Healthcare Questions

What is the difference between a branded and generic pharma company?

A generics company (e.g., Teva) develops and sells generic drugs, which are allowed for sale once the patents on the original branded drugs have expired. Given the commoditized nature of these no-brand name drugs, the generics business model and competition amongst one another is based on winning fixed volume contracts for mass production. Research & development costs are lower for generics companies since there are fewer clinical trials involved. However, sales & marketing costs targeted at retail pharmacies are higher since competition is based on securing those contracts with retail pharmacies. In contrast, branded pharma companies (e.g., Novartis) have patent exclusivity which enables them to compete on product innovation and reputation of quality, rather than pricing-based competition.

What are the main differences between biotech and other types of pharma companies?

Broadly put, biotech companies use living organisms to create their drugs, whereas the other life sciences categories develop their drugs using chemical compounds. Biotech companies are typically very high growth and based around one product/therapeutic area. Other sub-sectors in the life sciences industry, such as large pharma, are far more diversified with more product lines across several therapeutic areas (e.g., Pfizer, Merck).

What type of services do contract research organizations (CROs) provide?

CROs operate clinical trials on behalf of pharma and biotech companies in an outsourced, contractor-type relationship. CROs are hired to manage and lead the medical company's clinical trials and to perform other specialized tasks to help bring a particular drug/medical device to the market and obtain regulatory approval quicker. Client organizations contract with CROs to use their expertise, which is required to carry out these high-stake trials safely and in a cost-efficient manner - since CROs are an alternative to having to hire permanent, dedicated staff members with the required skill set.

What does the "probability of success" rate refer to in receiving FDA approval?

Depending on the targeted therapeutic area, certain drug candidates have a higher probability of success than others. But overall, research has shown that it's very difficult to achieve "approval" status from the FDA. When modeling a revenue forecast build for clinical-stage biotechnology companies, the probability of success rate (called the "POS") must be multiplied to each product line, excluding research & development. The risk- adjusted revenue would then be calculated as the unadjusted revenue multiplied by the cumulative POS rate.

What does interoperability mean in healthcare?

In the healthcare setting, interoperability is the ability of different IT systems and software applications to communicate and exchange data. The implication being data on a particular patient may seamlessly be shared across different clinics, labs, hospitals, and pharmacies. This enables the more efficient delivery of healthcare services for individuals, enhances the overall patient experience, lowers medical costs, and reduces errors.

What are some ongoing industry trends in the healthcare sector?

Industry Consolidation via M&A and Alliances -Payers acquiring or developing their own Pharmacy Benefit Managers (PBMs) - examples include the Cigna and Express Scripts merger and CVS's Caremark acquisition of Aetna -Retail pharmacies aligning with distributors - Pharmacies acquiring or creating alliances with payers Integrated Delivery Networks (IDNs) - Systems of healthcare providers and health plans within a geographic area - creating an alignment between the different sub-sectors - IDNs be thought of as a shift towards an ecosystem where various healthcare services are provided by different providers but under a single brand Value-Based Care vs. Fee-for-Service - Recent concerns that care has been compensated based on quantity rather than quality - The movement towards outcome-based payments for medical services is changing how healthcare providers are being reimbursed Consumer-Centric Healthcare E.g., Urgent Care Centers, Increased Access to Personal Health Data, Telemedicine

What are managed care organizations (MCOs)?

Managed care organizations (MCOs) are medical service providers who offer managed care health plans. MCOs refer to non-government payers in the US. MCOs make their money from the premiums and administrative fees from their customers (e.g., employers, individuals who purchase their health coverage plans).

How would you build a revenue model for a hospital?

