high level of profitability that draws and makes possible the innovation. It’s what causes companies to invest in the R&D, and causes venture capitalists to invest in startups. I think diabetes is still an excellent place to invest.

This points to a policy issue. There are a lot of proposals in the election campaign regarding how to reform healthcare, and I think many of them have a lot of merit. But one of the most challenging issues that I see is how to reduce costs, which we need to do, and at the same time maintain incentives for innovation in products and services. And I have yet to see any really good proposals on that.

Marc Buntaine

Proton beam radiation therapy holds the promise of improving treatment for a variety of cancers, by allowing physicians to deliver a high dose of radiation to a more localized site than is possible with more conventional x-ray therapy. Proton therapy is not yet widely available, with only five centers offering it in the U.S. The reason is clear: a proton beam facility costs upwards of $100 million, occupies an entire building, and requires a team of physicists to run it. This size and scope of investment has driven a debate over the cost versus benefit, and therefore appropriateness, of this therapy.

Still River Systems, a startup company in Massachusetts, is developing a compact proton beam radiation system, drawing on research by MIT physicists, which will cost around $20 million and fit into a single room. The company hopes to install the first unit by the end of 2008 and, ultimately, make proton therapy available to more people. To get there, the company needs to be successful as a business: secure partners, customers, and investors, and yoke the efforts of dozens of employees. CEO Marc Buntaine has shepherded other medical startups through successful product launches, and he says he brings an essential skill to the enterprise: “managing the ambiguity.”

Q: What comes to mind for you when you hear the question “Can good health be good business?”

As the CEO of a radiation oncology company, I need to make it true that good health can be good business. I’ve spent many years running companies that both improve patient care and have been very successful in business. Technology advances in materials science, imaging, and digital communications have provided opportunities; I’ve spent my career creating sustainable businesses from these opportunities by bringing new advances to surgeons and radiation oncologists. So, I would give an affirmative answer to your question.

Q: You’ve several times taken new healthcare ideas and concepts and brought them to market.

Yes. The common theme of my career has been to lead development and commercialization of new therapeutic tools that allow less invasive and more precise procedures, thereby producing fewer side effects. This has been a pronounced trend of medicine, certainly in the surgical equipment and medical device field.

Q: When you’re coming to a new project, how are you looking at the health side of it, and how are you looking at the business side of it?

From the health side of it, there has to be a clear basis of improved patient treatment. In the case of Still River Systems, the improvement is in the fundamental energy deposition curve of the radiation being delivered. There is an opportunity, using particle therapy, to eliminate what is called the exit dose, and minimize collateral damage to healthy organs and structures around the tumor during cancer treatment. Collateral damage means both compromising adjacent tissue functionality and potentially enabling secondary tumor growth later in life. Eliminating the exit dose is a tremendously important lever to give radiation oncologists as they prescribe treatment for tumor control or eradication. Given this clinical benefit, then you have to work your way back through the business issues. Reimbursement is a big part of the puzzle, as well as market introduction; you have to enlist champions for this new procedure and plan specific launch activities that will bring you enough market presence to gain real traction in the medical establishment. There has to be enough clinical advantage that highly trained professionals are willing to spend time exploring new ways of doing their jobs; this is obviously not a trivial process in the field of human care and disease intervention.

Q: What happens to healthcare ideas that don’t have the same attractiveness as a business model?

There are lots of those. These ideas go just a little ways and then sit, sometimes for quite awhile. The advantages of proton therapy have been understood for decades, but it has only been in the last decade or so that material sciences have advanced enough to make compact and affordable proton therapy a real alternative. Sometimes the stars have to be aligned to actually bring a new product to fruition.

Q: What are some of the challenges that you foresee in getting your system out?

We have engineering challenges that we continue to resolve on a routine basis. Every aspect of our product, the Monarch 250, has been previously deployed in other applications; our challenge is to engineer and manufacture our specific system and at the same time build a production company to appropriately respond to market demand. Our engineering focus is to integrate and optimize competing, but all necessary, system requirements in a small space. The organization challenge is to attract, retain, and adequately manage a high-growth enterprise of skilled and technically adept individuals, each of whom brings specific contributions that are critical to our success. Still River’s technical founder and I started from zero employees about three years ago, and have brought on 50 people, all of whom contribute very specifically in highly technical fields. This company growth will continue as we now begin manufacture and then deployment of Monarch 250 systems across the country and in non-U.S. markets.

Q: One factor that’s in your favor is that this kind of treatment is already approved by Medicare, so you already have an idea of how much people will pay to get the treatment.

That’s right. What we’re trying to do is improve the availability of proton therapy by creating a more accessible and affordable system, so that many more hospitals and institutions can take advantage of this therapy for their patients.

Q: This is a positive example of good health being good business, right?

Yes. Even with this positive example, however, there could still be overall healthcare system cost concerns. Healthcare costs have increased faster than the inflation rate, and Still River’s approach to provide proton therapy is obviously still expensive. However, if you compare radiation therapy with other methods of treating cancer — i.e., surgery or chemotherapy — radiation therapy turns out to be the most cost-effective, at least partly because of the minimally invasive nature of the treatment; patients can continue to work and carry on with their lives during the course of treatment. Proton therapy is more expensive than traditional radiation therapy, but the benefits of a more precisely delivered dose are apparent and of great value to cancer patients in terms of their quality of life.

Q: Is another issue that these treatments are only going to go to the people who can afford to pay for them?

This is something Still River is helping to address with a lower cost system. Of course, I think all our hospitals have programs in place to provide care for lower income and indigent patients, but an exciting development for us is that we are scheduled to deliver a system to a county hospital in Fort Lauderdale in 2010, and this will be the first proton therapy available at a county facility. We are also scheduled in 2010 to deliver a system to an oncology group that primarily serves a rural population base in Louisiana. Making proton therapy locally available to these patient populations wouldn’t be possible without our more affordable system.

Interviewed by Jonathan T.F. Weisberg