Medical Device Link.

Originally Published MX May/June 2004

ADVERTISING, DISTRIBUTION, & SALES

Value-added drug-device combinations present sales and marketing challenges.

Mark Speers

Medtech industry R&D labs are generating extraordinary drug-device combination products that promise to greatly enhance the quality and cost-effectiveness of human healthcare. Many of these products will warrant the kind of premium prices successfully established for drug-eluting stents.

The technical, regulatory, and manufacturing obstacles that producers of combination products must overcome are well known. Less well recognized are the formidable sales and marketing challenges they will face, since many manufacturers are just beginning to market such products. Chief among these challenges are the need for a new type of salesperson and the imperative to win acceptance of value-based prices by third-party payers. While providers have been the device industry's traditional customers, the providers' customers—the payers—are effectively the primary customers for combination products.

Senior company managers ought to be aware of these sales and marketing challenges and should anticipate them early in the development cycle of new drug-device combinations. Such early attention to value will drive critical product specifications and lay the groundwork for a successful campaign to improve the pricing landscape.

Background

Figure 1. Evolution of the combination product. (click to enlarge)

Drug-eluting stents have been receiving a great deal of press lately, but the concept of the combination product has been around for a long time. Such products have evolved over time (see Figure 1).

Evolution of the Combination Product. Initially, devices and drugs intersected only at the point of use in the clinical setting. Examples of primitive combinations include patient-controlled analgesia (PCA) pumps, drugs labeled for nebulization in use-specific high-performance nebulizers, and chemical agents employed to improve the resolution of medical images captured by diagnostic equipment.

In today's combination products, drugs have been incorporated into the devices during manufacturing to add value to the devices directly. Sophisticated drug-delivery technology, exemplified by the transdermal patch, has driven much recent progress. Another example of current combination technology is the range of antimicrobial catheters.

And a new generation of even- more-sophisticated combination products is now being evaluated. Novel cell-based therapies and more-potent biologics will require devices to effect highly localized delivery. Concurrently, leading-edge miniaturization of devices affords an opportunity for incorporating some of these biological agents. Artificial organs and drugs on chips are good examples of such high-performance product innovations.

Drugs and Devices. Combination products represent a merger of two separate worlds. Traditional drugs and traditional devices differ in key ways other than their form and nature (see Table I).

The first difference concerns the venue of use. The vast majority of drugs are consumed in outpatient settings. Drugs dispensed through retail pharmacies—not those administered in hospitals—are the basis of the pharmaceutical industry's growth and profits. In contrast, most devices are used by providers such as hospitals, often in the inpatient setting. The pharmaceutical industry, therefore, understands that its big business opportunities involve chronic conditions, whereas device manufacturers understand that the preponderance of their products are used to address acute health conditions.

The prescribers of drugs and devices, who are the call points for each industry's sales forces, also differ. Drugs are prescribed by medical doctors, while devices are called for by a host of users ranging from nurses and technicians (such as respiratory therapists) to interventional specialists and surgeons.

And finally, their customers are different. Drugs, generally, are purchased by managed-care organizations, pharmacy benefit managers, and increasingly, as their drug benefit's copayment rises, by patients. The invoices for devices are largely paid by the providers—physician's offices, surgery centers, infusion centers, and hospitals.

Sales Representatives. Drug sales reps and device sales reps have different skills and work challenges, and even different personalities (see Table II). Drug reps thrive on the maintenance of customer relationships. Device reps, on the other hand, work toward transactions, seeking the satisfaction of receiving the purchase order. Drug reps generally target individual physicians one at a time, though hospital drug reps deal with formulary committees. Device reps generally deal with hospital committees.

Their sales pitches also are usually different. Drug reps focus on clinical effectiveness ("This is going to be better for your patient") while device reps traditionally emphasize cost-effectiveness ("This is going to help you deliver care inside the existing diagnosis-related group (DRG) at lower cost"). The former are selling biology and chemistry; the latter are selling physics and materials.

Drug reps spend the bulk of their time scheduling, rescheduling, and waiting for opportunities for brief interactions with physicians. Device reps, in contrast, spend hours in product trials, in supporting clinicians just beginning to use their products, and in service to customers. They chase down back orders and carry extra inventory in their cars. Also, device company salespeople spend more time traveling; a device rep's territory is usually four or five times the size of a drug rep's territory.

In view of the discrepancies between these two types of sales forces in terms of approach, skills, and motivations, the question is how to field a group of sales representatives for a drug-device combination product. Presumably, what will be needed is either cross-trained reps with skills and knowledge to encompass both aspects of the product, or teams of reps taken from both drug- and device-selling rosters.

The Payer as Primary Customer

Many new premium-priced combination products cannot be economically justified for purchase within providers' existing schedules for reimbursement. This means that the first customer of the combination product should often be the third-party payer. In fact, a key difference between traditional devices and new combination products can be a shift in economic beneficiary from the provider in the case of devices to the payer in the case of drug-device combinations.

For example, autotransfusion was adopted by hospitals for cardiac surgery—and now, with miniaturization, is used for orthopedic surgery—because it reduces the need for blood transfusions and drugs. The technology has lowered the hospital's cost of performing surgery. Likewise, depth-of-anesthesia monitors reduce drug usage and speed patient recovery, decreasing the time patients must spend in step-down units following surgery. The seller's compelling economic pitch is, again, to the provider.

