Last week, both chambers of Congress voted nearly unanimously to pass the 21st Century Cures Act (the Cures Act), sweeping legislation that directly impacts the government funding and FDA review process of medical innovations, both pharmaceutical and device. President Obama has vowed to sign the legislation “as soon as it hits [his] desk”, therefore representing a rare bipartisan major piece of legislation, and perhaps the most significant to drug development since the Hatch-Waxman Act in 1984. From a biotech business development perspective, by far the biggest impact the Cures Act will have is the mandate to the FDA to find ways to help speed up the drug approval process. The Cures Act instructs the FDA to, among other things:
- include patient experience data in its deliberations of whether to approve a drug, including the use of real world evidence to support the indication expansion of already approved drugs
- expand its authority to review biomarkers and other drug development tools that can help speed drug development
- work with the industry and advocacy groups to help determine and incorporate adaptive designs and novel statistical modeling for new drug applications in hard-to-treat disease areas (i.e. expand use of surrogate endpoints)
The Cures Act serves as a new roadmap for development of treatments for rare and hard-to-treat diseases either where limited patient populations (i.e. rare diseases), ethical considerations (i.e. sepsis, certain cancers and others) or lengthy times for disease progression (i.e. progressive kidney disease) make it difficult to recruit for or run standard clinical trials. The FDA now must consider other voices, including patient advocacy groups, and alternative trial designs based on rational, well-supported and well-designed surrogate endpoints. In many ways, the Cures Act is an endorsement of the approval approach the FDA recently took with Sarepta Therapeutics’ eteplirsen for Duchenne Muscular Dystrophy.
While the FDA has not announced how it will implement its mandates under the Cures Act, it is possible to envision how the Cures Act will impact biotech deal making. The biggest impact will likely manifest through the NPV calculations companies employ to value drugs in later-stage clinical development. Since the Cures Act focuses on accelerating drug development, little should change in how companies view the post-approval commercial opportunity; however, the effect on development programs will be significant, where the total value of the product is most impacted in NPV calculations. While there is certainty that a current cost/revenue will be paid/earned, there is risk that future costs/revenue will never be paid/earned, so future cashflows are risk-adjusted in addition to the discount rates used to account for the time value of money. Thus, even large commercial opportunities can be overshadowed in the overall NPV if they are many years out into the future and there are large current development costs. The shortened development timelines and cheaper trials promised by the Cures Act will therefore give a tremendous boost to the NPVs for drugs in rare diseases and other hard-to-treat indications. Because the FDA will be more open in determining acceptable trial designs and working with companies on suitable endpoints, companies will have more certainty on whether a proposed pivotal trial design is acceptable for approval. This does not reduce the drug’s clinical risk (the Cures Act’s supporters and the FDA have all vociferously made clear they will not ease standards for required safety and efficacy), but the regulatory risk reduction is meaningful. Clinical, regulatory and commercial risk are cumulative in their joint effects on future cash flows so reducing regulatory risk would decrease the magnitude of the risk adjustment and boost NPVs.
It is unlikely NPV deal splits will change much because of the Cures Act but partners will receive higher deal values overall through the boosted NPVs. Structures of deals may shift as development costs decline and timelines shorten leading to increased milestone payments. One other potential implication is that additional private capital may be available to fund development-stage companies since less capital would be required to reach their next value inflection points.
Although the Cures Act combined with the anticipated policies of the incoming Trump presidency looks like a boon to the industry, there remain areas of friction that will require close attention by industry participants, including drug prices and concerns the changes in the Cures Act will result in the approval of unsafe medicines. Biotech companies would be wise to self-regulate to avoid any future government intervention by being price conscience and avoiding aggressively pushing the wrong drugs through approval. President-elect Trump has also voiced his desire to do something about high drug prices. Although likely more sympathetic to the industry than a Clinton administration would have been, industries/companies ignoring his statements are doing so at their own peril (Carrier, Boeing, Ford, etc.). It is not unreasonable to conclude that if a drug approved through the new Cures Act pathway causes a major health problem the pendulum of government will quickly swing back against the industry. While the Cures Act passed nearly unanimously, it took three years of hard lobbying and several of its opponents, including Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT), are loud and unrelenting in their criticism of the industry and the Cures Act.
To learn more about how partners value development stage products and how to get the highest deal value for your pipeline, our next Locust Walk Institute class on biotech business development and financings will be May 3 and 4 in San Francisco.
Witten by Andy Meyerson