Stay up to date on the pulse of the Philadelphia Life Sciences industry with our Biotech Bulletin. This is a quarterly newsletter with data and perspectives from local leaders within the industry. Greg Sarian of Sarian
Strategic Partners is the author of the Biotech Bulletin. Each issue will include insight on the latest industry trends, performance metrics on local biotech companies, as well as current acquisitions and IPO news in this area.

Uncertainty at federal level could impact the life sciences industry

By Ted Piper, Bravo Group

The life sciences industry is always under pressure to create the next new cure or treatment and make sure patients have access to best-in-class medications while trying to run a heavily regulated business amid shifting public policy and political winds. The year 2019 could bring drastic changes or keep the industry stalled in partisan politics.

Perhaps the greatest uncertainty is the fate of the Affordable Care Act.

In December, U.S. District Judge Reed O’Connor struck down the entire act. In addition to its effect on the millions of Americans insured under the ACA, repeal likely would harm hospitals, insurers and health care providers who’ve gained these new paying customers. In fact, hospital and health insurer stocks dropped after the December ruling. It also would affect expanded Medicaid coverage, employer health plan rules, taxes and Medicare payments, among other policies.

Killing the ACA would increase Medicare costs by $1 trillion from 2018 to 2027, the Committee for a Responsible Federal Budget said, requiring benefit cuts or premium increases.

The ACA also contains provisions that specifically affect the approval and pricing of pharmaceuticals, including ones that provide innovative biologic companies with 12 years of data exclusivity for their products and biosimilar companies with a simpler approval route. It also created the Center for Medicare and Medicaid Innovation, which is the vehicle being used to implement drug-pricing reforms.

As the case winds through higher courts, it is not the only challenge the industry faces this year. The issues include:

• Trump administration drug-pricing proposals

In 2018, new Health and Human Services Secretary Alex Azar made drug pricing a priority and released a somewhat vague “American Patients First” pricing plan in May. Because most of its actions are in draft form, the administration would have to move on the rules in the first half of 2019 to see progress by the 2020 election.

The big questions are what will be implemented and in what form. One of the more radical proposals is an International Pricing Index (IPI) model in which some Medicare Part B drug payments would be based on prices paid in other developed countries.

Medicare Part B spends about $30 billion a year for more than 59 million seniors and people with disabilities to receive certain drugs in doctors’ offices and outpatient hospital clinics — often by infusion or injection — for cancer, rheumatoid arthritis and other conditions. Many are cutting-edge biologic drugs made from living cells, and some cost more than $100,000 a year.

The IPI would base Part B drug prices on the usually lower prices set by 14 other countries. However, many of these countries have single-payer systems with prices and payments set by the government. In America, plans and patients in

Part B already pay about 15 percent to 35 percent below drugmakers’ list prices for a dozen widely used treatments.

U.S. drugmakers could simply refuse to sell a drug at the government-set price, which would prevent Medicare patients from treating their diseases.

Studies have shown that our country’s innovation environment gives Americans access to new cancer medicines about two years before patients in Europe.

And foreign pricing models already suppress private R&D investment by 11 percent to 16 percent annually, impacting the number of new medicines brought to market.

While the President has predicted drug prices will drop quickly, Azar has been quoted as saying he understands changing the pricing system is a longer-term evolution.

• States will continue to flex their muscles

As states try to protect their own budgets, they will continue to pepper the Centers for Medicaid and Medicare Services and HHS with proposals to change prescription pricing models on their own. Although HHS turned down Massachusetts’ request to establish its own drug formulary for Medicaid, analysts think it might like Louisiana’s proposals to apply a subscription model to its Medicaid program for certain drugs.

Vermont already passed a law allowing it to import prescription drugs wholesale from Canada but can’t implement it unless HHS approves. Four former heads of the Food and Drug Administration warned Congress in 2017 that lifting restrictions on imported drugs would “harm patients and consumers and compromise the carefully constructed system that guards the safety of our nation’s medical products.”

Vermont might have a window, though, because HHS has asked the FDA to form a working group to examine options that would allow temporary drug importation in specific circumstances. Despite industry alarms about the risk of importing ineffective or fentanyl-laced counterfeit drugs, the theory is that importation will increase access and pressure drugmakers to cut their prices in the U.S.

