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 aboutone 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 fora 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 lenders 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 andhealth 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 authors and not those of Charles River Associates (CRA) or any of the organisations with which the author is affiliated.

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Assessing the risks in annuity pricing models - PMLiVE

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