Model Assumptions 1. Number of Operating Hospitals & Freestanding Outpatient Surgery Centers: The first key metrics would include the number of operating hospitals and the number of freestanding outpatient surgery centers. Then, a growth rate would need to be attached, which will depend on historical growth and M&A plans announced by management since nearly all growth in terms of location count is driven through acquisitions (rather than organic growth). The reimbursements for services are mostly out of a hospital's control, so growth through acquisition is the most reliable growth strategy. 2. Utilization Data: Next, the utilization data of each hospital must be calculated. This includes the number of licensed beds (and the weighted average of licensed beds), average admissions (i.e., the inpatient volume), equivalent admissions, the average length of stay, and the average daily census. 3. Average Occupancy Rates: Then, the average occupancy rate will be calculated using the weighted average number of beds and the average daily census. 4. Reimbursement Rates: The reimbursement rates will differ by the payor, and thus the sources of revenue will often be separated by each type (e.g., Medicare, Managed Medicare, Medicaid, Managed Medicaid, Managed Care/Other Insurers). Existing Hospitals Revenue Projections 1. To start, calculate the average number of beds per hospital. Then, add a row for the implied outpatient volume, which is calculated as the equivalent admissions (a proxy for outpatient and inpatient volume) less the admissions (outpatient volume). Based on this metric, we can derive the average daily volume from admissions, beginning with the inpatient admissions, which will then be multiplied by the average length of the stay. This gets us to the inpatient volume adjusted for length of stay, and then we'll add the outpatient volume to arrive at the total annual volume. 2. Since we are calculating the approximate average daily volume, we would then divide the total annual volume by 365 for the units to line up. 3. Then, we'll project the number of hospitals owned for > 1 year and the beds per hospital from historical periods. That gets us to the total number of beds owned by existing hospitals, which will then be multiplied by the occupancy rate and then add a line for the annual improvement. Doing so gets us to the average daily census, which we'll then multiply by 365 to get to the total annual volume. 4. Using the outpatient volume as a total % of the total annual volume, we can calculate the implied outpatient volume. We'll now calculate the inpatient volume adjusted for the length of stay by subtracting the outpatient volume from the total annual volume. To arrive at the inpatient admissions, we'll divide the inpatient volume by the average length of stay to get to the inpatient volume. 5. To get to the equivalent admissions, we can add the inpatient volume to the outpatient volume. Now, we can apply the revenue per equivalent admission assumption metric to it. We'll assume a growth rate for this metric and then multiply the ending figure by the equivalent admissions to arrive at the total revenue generated by hospitals owned > 1 year. Hospital Acquisitions 1. To forecast the revenue from acquired hospitals, the first assumption will be the new hospitals acquired multiplied by the beds per hospital to arrive at the total beds from acquired hospitals. 2. You'll then go through the same calculations as we did for the hospitals owned for over one year. In the first couple of years post-acquisition, there should be a lower occupancy rate to be conservative since these are new hospitals that have not built up brand recognition yet. 3. Again, the average daily census will be multiplied by 365 to arrive at the total annual volume. 4. We'll then make an assumption for the outpatient volume as a percentage of the total annual volume and calculate the outpatient volume. That allows us to calculate the inpatient volume adjusted for length of stay, which is the total annual volume less the outpatient volume. Then, inpatient admissions will be calculated by dividing the inpatient volume adjusted for length of stay by the average length of stay. 5. Ultimately, this allows us to calculate equivalent admissions, which, as a reminder, is the sum of the inpatient admissions and outpatient volume. 6. Lastly, the same metrics will be applied as the existing hospitals. The equivalent admissions will be multiplied by revenue per equivalent admission to calculate the revenue from new hospitals for the year. But since hospitals are not acquired precisely at the beginning of the year, we'll apply a mid-year adjustment by multiplying this figure by 0.5. Overall, the total revenue will be the sum of the revenue from the existing hospitals and acquired hospitals.

What roles do pharmacy benefit managers (PBMs) play in the industry?

Pharmacy benefit managers (PBMs) directly negotiate drug prices with retail pharmacies and influence the prices of the products - as their job essentially is to manage the pharmaceutical spend for insurers and to keep drug costs as low as possible. PBMs get paid on the spread between what payers pay them for drugs and what they payout to the retail pharmacies and pharma companies, which further incentivizes them to lower the drug prices. Once a doctor has prescribed a particular drug, the script is handed to a retail pharmacy, and the PBMs dictate which drug to dispense (i.e., a brand or generic). PBMs reduce costs by negotiating drug prices with drug manufacturers and retail pharmacies and driving generic utilization and mail order penetration.

What are some limitations of telemedicine?

Telemedicine applies only to non-urgent situations, not actual emergencies. Any serious medical condition that requires immediate hands-on treatment or x-rays to assess the severity of the situation cannot be treated over telemedicine. Instead, telemedicine is intended for non-emergency matters and follow-up consultations after an in-person meeting. Telemedicine is also expected to free up more time for patients that require urgent treatment and give medical professions more time to rest, especially when the health of the medical providers themselves is a widespread concern due to insufficient sleep and constant stress.

What are physician organizations (POs)?