• A new day for the House

With a Democratic majority now in charge of the House of Representatives, it’s expected that a variety of drug- pricing legislation will make the agenda. Analysts predict bipartisan agreement around areas such as industry misconduct, facilitating the entry of lower-cost generic and biosimilar products, and homing in on issues with specific products such as the price of insulin.

• Continued breakthroughs coupled with dramatic prices

It was reported in the Health Affairs journal that, with new gene therapy products in the pipeline, 2019 could be the year of a drug with a list price in the millions.

Health Affairs reports that Novartis is showing one of its products for treating spinal muscular atrophy could be cost effective at $4 million to $5 million.

While many of these advances could be cost saving over the long term — not to mention lifesaving — the expected reaction from payers who need to absorb the cost upfront is uncertain.

The life sciences industry continues to show great scientific progress, but the American pharmaceutical, health care and insurance systems are complicated and finely interwoven. A policy change on one end can wreak unexpected havoc on another. With public pressure for change and the uncertain atmosphere in Washington, the industry is destined to be at the center of the news for much of the year.

A Spotlight Conversation with Drew Lakatos, Founder & President of Active Protective

Greg Sarian: Drew, thank you for your time today, tell us about Active Protective.

Drew Lakatos: Active Protective has developed a smart belt that protects the hips of older adults in the event of a fall using wearable airbags. We just shifted from a development stage to commercial stage company. We are ventured-backed, and we’ve been working at this for about four years now.

GS: What are your greatest accomplishments, thus far? What are your biggest feature opportunities and biggest challenges?

DL: Greatest accomplishments for really any entrepreneur is taking a concept that may seem relatively outlandish in the early days and developing it to a point where it makes sense to everybody and sort of the world wants it. Right?

That’s the dream. I remember having my first discussions with not only investors, but even friends and family about putting airbags on people. Doing that in a safe manner and thinking if there would be a market for it? And four or five years ago some of those conversations were met, in different ways.

We’re at a point now where we signed our first customer agreements. One is with the largest provider of skilled nursing in the United States and it’s really that conversion or that translation of a concept and a technology that was taken from a different industry, taken from the automotive industry and really repurposing it for healthcare activity. And now, what was a concept — this device is now being accepted at some of the largest healthcare players in the country.

GS: Looking forward, Drew, what are your greatest opportunities, looking ahead to the next three or five years? What are your biggest opportunities and what are your biggest challenges to accomplish those opportunities?

DL: We’re focusing on the US first. We have a global aging population. Even though the US itself is top- heavy with older adults, people over the age of 65 — it’s the fastest growing — and by the way — wealthiest demographic the world has ever seen.

There are parts of the world that are even older than ours. If you look at China, specifically, with one-child policy there’s an even larger caregiver shortage for their older adult population. I would say if we look at the next several years there’s a wonderful opportunity for us in the US. But as we go into international markets— that’s the next phase of the company, specifically for protecting hips. When we look even beyond that this type of device — this patented methodology of determining human falls and accidents would really apply to other healthcare issues.

We may be able to protect the head. We may able to protect athletes one day. We may be able to protect soldiers. The technology would apply to any type of injury or trauma where any type of passive protection would actually impede the user or the wearer. Our technology allows us to protect people in those previously unprotectable either locations or situations.

GS: What are the challenges? What are your hurdles when you start talking about international opportunities? What are your hurdles to meet that market demand?

DL: Yes It’s new to the world device. If we look at the shift in let’s say, skiing and snowboarding – winter sports. If you wore the helmet when you were skiing 20 years ago people thought you didn’t know what you were doing and if you wore a helmet you looked ridiculous on the ski slopes.

Now, 20 years later and it’s only been 20 years, if you go skiing and you’re not wearing a helmet now you look like you don’t know what you’re doing. That shift happened in about 20 years. So, back to our hurdles and challenges we have found a very attractive market in the rehab space. Very motivated patients who maybe have had a hip fracture or a knee implant or a stroke and therefore their mobility and stability is off.

