HM 717-Drugs, Devices and Diagnostics Pharmac-Respire Negotiations

Mark Beaumont MD

January 12, 2022




Mark C. Beaumont

Richard Acheampong


Market Analysis

Osteoporosis is a chronic medical disease that causes bones in the body to become weak and brittle.  As of 2015 more than 10 million Americans have osteoporosis, which is defined by the National Osteoporosis Foundation as a chronic, progressive disease characterized by low bone mass, microarchitecture deterioration of bone tissue, bone fragility, and a consequent increase in fracture risk. Roughly 50% of white women and 20% of white men have a fracture related to osteoporosis in their lifetime; although black men and women are at lower risk of osteoporosis, those with osteoporosis have similar fracture risk. Osteoporotic fractures are associated with increased risk of disability, nursing home placement and mortality. In 2015 there were over 500,000 osteoporosis related hospitalizations, 800,000 ED visits, 2.5 million office visits and total health costs of approximately $20 billion related to direct and indirect costs. Osteoporosis risk increases with age, and its impact will increase as the U.S. population ages. 

Osteoporosis is eight times more common in women than men due to the important role estrogen plays in the maintenance of bone mass and strength in women. Other factors in addition to ethnic background such as cigarette smoking, immobilization, low body mass index, alcohol abuse and low dietary intake or absorption of calcium and vitamin D increase chances of developing the disease. Patients can mitigate the effects of osteoporosis by consuming more calcium and vitamin D in addition to regular exercise. Unlike many diseases, osteoporosis goes unnoticed because there are no symptoms; diagnosis routinely occurs only after an individual falls and breaks a bone. 

The National Osteoporosis Foundation recommends treatment of postmenopausal women and men with a personal history of hip or vertebral fracture, a T-score of −2.5 or less on a bone density scan, or a combination of low bone mass (T-score between −1 and −2.5) and a 10-year probability of hip fracture of at least 3% or any major fracture of at least 20% as calculated by the FRAX Fracture Risk Assessment Tool. Nonpharmacologic treatments include education on strategies to prevent falls. Fall prevention is a priority for patients with osteoporosis because falls are more closely associated with fracture risk than is BMD. The USPSTF recommends exercise or physical therapy and vitamin D supplementation to prevent falls in community-dwelling adults 65 years or older who are at increased risk of falls. Patients should be counseled to quit smoking because it has been shown to decrease BMD at all skeletal sites. Heavy alcohol consumption is a major risk factor for fracture and should be discouraged. Dietary modifications may have a role in optimizing bone health. Consuming more than 2.5 units of caffeine daily may increase fracture risk. A balanced diet consisting of vitamin D, calcium, protein, vegetables, and fruits is recommended.

There were several drugs on the market that were developed to prevent and treat the disease. They were divided into two primary categories: antiresorptives and anabolics. The global osteoporosis drugs market accounted for $7.6 billion in 2018 and is expected to reach $10.5 billion by 2026. Antiresorptives prevented fractures by reducing the loss of bone mass, which reduced fractures by 40% – 50%. These were primarily oral medications that included bisphosphonates, calcitonins, and selective estrogen receptor modulators (SERMs). Bisphosphonates ($4.90 billion in 2005, 76.7% market share of category) were the most widely prescribed treatment and they attacked osteoclasts, bone removing cells, in an effort to increase bone density over time. Randomized clinical trials demonstrate a reduction of vertebral and hip fractures with alendronate (Fosamax) and risedronate (Actonel). Alendronate and risedronate also decrease vertebral fractures in men and in patients with glucocorticoid-induced osteoporosis. Common side effects included nausea, abdominal pain and increased risk of inflamed esophagus or esophageal ulcers. Calcitonins are hormones that metabolize calcium and phosphorus to slow bone loss and increase spinal density. Common side effects included nasal irritation in some patients. SERMs blocked the effects of estrogen in the breast tissue. Common side effects include hot flashes and other menopause-like symptoms. They were not to be taken by anyone with a history of blood clots due to possible increased risk of stroke and heart attacks.

