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Assessing the risks in annuity pricing models

The challenge of adapting pricing models to accommodate new therapies


By Walter Colasante

The number of companies targeting the development of new cell and gene therapies has risen dramatically in recent years. 

On a global scale, clinical research programmes are now underway targeting almost 50 different indications for gene therapies alone, up from only ten a few years ago. Several clinical programmes have advanced to late-stage development with regulatory decisions pending or on the horizon.

Many of these drugs have the potential to bring both patients and clinicians historic and transformative advances in the treatment of many serious diseases, including the introduction of single-dose and potentially curative therapies to address major areas of unmet need.

With these potential benefits, cell and gene therapies also introduce some important and new considerations related to established reimbursement and payer strategies. It is likely that these considerations will affect a wide range of stakeholders, including manufacturers, payers, regulators, patients and clinicians as
well as entire health systems.

As drug developers and global healthcare markets prepare for the introduction of new cell and gene therapies, they must also work to modify established protocols to reflect the many factors associated with these drugs, including small patient populations, potentially curative efficacy, high upfront costs, limited data on safety and efficacy, and complex manufacturing, distribution and administration procedures.

Any of these issues can increase cost or risk. Adapting pricing and reimbursement models to accommodate these therapies could be a significant challenge, especially for higher-cost drugs or those involving a single dose or short course of a curative therapy.

While there are now several examples of cell and gene therapies that have reached the commercial stage, performance thus far indicates that achieving long-term commercial success can be a challenge.

Among ten new cell and gene therapies approved in Europe since 2009, only seven are still commercially available today. Three others (ChondroCelect, PROVENGE and Glybera) were withdrawn, partly due to challenges associated with reimbursement.

Throughout the EU, reimbursement for cell and gene therapies is often limited and inconsistent, and an analysis conducted by the Life Sciences Practice team at CRA, the global consulting firm, found that as more of these therapies advance toward commercialisation, stakeholders are increasingly working to develop innovative payment strategies to support market access and address concerns about budget impact, including a strong focus on annuity payment models.

Understanding annuity payment models

On a very fundamental level, annuity pricing models are structured to reimburse drug manufacturers in instalments and over a set period of time, often over many months or years.

This model can help address the unique challenges presented by drugs with high costs and short treatment windows by reducing the burden of high upfront payments. They can also work to better balance the risk for payers based on pre- determined payment periods and requirements related to patient outcomes.

To be workable for all parties, annuity pricing models must also be structured to address a range of potential financial and logistical risks.

For example, in models where payments are spread over many years, payers might continue to be responsible for costs for patients even in cases where they transfer to another insurance plan – representing a transfer of benefit to a competitor.

Some models may also involve costly long-term patient monitoring as well as accounting and administrative procedures. Manufacturers will need to restructure traditional business and revenue forecasting models or develop entirely new models based on reimbursement timelines.

They might also need to restructure sales organisations, marketing plans and patient and clinician education programmes. In performance-based annuity pricing models, the effort to build consensus among stakeholders on measures of safety and efficacy could be a major challenge, especially in drugs supported by very limited efficacy and safety data.

The structure of annuity payment models can have a direct impact on long-term financial stability of both drug developers and payers. In many cases, research to develop cell and gene therapies is very costly, requiring a substantial financial investment and highly specialised expertise.

With an extended reimbursement timeline, manufacturers may not fully recoup an investment in drug development for years or even decades. Payers may also contest or be non-compliant with pre-determined payment schedules, resulting in financial or capacity strain, especially for smaller drug manufacturers.

To circumvent these risks, some companies might consider opportunities to use government or health insurer-backed annuity payments as collateral for secured loans.

Assessing the challenges

As part of the CRA analysis, the team reached out to a range of industry stakeholders including experts in drug development and commercialisation, academic researchers, investors and payers for insights about emerging annuity pricing models and the challenges they can present.

Research also included a global review of launch dates and regulatory information related to several cell and gene therapies.

Input from industry insiders and experts identified a range of concerns associated with annuity payment models, including a potentially significant impact on cost of capital and company valuations, costs and burden of long-term patient monitoring, the need to make reimbursement decisions based on very limited long-term clinical data, and the need to consider entirely new business models and forecasting strategies based on extended payment schedules.

Despite the challenges, some cell and gene therapy companies have already launched products based on annuity pricing models. GlaxoSmithKline (GSK) launched its gene therapy STRIMVELIS, a one dose treatment for severe combined immunodeficiency due to adenosine deaminase deficiency (ADA-SCID), in Europe in 2016 with an outcomes-based annuity pricing model.

Under the terms of this model, payments to GSK by payers are spread out over a pre-determined timeline for each treated patient. The model confirms that GSK must return a portion of the reimbursement to the Italian Medicines Agency if the drug does not demonstrate a sufficient level of efficacy based on pre-determined outcomes measures.

In their assessment, based on the mutually determined outcomes measures, GSK projected that about
one in six treatments on average might need to be partially refunded.

The financial impact of annuity payment models

Annuity models require manufacturers to consider several factors that can increase their own operational costs as well as the cost of capital. With annuity models, the risk that a payer might not be a viable long-term business entity or may contest a payment schedule could mean a potentially devastating disruption in revenue for
a manufacturer.

While the use of insurer-backed annuity payments as collateral for secured loans can help mitigate this risk, in considering this option manufacturers need to carefully consider multiple factors, including trends in interest rates and the duration of the annuity contract, the cost of capital based on a lender’s fees, operational repayment milestones and the expected costs of goods.

Both manufacturers and payers must also complete risk assessments based on available data, which will often be more limited than data used in traditional outcomes and risk assessments.

Banks and other lenders will also likely complete their own due diligence in evaluating many factors, including levels of payer interest, patient outcomes measures and the terms of annuity contracts to determine their own acceptable level of risk, often with limited relevant experience. In many cases, lenders will also require drug developers to provide audited cash flow statements.

Optimal strategies for mitigating risk

As progress in the development of cell and gene therapies continues to advance, payers and
health systems can anticipate the introduction of many new high-priced drugs in the near future.

While annuity pricing models are already a widely considered option to address the unique reimbursement issues associated with cell and gene therapies, developing and implementing these plans successfully will require careful analysis and successful efforts in building consensus among all stakeholders.

The risks may be especially acute among biotechnology companies with only one drug on the market. Manufacturers will need to bring together the full range of resources and expertise necessary to assess the impact these models will have on capacity, cash flow and long-term business planning.

To achieve this goal, drug developers will need to reach out to a broad set of stakeholders for guidance and expertise.

They may need to work closely with finance providers such as banks and other lenders and seek collaborations with consultants in market access early in a development programme to begin what is likely to be a long-term initiative in planning and programme execution.

It is likely that there will not be one simple solution. Effective approaches in reimbursement of cell and gene therapies may need to include elements from several potential models including, but not limited to, annuity-based models.

But the progress in research means that development of innovative pricing models that optimise benefits and balance risks for manufacturers, payers and health systems will become increasingly time sensitive as more paradigm-changing cell and gene therapies advance toward commercialisation.

The views expressed herein are the author’s and not those of Charles River Associates (CRA) or any of the organisations with which the author is affiliated.

Walter Colasante is Vice President in CRA’s Life Sciences Practice

25th October 2019

Walter Colasante is Vice President in CRA’s Life Sciences Practice

25th October 2019

From: Regulatory


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