The physician organization (POs) model is the traditional system in which physical organizations and hospitals co-exist with no contractual integration. This type of model has faced recent pressure from patients (and regulatory bodies) and may not be sustainable in the long-term due to managed care and the trend of IDS. As more healthcare reform initiatives call for providers to integrate service delivery and align their economic incentives, a shift towards PHO models is expected.

What is utilization management in the healthcare context?

Utilization management in healthcare describes the periodic review of the hospital and healthcare facility utilization to manage costs better. In addition, the quality of care provided is assessed to understand which areas to adjust to provide better patient experiences while remaining financially efficient (i.e., understand demand curves better, recognize which areas to focus on, identify inefficiencies). In the coming years, the trend of telemedicine and increased automated workflow is expected to have a very positive impact on the costs of hospital and related facilities.

What does the average occupancy rate represent, and how is it calculated?

The average occupancy rate is a key measurement of the profitability of a hospital that shows how well a hospital is utilizing its capacity. While the target rate will depend on the hospital and be specific to the location/services provided, an occupancy rate of ~75% is cited as the most profitable percentage whereas, for high-end hospitals in urban densely populated areas, a ~85% occupancy rate is considered "peak profitability." Average Occupancy Rate = Average Daily Census / Weighted Average Number of Beds

Could you explain what issue an integrated delivery network (IDN) is attempting to fix?

The concept behind an integrated delivery network (IDN) is to provides a range of health care services across the continuum of care through vertical integration. An integrated delivery network (IDN) is a network of healthcare facilities owned collectively under a single parent holding company. The term is used to define the connectivity of various healthcare specialists that provide a continuum of healthcare services (i.e., joint healthcare). The issues IDNs see in today's healthcare system is misaligned incentives, inefficiencies such as lack of coordination and poor communication leading to higher medical costs for patients, and fragmentation. In the ideal healthcare system, there would be coordination and an alignment in economic incentives that increase the utilization of available resources, leading to better clinical outcomes and improving the delivery of healthcare services. IDNs promote the idea of organizations working collectively to combine their assets and specialties to deliver the most comprehensive, efficient healthcare services to the patients they serve.

Tell me about a healthcare startup you're closely following.

Founded in 2016, Truepill is a B2B telehealth startup that provides pharmacy API and fulfillment services of medications and is often referred to as the "AWS for pharmacies." Truepill works directly with D2C pharmacy brands (most notably Nurx, Hims, Lemonaid), digital health companies, and other healthcare organizations to enable them to improve upon and scale their platforms. Truepill's team of licensed medical professionals can diagnose, provide consultations, and prescribe medications across various clinical areas via telemedicine and in-person clinics. In addition, Truepill operates pharmacies that can ship cash or insurance-billed medications directly to the doorsteps of the patient. Essentially, Truepill acts as the licensed pharmacist dispensing and shipping the medication prescribed through D2C startups. For D2C healthcare startups, Truepill handles all the logistics, shipping, and pharmacy fulfillment on their behalf, thus enabling them to benefit from Truepill's economies of scale and growing international footprint. Truepill's API provides full transparency to its user base by providing data such as overall fulfillment volume, the number of orders going out on time, the delivery status of the order on a real-time basis, and reports on issues that caused delays. Competition amongst D2C pharmacy brands has become crowded as more niche startups enter the market - however, Truepill provides non-partisan services (comparable to Stripe's role in FinTech) by functioning as a background infrastructure layer. Truepill's business model of being only B2B has previously never existed before, and co-founder Sid Viswanathan has stated that Truepill seeks to become "the pharmacy behind the scenes that's powering the entire ecosystem." Thus, Truepill works alongside and negotiates agreements primarily with drug makers and PBMs, as opposed to competing with the industry intermediaries that sit between insurers and drug makers. Telemedicine and on-demand virtual deliveries will have a significant role in the modern pharmacy, and Truepill looks to capitalize on this trend by leading the development of the digital pharmacy infrastructure.

What do indemnity healthcare plans involve?

Often called "fee-for-service" plans, indemnity plans enable patients to direct their own healthcare decisions and enjoy greater flexibility. The benefits are greater flexibility in being able to visit any doctor or specialist at a hospital. The insurance company that provided the healthcare plan will then pay a set portion of the total incurred charges from the visit. However, the patient must pay an annual deductible and out-of-pocket payment for services before submitting a reimbursement claim. Once the requirements are met, the insurance provider pays a percentage of the total costs based on the usual, customary and reasonable (UCR) charges of comparable providers.