Denosumab (Prolia) is a human monoclonal antibody that inhibits the formation and activity of osteoclasts. In a dose of 60 mg given subcutaneously every six months for three years, it significantly increased BMD in postmenopausal women compared with weekly dosing of alendronate. Denosumab has been shown to decrease hip, vertebral, and nonvertebral fractures compared with low doses of calcium and vitamin D. It appears to be a reasonable alternative for persons whose condition does not improve with bisphosphonates.

The Women’s Health Initiative study confirmed that estrogen, with or without progesterone, slightly reduced the risk of hip and vertebral fractures; however, this benefit did not outweigh the increased risk of stroke, venous thromboembolism, coronary heart disease, and breast cancer, even for women at high risk of fracture.

Anabolics prevented fractures by stimulating new bone growth using a bone-building agent that increased bone mass, which reduced spine fractures by 65% and hip fractures by 53%. The only medication in this category was an injectable parathyroid hormone, Strocal, manufactured by Pharmac. Common side effects include dizziness and lightheadedness. Since the long-term effects of Strocal were still under examination, the FDA recommended that patients restrict their use of the drug to two years or less. Of all women undergoing osteoporosis treatment, four million had symptoms and were candidates to take PTH. However only 350,000 chose to take the drug each year, which represented a mere 8.75% market penetration.


Pharmac/Respire Opportunity

A potential partnership between Pharmac and Respire represented a very lucrative opportunity for both parties. For Pharmac, they believed Strocal’s daily injection regimen limited the full market potential. An alternative delivery method in nasal form could increase the drug’s sales by 7x compared to the injectable form with sales estimates well over $1 billion within 3 years of its release. An inhalable formulation of the drug would also be covered under new patents, extend Pharmac’s IP protection and expand its osteoporosis franchise. For Respire, they held this exclusive patent for the inhalable delivery of PTH through the lungs but had failed to reach any major partnerships to commercialize the IP. There were a few companies developing different PTH injectable products but none made it beyond phase 2 clinical trials. A potential agreement with Pharmac could potentially launch the product into the market by 2014, well before Strocal was off patent. It would also satisfy the commitment made to investors and board of directors for closing a major partnership before the firm sought additional funds.

Potential Value

The potential value of this market is expected to grow as the size of the aging population is also growing. The market for drugs to treat and prevent osteoporosis had reached $6.39 billion in 2005 and was expected to be $9.53 billion in 2010. The proposed product would be classified as a calcitonin, which currently only had one product Miacalcin (manufactured by Novartis). The non-injected form of Strocal would be much more appealing to many patients as they had identified the daily injections to be more difficult to manage than oral medications. Even though this formulation would cost 2x – 4x more to manufacture and powder production would need significant scale-up, the potential revenues of the new Strocal would incrementally boost sales to well over $1 billion within 3 years of its release. A significant factor in achieving these projections would be demonstrating to regulators and payers the clinical benefit of the new product. Reimbursement would be strongly supported by clinical data showing significant benefit in terms of safety and efficacy. Pharmac and Respire needed to show this new formulation of Strocal improved patient compliance as well as reduced long-term healthcare costs through fewer fractures and related complications.

Key Considerations and Goals for Negotiation

As discussed in the case, there were several key aspects of the potential partnership already established. Respire would be responsible for developing and manufacturing of the delivery systems technology and dry powder PTH formulation. Pharmac would responsible for paying all development costs related to the delivery systems technology and inhaled PTH formulation, which included the device, formulation, powder and portion of filling cartridges. The firm would also be responsible for clinical development, marketing, regulatory interactions and filings for the product. Both firms agreed to only work exclusively with one another on inhaled PTH products.