A pair of drug-device combination products might be considered in comparison with these traditional devices. The drug-eluting stent, for instance, cannot be claimed to save hospitals any money, especially at an introductory price of around $3000, two to three times the cost of a traditional stent. Its promise is a reduction in the incidence of restenosis. The beneficiary is the payer, which does not have to finance as many downstream angioplasties and bypass surgeries. Similarly, an orthopedic implant impregnated with bone morphogenic protein, a bone graft substitute, does not bring any benefit to hospitals. The beneficiary again is the third party, which can expect to pay for fewer subsequent revisions and repeat surgeries.

For manufacturers to capture the premium prices that they deserve for their innovative combination products, they need to look beyond their traditional customer—the provider—to their real customer—the payer. Success in this leapfrogging will establish a higher level of provider reimbursement for the procedure and thereby give the provider the "headroom" to pay the manufacturer a higher price for its value-added product.

Johnson & Johnson (J&J) executed this process extremely well with the drug-eluting stent. Perhaps for the first time, Medicare approved a premium code for a product-defined DRG before the product was approved by FDA; providers are reimbursed an extra $2000 per angioplasty when a drug-eluting stent is employed.

Regarding the payer as its ultimate customer, J&J spent two years lobbying and sharing clinical and economic data with the Centers for Medicare and Medicaid Services. The resulting landmark decision has opened up an enormous opportunity for hospitals and drug-eluting-stent manufacturers. Without this relief, many hospitals would have been forced to ration the use of these premium-priced combination products, and the manufacturers' sales would have been severely limited.

Value-Based Device Pricing

Figure 2. Finding a price point for the sale of traditional medical devices (left) and combination products (right) to third-party payers. (click to enlarge)

The advantage of increasing the headroom for a product's value-based price can be graphically illustrated (see Figure 2).

The Calculation. The bar at the left-hand side of the graph represents a traditional device. Its price is made up of the manufacturer's cost (blue) plus the typical device gross margin of 40–50% (yellow). The top of this bar is the cost-plus price.

The adjacent bar displays how the product's value-based price is calculated. The first step is to think about the product's value to the payer. This process usually establishes a high ceiling within which the value chain can be shared. To prevent payers from being economically indifferent regarding competing products, the manufacturer should leave a small financial incentive for the payer, as indicated in the orange section. Nor should providers be economically indifferent to the products; some margin (white) should be left for them as well. These calculations lead to the determination of the product's value-based price, which in the figure is just above $200. The price range between the lower cost-plus price and the higher value-based price signifies the additional profits available to a manufacturer that charges a value-based price for its product.

The right-hand set of bars in the figure represents a drug-device combination product. That the new technology likely incurs some incremental manufacturing cost is acknowledged in the blue section of the bars. As can be seen, if the manufacturer tries to market its combination product within the economic paradigm established for the traditional version of the device, it cannot attain even a 40–50% margin, as shown by the labeled gap. The manufacturer has to argue a new value to the payer. The bar at the far right replicates the calculation of value-based price used for the traditional product. But with a combination product, the new price range that is opened is typically larger than the value-based price range for the traditional product.

The Obstacle to Overcome. A huge stumbling block for innovative manufacturers is that many new combination products are given existing procedure codes initially. For example, without J&J's efforts, the drug-eluting stent would have been used by an interventional cardiologist to perform an angioplasty with stent under an existing current procedural terminology (CPT) code and DRG. The American Medical Association is not eager to make its CPT book any thicker, so it has a bias against adding codes for new devices. Thus, as combination products come to market, they run into that device margin gap noted in the center of Figure 2, because their manufacturing costs are higher. Providers, trying to be fiscally responsible, are reluctant to adopt the new technology if the price is higher than any they have traditionally been persuaded to pay.

A client with a combination product designed to perform a less-invasive procedure than possible with a traditional product recently overcame this problem. A preexisting $225 facility outpatient CPT code was historically based upon employing a rudimentary $35 disposable device. The company had invented a much more elegant solution promising far less morbidity and far better clinical outcomes, but it wanted $625 per disposable. Ambulatory surgery centers comparing $625 per disposable against an entire facility fee of $225 would not go for it.

The strategy then was as depicted in the right-hand bar in Figure 2. The value of the procedure incorporating the combination product was estimated. This value was much higher than the traditional product's value because the combination device would dramatically reduce the number of open surgeries that had been commonly performed to treat the disorder involved. Even after leaving some payer and provider incentives and acknowledging some additional costs on the provider's side, a much higher value-based price could be generated. The manufacturer ultimately achieved its desired price level at gross margins approaching 80% because its ambulatory surgery customers went to their third-party payers and presented compelling arguments for increased reimbursement.

Conclusion

Drug-device combination products will continue to offer phenomenal value to the healthcare system. One of their distinctions is that much of the value the drug brings to the traditional medical device will accrue to the payer rather than the provider. This presents a challenge to medtech manufacturers. Their response should be to leapfrog over their traditional customer, the healthcare provider, and approach the payer as the main customer for the technology. The time to act is prior to product launch, when the pricing landscape is established.

Mark Speers is managing director of Health Advances LLC (Boston), a strategic consulting firm.

Illustration by ROB COLVIN

Copyright ©2004 MX