Provide an overview of the path to becoming an approved therapy by the FDA.

Pre-Clinical Discovery: Non-human testing to determine what a safe dosage for humans would be or if it even is safe to proceed with human testing (i.e., animal testing) Phase 0: An exploratory study usually involving fewer than 15 test subjects and dosage on the lower end due to safety concerns Phase 1: Human tests to determine if the treatment is safe while testing for the highest dose in humans without serious side effects (typically involves 20 to 80 test subjects) Phase 2: Continued human tests to determine if the treatment works and testing specific dosing to observe response and efficacy (can involve a few dozen to 300+ test subjects) Phase 3: Further human tests to determine if the treatment is better and testing the therapy against currently available therapies and treatments (ranges from several hundred to 3,000 test subjects) New Drug Application (NDA): Formal application submission asking for approval by the FDA - once an NDA is received, the FDA has ~60 days to decide whether to proceed with the process of review. Phase 4: Involves a thorough drug review by the FDA on all submitted data (e.g., studies conducted, labeling plan, and manufacturing facilities inspections) before making a formal decision on the application

What are some of the main health plans used today?

Preferred Provider Organization (PPO) Health Maintenance Organization (HMO) Point-of-Service (POS) Indemnity Plans (Fee-for-Service) Health Savings Account (HSA)

Explain the purpose of rebates in the context of pharmaceutical pricing.

Rebates are essentially discounts offered to PBMs by pharma companies to incentivize them to include them in their list of covered drugs (called a formulary). Therefore, PBMs maintain on behalf of the payers a schedule of which drugs are covered for their customers and at what prices. Particularly when there's high competition for a drug product, a pharma company might give bigger rebates to the PBMs to ensure they remain on the list of the covered drugs - at the expense of reduced product revenue.

What do usual, customary and reasonable (UCR) fees refer to?

The usual, customary and reasonable (UCR) fees are the fees paid out-of-pocket by insurance policyholders for healthcare services. The UCR is the amount paid for a medical service based on what nearby providers typically charge for the same (or similar) service and often varies depending on the geographic area in which the service was provided.

Provide a broad overview of how the healthcare industry is segmented.

1. Life Sciences Biotech Large Pharma Specialty Pharma Generics 2. Healthcare Services Other Services: Contract Research Organizations, Pharmacy Benefit Managers (PBMs), Pharmacies, Distributors, HCIT Payers: Managed Care Organizations (Health Insurers), Centers for Medicare & Medicaid Services (CMS) Providers: Hospitals, Urgent Care, Inpatient Rehab Facilities, Ambulatory Surgery Centers, Long-Term Care Hospitals, Outpatient Rehab, Skilled Nursing Facilities, Home Health & Hospice 3. Med-Tech Medical Devices Medical Equipment

What is the biggest cost driver for pharma companies?

1. Research & Development (R&D): For pharma companies, clinical trials related to R&D are by far the highest cost. These trials typically take five to seven years going through the various stages of clinical trials (i.e., FDA approval for a product, regulatory hurdles, application acceptances). 2. Production Costs: R&D is followed by the costs of producing pharmaceutical products, which refer to active pharmaceutical ingredients (API) manufacturing. 3. Sales & Marketing (S&M): The third cost is sales & marketing, usually directed at physicians and patients - however, this trails the previous two by a large margin.

What assumption would you look at to value a clinical-stage biotechnology company?

A biotech company typically consists of a portfolio of different experimental drug candidates. Because each experimental drug candidate is unique and specific, we must value them separately. We must determine the annual free cash flow of each experimental drug candidate, then use discounting principles to determine the net present value of each unique product. Biotech companies are very cash-dependent, so the company's current cash balance is also crucial when determining the full equity value of a biotech company. 1. Number of Products in Pipeline/Development Stage: In the first assumption, the number of products under development and the current development phase for each must be identified. Then, it must be determined whether the company has a discovery platform of pre-clinical models and research. 2. Peak Opportunity: Determining the potential peak revenue opportunity within a therapeutic area is often the most important assumption. Sales will grow modestly after the company has achieved peak revenue until patent expiry or loss of exclusivity. Loss of exclusivity means that a brand name drug will lose its exclusive rights to sell in a certain geography. 3. Indication: The indication refers to the use of that drug for treating a particular disease/condition. More specifically, an indication is a specific, identifiable condition that the FDA has cleared a therapeutic drug to treat and can be thought of as a subcategory to a broader therapeutic area. 4. Estimated Time for Completion: The estimated time for completion refers to how long it'll take for the biotechnology company to complete all necessary clinical trials. 5. Launch Date: Once you have determined the estimated time for completion, you can estimate a launch date for the drug. Once the product has officially launched, you can apply an uptake curve that grows each year until the estimated peak revenue is achieved.

