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Maximize Value October 12, 2016

Market Meaning: Value-Based Rx Pricing Gaining Steam

Partner, Health & Life Sciences, Oliver Wyman
Key Takeaway
The #pharma world is seeing more advances in innovative #pricing approaches thanks to royalty-financing partners. #OWHealth

The pharmaceutical world is seeing more advances in innovative pricing approaches. The latest offering from GlaxoSmithKline (GSK) is a more progressive, outcomes-based example of value-based pricing. Here, Oliver Wyman’s David Campbell breaks down the market meaning of the new pricing model and explores how it may impact the biotech landscape – particularly the many smaller firms in the space that license their IP through royalty financing.  

GSK recently received approval in Europe for Strimvelis, a treatment for a rare immunodeficiency disease colloquially known as bubble-boy disease. The gene therapy treatment will cost $665,000, which may at first glance seem high, but consider the following:

  • It is a one-time treatment, so other, future medical costs are low, if not zero, making value and health economics an easy calculation.
  • More significantly: The treatment comes with what is the equivalent of a money-back guarantee. If it does not work, the cost may be partially refunded.

This arrangement is an example of the pharmaceutical industry’s shift toward what Oliver Wyman calls Health Care 2.0, where the focus is on value. GSK’s move is an evolution from earlier forays into value pricing and demonstrates a willingness to push the pricing envelope.

The rise of value-based pricing

Some are comparing the launch of GSK’s new gene therapy treatment to uniQure’s launch of the gene therapy Glybera.  That drug, sometimes referred to as “world’s most expensive medicine,” carried a $1 million price tag and had no value-based pricing. 

By contrast, GSK offers value-based pricing for Strimvelis. Value-based pricing mechanisms range from partial capitation (companies receive bonuses for adherence to good protocols) and gain sharing (cost savings shared by players in delivering patient care), to risk sharing (a more progressive approach that involves additional cost savings, as well as the risk of losses if the drug doesn’t perform). GSK has said it is considering outcomes-based arrangements; and if a patient needs a different therapy or their health declines, GSK would refund some of the cost.

GSK’s move represents a growing trend in commercialization and pricing: companies striking a balance between improving quality of care while reducing overall cost of care. Alternative pricing models – like the value-based model GSK is advancing – will change how revenues are generated by nearly all commercializing companies; and they will have particular impact on smaller biotech firms that license their IP.

Impact of value-based pricing on biotech landscape

Going forward, all firms will need to be open to different pricing models that share the risk of success with the consumer. For smaller firms that license IP for royalty monetization – and there are many within the biotech space – accurately valuing drug licensing (estimating the degree of uptake by physicians, for example, or the likelihood of a drug’s clinical success) will be critical.

Additional considerations for biotech firms pursuing royalty financing in this new landscape include:

  • As new models emerge, how will investors who have relied on comparables fare? 
  • How will investors judge the significance of trial populations, insofar as predicting when the drug will be fully reimbursed, earn upside, or be refunded?  
  • Will their research reveal how these new models effect physicians’ prescribing, and payers’ formulary listings? 
  • Have the developers incorporated this into their development plans, and are they well or poorly positioned for such licensing, or for royalty financing? 
  • Will the investors providing royalty financing have the capabilities to accurately value royalty financing such products?

The pharma landscape and how it defines value is changing. Companies that are willing to innovate in pricing are best poised to win.

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