There were still several open issues that needed to be negotiated, which included the royalty rates / structure, milestone payments and equity investments. Both firms needed to agree on the base royalty rates Respire would be entitled to as a result of Pharmac’s sales and any changes to the rate as a result of patent expiry, sales, sales growth, product cost or gross margin. Respire would be looking to get the highest rate possible since they have empowered Pharmac to be successful and there are no direct competitors for inhaled PTH on the market. On the other hand, Pharmac would be looking to give the lowest rate possible since they are paying for most of the development costs. They also needed alignment on payment of milestone payments at the start or end of key clinical development events such as the signing of the agreement, phase 2 trials, phase 3 trials, regulatory filing and approval. Lastly, there was interest from Pharmac in purchasing equity in Respire. This would dilute current shareholder value but provide more cash for growing the firm.

Negotiation Assessment (Respire)

Prior to the negotiation with Pharmac, Rutva and I met briefly to develop a strategy around items that would be most impactful to the ratio of value (ROV) between Respire and Pharmac. Our mutual understanding of this negotiation was to achieve the most revenue as possible for Respire by driving up milestone payments, royalty rates and manufacturing markup. We conducted a sensitivity analysis to determine how the ratio of value would be impacted by modifying the royalty rate pre-expiry, royalty post-expiry, equity, COGS reduction per year, mark up (profit), and milestone payments. All other values such as osteoporosis patient population growth, market penetration, technology development costs, facility costs and the discount rate were agreed upon to ensure our projections would be aligned with Pharmac’s DCF.

To no surprise, the royalty rate and equity investment were our highest priority for the negotiation. We found the royalty rate to have the biggest impact to the ROV. As the rate increased from 4% to 5% the ROV decreased by 0.5 and 11% to 12% the ROV decreased by 0.16. We decided to pursue a value of 18% assuming the opposition would knock this to a much lower rate. We constructed an argument around keeping the pre and post expiry rates the same since Respire was empowering Pharmac to be successful and there were no competitors in sight for this product in the market. Equity investment was also a high priority since accepting additional financing would dilute the founder and investor ownership within the firm depending on the share sale price. 

The remaining items were COGS reduction per year, mark up (profit) and milestone payments. We decided to keep the COGS reduction per year at 0% since every 1% decrease meant the ROV decrease by 0.09. For the markup (profit) value, we decided to start at 5% and lower the rate if the high royalty rate of 18% remained. Every 1% increase in markup meant the ROV decreased by 0.03. The last remaining item were milestone payments which we found every $10M increase translated to the ROV decreasing by 0.01. We adjusted the payments to total $100M, which was slightly above the upper range in the case of $80M. The table below shows the estimated NPV, ROV and ROI for both firms based on our pre-negotiation strategy.


Pharmac Respire Ratio
NPV @ 15% $1,332,287,427 $1,301,249,186 1.02
Investment $250,055,387 $40,000,000 6.25


The negotiation with Pharmac began with reviewing all items mutually agreed upon to ensure both financial projections had the same assumptions. We spent a long time discussing the royalty rate as expected. Pharmac suggested using industry standards in addition to the rates suggested in the case, which led to the team agreeing on a royalty rate of 11%. Pharmac also resisted any royalty payments post-expiry by citing a federal court case that ruled in favor of banning post-expiry patent payments (Kimble v Marvel). This significantly impacted the NPV for Respire in the last three years of the DCF. For this reason, a markup of 3% was decided to ensure Respire had positive cash flow following the patent expiration. The next item discussed were the milestone payments, which were adjusted slightly to $75M. The negotiation ended with no equity investment and no COGS reduction per year. The table below shows the estimated NPV, ROV and ROI for both firms post-negotiation.


Pharmac Respire Ratio
NPV @ 15% $1,849,945,459 $188,452,198 9.82
Investment $225,000,000 $15,000,000 15.00

Overall, the final terms of the deal were not ideal to Respire but we were able to establish a major partnership deal. This would satisfy commitment to investors and the board of directors. The firm also had no great alternatives if the deal were to fall through since the previous three negotiations with large firms had showed no promise. There were definitely areas of the negotiation that were still vague by the end specifically with estimating development costs and developing termination clauses that discourage either party from breaking terms of the partnership. We can only speculate these types of negotiations are incredibly difficult for financially constrained small startups to gain leverage over larger firms with diversified product portfolios.