What does a fully integrated medical group (FIMG) include?

A fully integrated medical group (FIMG) is one of the end goals of IDS. In a FIMG, the physical practice is listed as a single, legal entity and is managed under single, centralized governance similar to a PIMG. However, the practices under a FIMG operate under a common name, and there's complete integration in the organizational structure and management of workflow. For example, the administrative operations, clinical systems, and income distribution are unified and completed under a single allocation system.

What is a medical service organization (MSO)?

A medical service organization (MSO) provides management, administrative, and operational tasks on behalf of medical practices. While not licensed to practice medicine, MSOs encourage integration between hospitals and physicians by performing time-consuming responsibilities on their behalf. Some areas in which MSOs assist are financial/billing management, human resources (HR) management, recruiting, and regulatory compliance.

What does a partially integrated medical group (PIMG) mean?

A partially integrated medical group (PIMG) is a step in the right direction towards IDS, but it's not a complete integration. In a PIMG, there's a medical group practice resulting from the mergers of multiple practices into a single legal entity. However, separate practices still retain independence in their operations. While there's usually centralized governance, there are many non-integrated elements such as the total income allocation by each center and the retention of the individual identity of each facility.

What is a physician-hospital organization (PHO)?

A physician-hospital organization (PHO) refers to ventures organized and owned under hospitals and physicians at medical practices that engage in paid contracting under managed care plan contracts and provide services in coordination with one another under a formal partnership. While integrations will vary by contract, there may be limitations in the cooperation between healthcare providers as the economic incentives are not completely aligned between hospitals and physicians, leading to disagreements.

What are point-of-service plans (POS)?

A point-of-service plan (POS) can be viewed as a hybrid managed healthcare care plan between HMO and PPO. Similar to an HMO, plan holders are designated an in-network physician as their primary care provider. However, the patient may go outside of the provider network for healthcare services like under a PPO plan. The benefits provided will depend on whether the policyholder uses in-network or out-of-network healthcare providers. Relative to HMO and PPO, POS represents a small fraction of the total health insurance market.

Tell me the difference between acute and post-acute care.

Acute Care: Acute care refers to receiving treatment at a hospital and is associated with shorter-term, often severe injuries and medical emergencies - e.g., urgent care, intensive care units (ICUs), and emergency room services. Post-Acute Care: Medical treatment received at non-hospital healthcare facilities is classified as post- acute care and can range from short-term rehabilitation to longer-term restorative care. These are all services beneficiaries receive after treatment at an acute care hospital - e.g., physical therapists, skilled nursing, rehabilitation facilities, and psychiatric care.

What is an independent practice association (IPA)?

An IPA, short for Independent Practice Association, is an organization of independent physicians licensed to practice. The purpose is to build a contracting relationship with HMOs and payers that provide discounts to patients under fee-for-service arrangements. This type of integration is beneficial as it creates a funnel for patients to go from the IPA to the physician's office, which helps the physician generate more revenue while the IPA can process claims under the conditions outlined in the contract agreement.

What are health maintenance organizations (HMOs)?

As a healthcare plan alternative to PPOs, an HMO is a network that provides health insurance coverage for a monthly or annual fee. The coverage is limited to the network of doctors and other healthcare providers that are under contract to the HMO, and participants are required to first receive medical treatment from a primary care physician (PCP). HMO contracts have the benefit of lower premiums relative to traditional health insurance plans because the health providers have the advantage of having patients directed towards them; however, the downside is the restrictions related to coverage access.

How would projecting revenue from drugs in the pipeline differ from recently launched generics?

For pipeline products, it may be appropriate to apply a risk-weight to project revenue. The risk-weight will be based on the percentage likelihood that the product will make it through the development and receive FDA bioequivalence approval. This is intended to account for the risk the product may face manufacturing issues or run into quality control difficulties, especially if the particular drug is complex (e.g., extended-release, injected).

Let's say you're valuing a pharmaceutical company selling drugs approved for therapeutic usage. What would the basic drivers of revenue be?

