The University of Arkansas for Medical Sciences has corrected a contract that for nearly eight years gave a private company the exclusive right to market UAMS’ intellectual property and resulted in no royalty payments for UAMS.
The contract originally favored RxResults LLC of Little Rock, which was formed in 2008 to sell something the university’s College of Pharmacy developed: a system for identifying lower-priced substitutes for higher-cost prescription drugs.
An executive and minority shareholder of RxResults is Alan Gardner, whose wife, Stephanie, was dean of the College of Pharmacy until mid-2015. Stephanie Gardner told Arkansas Business that she followed UAMS’ conflict-of-interest protocols and didn’t have any role in the business relationship with RxResults.
But after her promotion to provost and chief academic officer, UAMS officials expressed concerns about the arrangement and threatened to cancel the RxResults contract altogether, according to internal emails and documents obtained by Arkansas Business under the state Freedom of Information Act.
The original contract contained two bones of contention: the terms of royalty payments and an exclusivity clause.
The exclusivity clause kept UAMS from selling the COP’s Evidenced-Based Prescription Drug Program, called EBRx, directly to any other customer except other state agencies.
UAMS’ frustration with the clause was highlighted when the Arkansas Department of Human Services announced earlier this year that it wouldn’t renew its contract with UAMS for the prescription services. DHS had budgeted $2.6 million for UAMS this year.
The loss of that revenue forced the EBRx program to lay off seven of its 20 employees because the contract restricted UAMS from seeking replacement clients. EBRx’s other clients included the state Employee Benefits Division and the University of Arkansas System.
Without the DHS contract, revenue flowing to the EBRx program fell from $3.3 million for the fiscal year that ended June 30 to a projected $1.6 million for the current fiscal year that began July 1.
“RxResults has had the benefit of exclusivity for 8 years and it hasn’t helped them or us,” Dwight Davis, the director of EBRx, said in an email on April 7. “The handcuffs must be removed.”
Davis had already complained about how little UAMS received from RxResults for the use of the EBRx system. Between October 2011 and September 2015, RxResults paid EBRx about $900,000 for services provided, which RxResults then resold to clients like Harding University in Searcy and Dillard’s Inc. of Little Rock.
RxResults payments provided “little to no margin,” Davis said in a Nov. 9 email, while “UAMS has made significant contributions to RxResults.”
UAMS hoped that RxResults would also generate royalty payments, but the contract based the royalties on RxResults’ profitability, not its revenue.
That contract language was a red flag for Nancy Gray, who was named director of BioVentures, UAMS’ technology licensing office and business incubator, in March 2015. In a Nov. 23 email, she insisted that the terms be changed.
“Profit is a non-starter for me,” Gray wrote. “Too many ways to ‘cook the books’ to adjust profits — aka commissions, bonuses, etc. Need to be tied to sales/revenues, not EBITDA. This point is a deal breaker for me.”
Since RxResults wasn’t profitable, it never paid the 5 percent royalty, according to documents provided by UAMS.
For January-May of 2015, RxResults had a loss of nearly $1.1 million on revenue of nearly $670,000. That report — the latest shared with UAMS even though quarterly reporting has always been required by the contract — projected total 2015 revenue of $2.5 million and an annual net loss of $2.3 million.
In early December, Gray and William Bowes, UAMS’ chief financial officer, let RxResults CEO Tery Baskin know they weren’t satisfied with the contract.
“Under the current Master Services Agreement and based on RxResults current projections, UAMS would not be paid a royalty until the end of 2018,” Gray and Bowes wrote in a Dec. 3 letter. “We feel strongly that we should already be receiving a royalty based on current revenues.”
Then, on Jan. 11, UAMS notified RxResults that the contract would be canceled in 90 days. That termination letter would be rescinded as talks continued, and a new agreement was finally reached at the end of August.
The terms of the royalty payment are now based on net revenue and the exclusivity clause has been relaxed.
Baskin said in an interview that UAMS had always received value from the business relationship. “It hadn’t been bad for UAMS at all,” he said. He said that in the first couple of years of their business relationship, the money paid to UAMS was “pretty much straight profit.”