That is a very motivated first target market. Our hurdles are really expanding beyond that to the point where this becomes an accepted device and at some point, a very attractive device for people living independently and wanting to wear this at home and feeling very comfortable wearing this, outside the clinical setting. GS: So, while it may be self-explanatory how exactly do you help the patient? How does the end user benefit? DL: Falling and hip fractures are so devastating. I could rattle off the statistics of just how costly and how life-altering, if not life- ending, that hip fractures are. British Medical Journal did a study where they asked folks over the age of 65 what their greatest fear was. The number one answer was falling and breaking a hip. The second greatest fear in that study was dying. People fear breaking their hip – they fear breaking their hip more than actually dying. So, that really is a lot of the motivation. If you fear falling that much it becomes debilitating. You move less. You may not walk to the mailbox. You may not do basic house chores. So, back to the benefits of the patient, it’s restoring upright mobility. It’s restoring independence and confidence and safe mobility to the patient and that’s the driver. That’s why folks would like to wear the belt is they want their life back. They want to be able to take a walk without really being scared to death of falling down. One of the completed pilots in a short-term rehab setting and one of the findings was that users of our belt were walking 50% further than nonusers of our belt upon discharge. And it’s really finding out just how well we’re restoring confidence and safe mobility. GS: What keeps you with the Greater Philadelphia Area? I know you are from this area originally. You started the company and the Lehigh Valley, but what advantages or benefits do you as the founder see in creating and growing Active Protective in the Greater Philadelphia Area? DL: It is the perfect place for us. And it may not be obvious but it’s an absolutely perfect place for our company because Pennsylvania is the second oldest state population- wise, second to Florida. Our customers are here. We’re also surrounded by large orthopedic providers and the tri-state area is really the hub of the medical alert pendant manufacturers. There’s a number of them throughout this area with their home-bases, with their call centers, with their fulfillment centers all in this area. When you’re looking at aging technology, we really have a leg up by being in this area just based on the industry. Now, outside of that from the venture community and just entrepreneurship, it is a smaller community than Boston or San Francisco, for example. But because of that we see such camaraderie and really support to succeed in our efforts and very helpful for us to be in this region.

HR Outsourcing…When Do I Need it?

By: Marcia Zaruba O’Connor, CEO, The O’Connor Group

Great Question!

We get asked this question many times when we meet with a new client.

Most times CEO’s honestly do not know that answer. They are growing rapidly and have aggressive plans for the

year, and since they worry so much about costs, they do a lot of the HR work themselves. According to a survey by the National Small Business Association, roughly 30 percent of small business owners spend more than six hours each week on payroll tax administration, and that’s just one of many HR functions that you must deal with.

So, we thought we would share our top ten reasons why we believe you SHOULD outsource HR if you area growth company and are under 75 employees.

1. FIXED COST

HR consultants are brought into a team and are considered an expense to the business owner. It’s a fixed expense that you can budget for on a monthly basis. Otherwise you would have to hire someone with benefits and bonus potential. This will also help in your overall spend. Keep in mind that you can get a strong consultant that can be very efficient and get many projects done faster. Many times, our clients start with a consultant for 8 hours a week and once they start needing that consultant for at least 32 hours, the conversation is needed to determine whether they are ready to fully commit to a full-time employee.

2. THE COST OF BURDEN

A strong project manager HR consultant can also take the burden from your team members who are currently doing all the heavy lifting and help them focus on what they do best. Just add up all the time your current staff does the recruiting, the scheduling, the interviewing, the background check, the benefit paperwork, the onboarding and more, you will soon see that the total cost outweighs the cost of the consultant.

3. EFFICIENCY

Another reason why people bring on a consultant is due to their expertise. One of the main reasons why people like using our firm is because we have a team of HR experts at your fingertips. So, when one doesn’t know the answer, they have the team to fall back on and get an answer! The expertise is there when you need it.

4. EMPLOYEE RELATIONS DIFFUSER

One of the top three reasons a client calls is due to employee relations. Basically, we coach our CEO’s to have the conversations with their team. There is always a red flag when after they hire us, they want to fire someone. When we ask, is there any documentation about the situation, usually, its no. That’s where we put a plan together so that it doesn’t backfire on them. So many CEO’s do NOT keep notes on an employees’ poor performance. Due to today’s litigious society we live in, it makes sense to have conversation around these topics as soon as possible and document it!

5. RECRUITING ASSISTANCE

I have been working in the Human Resources and Recruiting world for over 25 years and I have found out that usually you either LOVE HR or you LOVE Recruiting – it’s quite rare to love both. So, what happens then? Well…for the HR professional who loves HR more than recruiting, and you are hired to work on recruiting as well, the HR professional usually leaves recruiting to the last thing on their agenda for the day. And if you LOVE recruiting the opposite. So, I always advise my clients that if you need recruiting, I will assign you a true recruiting consultant instead of having the HR consultant also do the recruiting.

Keep in mind it takes around 40 hours to fill a position!