For the typical pharmaceutical company, the most basic drivers of revenue growth would be the current number of patients using their drugs, the average price of the drug, and the average dosage of the medication recommended by the physician/medical professional.

Explain the 3rd party business model in how providers are paid in the healthcare industry.

Hospitals and healthcare facilities get paid through a co-pay that the patient gives them at the time of care and through the fees from the payers. Once the medical care has been provided, a claim will be submitted to the payers describing what services were performed and what reimbursement is appropriate based on services codes. Payers, to keep their costs down, will then send them to an internal payment integrity unit or an external 3rd party HCIT company to check for errors or services incorrectly billed. These adjusted claims are then sent back to the payer, and that's what the payers will choose to reimburse hospitals and other providers Payers reimburse providers based on contracted rates for the services rendered (e.g., with participation in a PPO, hospitals typically have a one to three-year contract stating reimbursement terms; for physicians, it's based on a set fee-schedule, often based on the Medicare rates)..

What do inpatient and outpatient refer to when discussing providers?

Inpatient and outpatient are two common ways to segment the services that healthcare providers offer. 1. Inpatient Care: Treatment where the patient stays overnight at a hospital or a comparable facility. 2. Outpatient Care: Refers to facilities where patients receive treatment but don't stay overnight.

What are the differences between Medicare vs. Managed Medicare and Medicaid vs. Managed Medicaid?

Medicare: Medicare refers to healthcare coverage managed directly by the federal government. Managed Medicare: Also known as Medicare Advantage, this plan is managed by a Managed Care Organization such as Humana or Aetna, which contracts with the federal government to offer healthcare coverage to Medicare-eligible individuals. Medicare Advantage plans have different cost and benefits structures and may include coverage for additional services not covered by Original Medicare, such as prescription drug coverage (known as Medicare Part D). Medicaid: Often called Original Medicaid, this healthcare coverage is offered directly by the government. Medicaid is run at a state level, so the offerings vary by state. Managed Medicaid: Refers to plans provided by Managed Care Organizations (MCOs). The distinction is that many states have increasingly chosen to contract out their Medicaid program to MCOs because they have realized that the MCOs are more cost-effective and provide better services.

Why is payment integrity such a point-of-conflict in the healthcare industry?

Payment integrity is ensuring claims were paid in the right amount. Payment integrity providers analyze disputes and adjust claims on behalf of managed care companies, Medicare, and others. Payment integrity companies earn a percentage of the errors they identify. For example, if they believe a patient was incorrectly admitted as an inpatient when being treated as an outpatient would've been appropriate - then the payment integrity provider would file a formal dispute that the patient didn't need to stay overnight. Today, most payment integrity programs include some level of automation. However, a significant amount of manual work is still required to verify each payment and identify potential misclassifications or fraud. The increased complexity in treatments and innovations in tests/services has made it even more difficult for payers to distinguish between what qualifies as medically necessary tests/services and those that don't meet the qualifications. The rise in the sheer volume of claims filed each year has made catching these mismatches and anomalies overwhelmingly challenging. Given the mounting amount of data, it would be very difficult to recognize patterns and fix them on time, but recent advancements in artificial intelligence (AI) have been promising as a potential solution for this inefficient payment integrity system.

What are preferred provider organizations (PPOs)?

Preferred provider organization (PPOs) refers to contractual arrangements in which healthcare professionals and facilities provide services to their subscribed clients at discounted rates. The PPO is structured as a subscription-based membership in which healthcare professionals have agreed with an insurer (or a 3rd party) to provide medical care services at reduced rates. PPOs are by far the most common form of managed care in the US. Under PPOs, payers will steer patient volume towards certain providers in exchange for contracted reimbursement rates.

What are the two channels for pharmaceutical drug distribution?

Retail Pharmacy Channel - In the retail channel, the product flows from the branded pharma or generics company to a distributor that's typically aligned with a particular retail pharmacy and then onto the retail pharmacy before finally reaching the customer. - On the funds side, customers' co-pay just passes through the retail pharmacy onto the PBM. The amount the customer essentially pays and their premium goes from the payer to the PBM based on the negotiated drug prices for the drugs on the formulary (i.e., list of covered drugs). - For funds flowing out of the PBM, the PBM will pay the retail pharmacies based on those negotiated prices, and the retail pharmacies will pay the pharma and generic companies based again on the negotiated prices. There is much negotiation involved throughout the chain and opportunities for PBMs or retail pharmacies to earn a spread by negotiating different prices with different parties. - The result being industry consolidations with payers and PBMs merging and retail pharmacies and payers merging to reduce opportunities for "excess" profit from the spread and lead to better margins. Mail Order Channel - In the mail-order channel, the products go directly from the generic or branded pharma company to a typically PBM operated mail order facility and then onto the customer. The funds, the customer's co-pay, go directly to the PBM, and then the payers pay the PBM based on those negotiated drug prices. - Then it's the PBMs who will pay the pharma and generic companies for the cost of that product based on the negotiated drug prices.