He said he personally invested $1.3 million into RxResults and others invested $4 million in 2014. “So we’ve got significant private money that says this is a good model,” Baskin said. “This is something that needs to be done for health care, and we think it will be a good business investment at some point.”
Davis, the EBRx director, said the relationship with RxResults provided UAMS an opportunity to build its intellectual property and test it in the private market.
“But, I guess if you look at it from the perspective of this is supposed to generate royalties into UAMS, it certainly didn’t do that,” Davis said. “So it was a balance.”
‘Exclusivity a Good Thing’
Sometime around 2003, the Arkansas Department of Human Services asked UAMS’ College of Pharmacy for help controlling prescription drug costs, Stephanie Gardner said in an interview with Arkansas Business.
“And we helped them with basically creating an evidenced-based prescription drug program,” Gardner said.
The program was wildly successful, saving DHS some $70 million in just a few years. That savings attracted interest from private companies that also wanted help with prescription drug costs, but the COP “just didn’t have the resources to do that,” Gardner said.
UAMS Chancellor Dan Rahn said in an email to Arkansas Business that the medical school’s culture encourages commercializing discoveries “to use our intellectual capabilities to form companies and private sector jobs.” And that seems to be what Gardner was doing when, in her words, she “talked about this potential opportunity” with Tery Baskin, “who I had known for years.”
Baskin was interested in helping, he told Arkansas Business.
“Health care costs are obviously a big concern for everybody in the country,” Baskin said. “And that’s why when you have something that’s improving both the cost and the quality, this is going to turn out to be a real meaningful … model.”
He approached UAMS about marketing the service and formed RxResults in 2008. His first hire in 2009 was Stephanie Gardner’s husband, Alan, with whom Baskin had worked previously.
RxResults became part of UAMS BioVentures, and Baskin said the exclusivity clause was his idea.
“I wasn’t going to go through and build all of this and then [have UAMS] say, ‘Oh, you’ve done all the hard work, we’ll just go do all this,’ and then I’m left over here and did all the development work and … took all of the risk,” Baskin said. “So it was a good business decision. … That exclusivity was a good thing to have.”
BioVentures’ Gray said that most of the incubator companies have similar exclusivity agreements in place.
Baskin said the prescription drug service saves the average client 12-15 percent of his total pharmacy bill. Despite such an appealing outcome, Davis said, selling the service isn’t easy.
Not only is RxResults in a “very competitive environment,” but the savings it offers requires some patients to change medications. And that, Davis said in an interview, is an objection to buying the product.
In his Nov. 9 email, he described another objection: “Some companies may view RxResults as a higher-cost middleman and elect not to do business with them.” Instead, he suggested at the time, potential clients would rather work directly with UAMS.
When interviewed recently, however, Davis said he had heard that concern from companies “on occasion” but wasn’t sure how many of those companies would have become UAMS clients.
The percentage that RxResults originally paid UAMS for direct EBRx services worked out to be about 60 percent of RxResults’ revenue, Davis said.
Davis said Baskin told him that such a high pass-through to UAMS was making it hard for RxResults to attract investors. Davis consulted with UAMS’ then-CFO, Melony Goodhand, who was also a member of RxResults’ board of directors, and in 2012, the contract was amended to 22 percent of the revenue RxResults receives from clients for UAMS’ services.
Goodhand left UAMS at the end of 2012. She was replaced in mid-2013 by William Bowes, who also took Goodhand’s place on the RxResults board until February of this year. Then the seat was filled by Keith Olsen, Stephanie Gardner’s successor as dean of the College of Pharmacy.
In September 2014, RxResults announced that it had received a $4 million investment from Ansley Equity Partners and Ansley Securities of Naperville, Illinois. The money would be used to accelerate the company’s growth and to expand its services, Baskin said in a news release at the time.
Baskin said in an interview with Arkansas Business in November 2014 that RxResults was in growth mode and planned to add between 20 and 30 jobs by 2016. That projection turned out to be overly optimistic; he recently said the company had 16 employees.
But other changes did affect RxResults in 2015. In March, Nancy Gray became the director of BioVentures, taking over from Marie Chow, who had served as interim director since Michael Douglas retired in 2012. And after Stephanie Gardner was promoted, Keith Olsen became dean of the College of Pharmacy.