6. ONBOARDING PROGRAM

Many clients when we first start with them have NO true onboarding program. We strongly believe in Onboarding Programs. Why you ask? According to ClickBoarding – 69% of employees are more likely to stay with a company for three years if they experienced great onboarding. That’s a big deal. The average person is now staying for under two years.

7. EXIT INTERVIEWS

Yes, we agree with exit interviews and the great thing about having an HR consultant conduct them is that the employee is usually much more honest with the consultant than they are with your employees. Honestly, we aren’t sure why, but we have found that the amount of information our consultants retrieve is much deeper and informative to a company.

Now…we also believe in conducting stay interviews – yes, asking them, why do you like it here? I would rather know while they are working for me rather than knowing when they have another offer! According to Forbes, “Hard data proves the top reason employees quit is they don’t trust their managers. Stay Interviews are the absolute best trust- building activity…and therefore the best retention tool.”

8. EMPLOYEE HANDBOOK

Yes, as much as we don’t want to you really need to stay up to date with your employee handbook. Wait – you don’t have one – do you? Well, that’s okay, 30% don’t in small companies.

It’s the one document that an employment attorney will ask for if anything goes into a legal dispute. An HR consultant will know which new policies are out there and what needs to be added. It’s a very cost-efficient way to make sure you have all the pieces in place while you are building your company.

9. BENEFITS ENROLLMENT

Many small businesses do not have the investment in technology to be able to provide all their benefit information online and since there are more forms than ever you will need a strong process in place to make sure all the paperwork is done properly and efficiently. Many companies under 50 employees do not have benefits nor are they required to have them, but we do advise to start as soon as you can while you are growing. The total cost won’t shock you as much as when your firm hits 50 employees.

10. STRATEGIC ADVISOR

It gets lonely at the top and sometimes it’s difficult to talk to your leadership team about members on the leadership team or throughout the company. Having a strategic advisor to guide you and you team through various organizational changes and decisions for the rapid growth in your company.

Here are just a few of the reasons why clients call us in to help them with their companies. The biggest suggestion we give you is don’t wait until there is an emergency. Budget for the expense and start small with only eight hours a week. You need to trust your consultant to guide you, they are there to help you grow on the people side of the house!

The Planning Prescription: Strategic Ways to Plan for Health Care Costs in Retirement

By: Kevin Wager, Sarian Strategic Partners

As leaders in life sciences, your vocation is enabling patients to live longer, fuller lives. In helping you with financial planning strategies for more than 20 years, our team has observed gaps that exist in how you think about managing your own healthcare costs in retirement. One of the biggest worries pre-retirees have is that they are living longer and fear that they will not be able to keep up with the rapid increase in health care costs. Studies show that a couple, ages 65, could spend upwards of $250,000 for health care costs during their retirement years. One of the best ways to plan for health care costs in retirement is by utilizing a Health Savings Account (HSA).

An HSA is an account used specifically for medical expenses with tax preferential treatment. An HSA is the only retirement account to provide preferential tax treatment in three ways: tax deductible contributions, tax free investment growth, and tax- free withdrawals when used for qualified medical expenses.

HSA Eligibility Requirements

An individual:

• Must be covered under a High Deductible Health Plan (HDHP)
• Must not be enrolled in Medicare or other health coverage
• Must not be claimed as a dependent on someone else’s tax return

In 2019, for a health insurance policy to qualify as ‘high- deductible’, the plan must have a minimum annual deductible of $1,350 for an individual, $2,700 for a family, and a max annual out of pocket expense that does not exceed $6,750 for an individual, $13,500 for a family. In 2019, the max contribution limit is $3,500 for an individual and $7,000 for a family.

Using an HSA as a specialized checking account and paying for current year medical expenses with HSA dollars and receiving the current year tax deduction is a worthwhile strategy. But this strategy does not allow you to take advantage of the tax savings power. Because there are no requirements to use the dollars in the HSA by a certain time, a unique strategy arises; contribute funds to the HSA but do not use the HSA to pay for short term medical expenses incurred. Instead, pay for current year medical expenses out of pocket and keep contributing to the HSA. This will allow the HSA to continue to grow tax free for future medical costs. Fully funding an HSA for 15 years leading up to retirement could give you a tax savings of $50,000! For any questions or to read an extended whitepaper on Health Care Planning in Retirement please contact Kevin Wager at kwager@hightoweradvisors.com.