How would you build a revenue model for a recently launched generic drug company?

Revenue Model Process 1. To begin, the two main revenue drivers would be recent product launches and the current pipeline. 2. For a generics drug, pricing and annual sales data on the branded drug before the patent expired will be looked to have a benchmark to reference. The branded annual sales can help estimate the total market size for the drug, and this proxy can project how the generic drug will perform (i.e., demand sizing). 3. In most cases, the revenue build will be a top-down model. The total market volume with the average quantity of capsules in each bottle and the estimated price for the bottle will be gathered. Then, the market growth will be projected based on historical growth rates, but this will usually be on the lower end, and most models will assume minimal annual growth YoY in line with population growth. 4. In the next step, the estimated generic market volume as a percentage of the total market will be calculated for each. Initially, the branded drug will retain some market share, but then gradually, this hold on the market will fade as PBMs drive the conversions to generics. Keep in mind, this is the capture rate by all generic companies, rather than just the company being valued. The assumption should be on the higher end (~85%) and then gradually increase each year once the patent has expired. 5. Next, the key variable, the competition, must be accounted for in the forecast. The question that needs to be answered is: "How many generics companies will there be in the market?" This will determine the estimated revenue for the target company and its specific market share. Thus, there should be a line item for the total number of generic companies that will compete with the company being valued. As more competitors enter each year, the revenue should decline from lower quantity and price declines. But once a certain number of competitors have entered the space, it no longer becomes profitable, and the number of new entrants will stagnate close to zero. A reasonable assumption is that when a new competitor enters the market, the price will drop by ~10%. 6. A simplifying assumption is that the market share will be evenly split between all competitors, but this will be driven by the contracts with the retail pharmacies. So generic companies with a history of being well-supplied and reliable can secure favorable contracts and grab more market share. 7. Lastly, now that we have the sale volume (% of total market share) of the company being valued and estimated drug price from sites such as GoodRx or the negotiated price with the pharmacies if publicly available, we can multiply the two to arrive at the revenue for the product.

From a financial perspective, how were hospitals and healthcare facilities affected by the COVID-19 pandemic?

Since the beginning of this year, healthcare workers have been at the forefront in the fight against the coronavirus outbreak, and the revenue and profitability in the healthcare industry have deteriorated due to the deferral of most surgical procedures for non-life-threatening conditions and the decrease in the number of accidents and non-coronavirus illnesses. Considering its high fixed cost nature, hospitals today are currently in an urgent, cost-cutting mode for expenses unrelated to COVID-19, as seen by employee layoffs and reductions in working hours for workers not relevant to COVID-19. While the healthcare industry is notorious for being slow to adopt new technologies, a considerable portion of the forecasted total industry growth of IT spend is expected to stem from the vertical healthcare institutions such as hospitals and smaller-scale clinics that have been disproportionally affected throughout the coronavirus outbreak. The reason is that these medical facilities were using outdated technologies and have no choice but to adjust to the prevailing conditions. So while digital infrastructure, certain healthcare services (related to diagnosis, testing, and disease control ), and telemedicine platforms experienced positive growth, many hospital holding companies and healthcare facilities have been seeing substantial margin contraction.

What is telemedicine and how does the process work?

Telemedicine (or telehealth) refers to the treatment of patients provided remotely using modern HIPAA compliant video-conferencing tools. This type of remote treatment has gone mainstream in the past year as it enables patients to communicate with a healthcare professional virtually rather than physically visiting the medical office or hospital. Through real-time videoconferencing, a patient can discuss their symptoms and medical issues with a qualified healthcare provider to receive a diagnosis and determine whether an actual visit is required. In effect, this reduces the healthcare bills of the patients as unnecessary visits are reduced, and it allows medical professionals to provide treatment conveniently. During the COVID-19 pandemic, telemedicine was brought into the spotlight, with Teledoc being one of the main beneficiaries leading the movement. One reason telemedicine saw such staggering growth was because many non-COVID patients feared that going to a hospital or medical facility would make them catch the virus. Funding towards privately held telemedicine startups substantially increased in 2020 as virtual medical treatment became more normalized and accepted. Telemedicine has shown to provide a multitude of benefits for patients such as improved clinical outcomes, increased patient engagement (from more frequency of communication), expanded patient access, reduced costs and improved efficiency (which leads to lower billings to patients), and enhanced care coordination as this integration can often have a ripple effect on other parts of healthcare operations.

