Thursday, March 12, 2009

Reimbursement analysis and planning can help build value for your life science startup

Capital is scarce in the current financial climate, and needs to be conserved. There is no money for a startup to spend on “like to haves” – it all need to be committed to “need to haves”. Early investment in reimbursement analysis and planning seems like a luxury under these circumstances. Besides, given the scarcity of VC money for new investments, you’ll likely be partnering with an established company that has in-house reimbursement expertise. And with the disappearance of the IPO as an exit strategy, you don’t plan to ever have to bring your technology all the way to the market – an acquirer will be doing that, and they’ll take care of reimbursement when the time comes, won’t they?

Perhaps that is true… if you’re really lucky … and if you’re willing to sell your interest at a discount. The thought process exemplified by the preceding paragraph is, in reality, a recipe for coming out on the short end of any deal – giving away a good piece of what you’ve worked long and hard to create. I would argue that a prudent investment in sound reimbursement analysis and planning is one of the very best and most important investments a young life science startup can make, irrespective of your financing and exit strategy. My argument can be summarized in three general points.

First, you need to remember the value, to either investors or acquirers, of risk mitigation. Removing uncertainty from an investment proposition – “taking risk out of the deal” – will always raise enterprise value. For an innovative medical technology, reimbursement uncertainty is a major risk factor. If you can provide a compelling analysis of the reimbursement status of your product, and a clear description of the resources and activities required to achieve optimal reimbursement, you will remove a major unknown from the investment analysis and thereby raise the value of your company to any investor or acquirer. And the cost of doing the necessary analysis and developing the roadmap to reimbursement is a small fraction of the amount required to address even relatively minor issues of technology risk. In terms of return, the money is better spent on reimbursement planning.

Second, you never want to enter any negotiation with less information about a critical deal element than the other party. Superior information translates directly into a negotiating advantage. If a potential investor or acquirer knows more than you do about the reimbursement issues relevant to your technology, you will be at a profound disadvantage in the discussion of valuation. If you have the information advantage, the negotiating leverage shifts to you. (That is why theoretical discussions of the efficiency of markets always include the assumption of equal information.) A full and complete understanding of the reimbursement status of your own technology is essential to assuring that you enter any negotiation in the strongest possible position, and – properly employed - will yield a significant return.

Third, the ability to demonstrate command of reimbursement issues relevant to your technology is an important element in establishing the credibility and excellence of your management team – and thereby helps to build an investor’s or acquirer’s confidence in the work the team has already done and its ability to continue to lead. You are asking people to make a substantial investment in the future success of work you have begun. Failure to understand and begin to address an issue widely recognized as critical to success is an error of omission that can only reflect poorly on a management teams overall performance.

I am not advocating the need to take on a heavy continuing reimbursement planning cost early in the technology development cycle. You want and need a level of resources committed to reimbursement that is appropriate to the progress you have made in defining your product and advancing your technology, as well as to the generality or specificity at which issues can be addressed. The investment can and should be measured and prudent – after all, capital is scarce and needs to be conserved. If you spend your money wisely, however, some of it will be spent on assuring that you understand the reimbursement issues raised by your technology and on developing a plan to address them.

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