Personnel Costs Soar
In the first five months of 2015, RxResults’ revenue was almost $670,000, an increase of more than 30 percent compared with the same period in 2014. But much of that growth seems to have come from selling a service that offered personalized medication reviews.
Meanwhile, personnel costs more than doubled to $962,000, and the five-month period resulted in a bottom line loss of $1.1 million.
Baskin said the board decided to sacrifice short-term profitability for a much bigger position in a few years. “Our goal was where would we be in that three- to five-year window?” Baskin said. “And it’s bearing out to be good.”
Baskin said that he pushed to revise his company’s contract with UAMS because of changes that RxResults made to its business, including fielding client calls that used to go directly to EBRx.
But Davis, from EBRx, and Gray, from BioVentures, said they were the ones who pressed the issue of renegotiating the contract. “I wanted to protect UAMS’ financial interest because that goes to pay salaries of my employees, and so we want to make sure our program is profitable,” Davis said in an interview.
CFO Bowes said Davis’ concerns about the terms of the contract caused Bowes “to question whether or not we should even be involved with RxResults.”
After the Dec. 3 letter informed Baskin that the exclusivity clause and royalty terms would have to be changed, Bowes met with Baskin. Bowes reported on that meeting in a Dec. 9 email: “As expected, the terms of the letter are such that this won’t work for RxResults and will send them into a deeper hole.”
Negotiations stalled during the last weeks of 2015, particularly regarding the exclusivity clause, COP Dean Olsen told Arkansas Business. “So I said, ‘OK, well, we’ll just terminate the agreement.”
Bowes sent the letter on Jan. 11. On Jan. 14, Alan Gardner, SVP and 5 percent shareholder at RxResults, emailed the termination letter without any other comment to his wife, Stephanie, Olsen’s predecessor as dean.
“There was nothing I could do as a result of that,” Stephanie Gardner told Arkansas Business. “That was just an FYI; there’s a potential for this to end.”
She said she didn’t have anything to do with the contract negotiations “at all.” And, according to Bowes, neither did Chancellor Rahn.
Except Baskin seemed to think he did.
In an email to Dean Olsen on Feb. 11, Baskin said, “I remain committed, as I know you and the Chancellor are, to getting our new agreement finalized.”
On Jan. 15, a meeting took place that included Bowes, Gray and Davis from the UAMS side and Baskin and Alan Gardner from RxResults. Negotiations resumed, but the termination letter wouldn’t be rescinded until April 8.
Meanwhile, Davis learned that EBRx’s contract with DHS would not be renewed when it expired June 30.
“I think this is exactly why the exclusivity clause of our agreement with RxResults should be stricken or minimized to some degree,” Davis said in a Feb. 21 email. “While it’s not one’s objective to compete with or harm RxResults, we are simply land-locked.”
In an email response to questions from Arkansas Business, DHS spokeswoman Amy Webb said the agency had been reviewing contracts to determine if they were “the best and most-cost-effective approach for the work being done.”
DHS added prescription drug analysis to an existing contract with Magellan Health Inc. of Scottsdale, Arizona, saving the Medicaid program $700,000 a year. Davis said the EBRx employees who were laid off were hired by Magellan.
After months of negotiations, UAMS and RxResults came to an agreement that removed the exclusivity agreement and injected a royalty tied to RxResults sales. And Gray said that under the new agreement RxResults will pay UAMS for services based on the number of hours it makes use of EBRx employees.
“Bottom line, we’ve ended up in a great spot,” said Chris Monroe, a vice president and principal at RxResults. “And that’s from our vantage point and UAMS’.”
For the current fiscal year, EBRx is projected to receive $150,000 from RxResults, which would be up from $108,000 that was projected for the fiscal year that ended June 30.
UAMS Chancellor Rahn, who last week announced that he will retire at the end of July, said in his email that it’s difficult to anticipate the revenue startup companies will generate.
“UAMS is committed to helping advance economic development through the growth of new businesses and commercialization of intellectual property,” he said. “It can take many years before a business reaches a point to generate a positive return to the University.”