How do you calculate the medical loss ratio (MLR) and why is it tracked?

The MLR ratio is used to measure the percentage of premiums an insurance company spends on claims and expenses that directly improve healthcare quality. Under the Affordable Care Act (ACA), this provision's intended purpose was to ensure a minimum percentage of the health insurance premiums were used to pay claims and encourage providing value to enrollees while limiting insurance companies' marketing and administrative expenses. Medical Loss Ratio (MLR) = Medical Costs / Premium Revenue For example, a medical loss ratio of 80% indicates that the insurer is using the remaining 20% of each premium dollar to pay overhead expenses.

How do you calculate the equivalent admissions of a hospital?

The equivalent admission is a proxy for the combined outpatient and inpatient volume. Combined Outpatient & Inpatient Volume = (Admissions × Total Inpatient & Outpatient Revenue) Inpatient Revenue

What impact did Medicaid expansion have on hospital reimbursements?

The expansion of Medicaid eligibility to those with lower incomes was of the key focus points of the Affordable Care Act (ACA). Medicaid reimbursement rates have historically been the lowest of all the various payer types. So the Medicaid expansion that happened through the Affordable Care Act (ACA) had a positive impact on hospitals since more patients now had health insurance rather than being uninsured. The caveat being more oversight over hospital practices, outcome-based payments, and penalties for non-compliance.

What is the difference between onsite and near-site healthcare, and what benefits do they provide to employees and employers?

The health and well-being of employees have been a topic at the forefront of many regulatory conversations in recent days. Through onsite or near-site healthcare, employers can address increasingly rising employee healthcare costs and chronic conditions of employees, which both contribute towards time away from work for the employee and wasted non-productive time. With an onsite clinic or a near-site clinic, employees can reduce the time spent away from work to receive preventive diagnoses or treatments. In addition, health benefit options can serve as an incentive for employees to join a certain company. Other than the distance, the biggest difference between a near-site clinic and an onsite clinic is the required costs. Onsite clinics require significant investments to set-up, which is why it's usually only done by large corporations with considerable resources. Near-site clinics are managed by outside 3rd party organizations, which reduce the monetary investment substantially. Thus, smaller businesses opt for near-site clinics because they cannot afford to host an on-site clinic. Contrary to common belief, these near-site clinics are arguably more convenient to employees since there are multiple location offerings. Since there are various locations to choose from, it's easier for employees to receive care regularly, whereas with onsite clinics, the employee would have to come near the workplace.

What are the two pathways for a generics drug being approved?

There are two pathways for approving a generics drug: 1. Paragraph lll: First, there's the Paragraph lll filing, often called the standard channel. This is when the generics companies wait out until a patent expires and then markets it at the same time as other generics. 2. Paragraph IV: The other channel is called a Paragraph IV filing - when a generics company challenges a patent before it expires. If this is approved by the FDA, the generic company can gain 180 days of exclusivity before other generics can come in. This is a pathway that most generics companies use if they think they have grounds to challenge a patent.

Talk to me about the rising trend of D2C startups in the pharmaceutical industry.

There has been a noticeable shift towards a healthcare system model where patients can conveniently go online, consult with a physician around a range of clinical and therapeutic topics, and receive a prescription for that specific condition. Well-capitalized startups within the digital health space include TruePill, PillPack (acquired by Amazon Pharmacy), Capsule, NowRx, Surescripts, and ZappRx (acquired by Allscripts). The pharmacy retail market is undergoing significant disruption from startups like Amazon's PillPack, Capsule, NowRx, Hims & Hers, Ro, and Blink Health, which offer patients low-cost, fast-delivery prescription medication services. Thanks in part due to the de-stigmatization of certain healthcare areas (e.g., birth control, erectile dysfunction, hair loss, acne) and demand for increased privacy by consumers, the D2C model has taken off as one of the fastest-growing segments in healthcare.