In recent years, we have seen a trend towards the launch of new gene and cell therapies with record-breaking price tags. Such headline-grabbing launches are becoming more and more frequent, as the pipeline for advanced therapies at all stages of development continues to grow at a rapid pace[1]. We are also seeing industry and payers adopting new innovative pricing models for those products, such as outcome-based reimbursement and annuity payment models. In this article, we discuss these emerging alternative pricing models and consider the impact they may have on related licensing arrangements.

Current trends

In May 2019 AveXis, a subsidiary of pharmaceutical giant Novartis, announced that it had received approval from the US Food and Drug Administration to market its gene therapy Zolgensma for the treatment of paediatric patients with spinal muscular atrophy (SMA). Although this is the first promise of a cure for this debilitating and lethal condition, the media coverage focussed instead on Zolgensma’s price tag, which at $2.1 million per patient makes it (currently) the world’s most expensive single-dose medicine.

Zolgensma is illustrative of a general trend in gene and cell therapies that have reached the market in recent years and established a new standard of pricing for single-treatment medicines. While manufacturers point to the relative cost-effectiveness of such treatments (which may offer a one-off cure for severe conditions that otherwise would require several years’ worth of conventional treatments and care) public and private payers are concerned about this new escalating pricing paradigm.

Health care systems may be able to absorb such high prices for rare diseases with small patient populations. However, the current reimbursement systems will be under severe pressure if (as is hoped) pipelines for advanced cell and gene therapies result in treatments for common conditions such as diabetes or heart disease. The Institute for Clinical and Economic Review in the US has estimated that if gene therapies are developed to treat only one in ten American patients with a genetic condition – approximately 1% of the total population – the cumulative budget impact could rise to $3 trillion[2]. For comparison, the projected total healthcare spend in the US for 2019 is $3.8 trillion[3].

Alternative pricing models

The pharmaceutical industry has sought to counter criticism over the high price tags for gene and cell therapies by coupling these revolutionary therapies with new and unconventional pricing and reimbursement mechanisms.

One alternative structure that has been adopted is an annuity based model which spreads the payment for an expensive treatment over several years in a pre-agreed payment plan, thus minimising the up-front cost to payers.

Another approach adopted by the industry, and perhaps an even clearer way to demonstrate value to payers, has been to tie reimbursement to patient outcomes. The industry has negotiated several of these outcomes-based reimbursement models with public and private payers for cell and gene therapies. Reimbursement payments to the drug maker under this model are conditional upon the patient reaching specific clinical outcomes by set deadlines. Depending on the model, a patient’s failure to meet the specified clinical outcome can result in the drug maker having to refund payments received and/or forfeit any subsequent payments.

These new models are also being blended to create payment plans which combine annuity-style payments with rebates and outcomes-dependent instalments. We expect that in the years to come other creative payment models will emerge and be adapted from other therapy areas. For example, in Australia, the government has used a subscription style model that allowed it to pay a lump sum to drug makers for unlimited access for patients to curative hepatitis C treatments such as Sovaldi for a period of time.

Example annuity and outcomes-based reimbursement models for cell and gene therapies:

Licensing challenges

Cell and gene therapies often have their roots in academic research laboratories and the main players in this field of treatments have close ties and valuable licensing agreements with academic research institutions. For example, AveXis, the biotech company that developed Zolgensma, started as a spin-out to continue research conducted at the Center for Gene Therapy at Nationwide Children’s Hospital in Columbus, Ohio. To further its spinal muscular atrophy work, the biotech also licensed a patent owned by Martine Barkats, a researcher at the Institut de Myologie, Paris. Shortly after, AveXis was bought by Novartis for $8.7 billion. Cell and gene therapies such as Zolgensma will generally have more constituent parts (such as promoters, viral vectors and cell lines) than other more conventional small molecule therapies. This means that a party commercialising a cell or gene therapy will often need to license in more third party intellectual property or materials than a manufacturer of a conventional small molecule therapy. Most cell and gene therapies reaching the market are therefore likely to be underpinned by one or more licence agreements.

While much has been said about the impact of alternative pricing and reimbursement mechanisms on drug makers, payers and patients, we want to also consider the impact on licensors of the intellectual property which enables the development and manufacture of a therapy. In particular, how future pricing and reimbursement models can impact the royalties payable by licensees to their licensors. One inherent challenge is that these licences are generally negotiated many years before the commencement of discussions with payers on pricing and reimbursement mechanisms, making it very difficult to predict which scenarios will be relevant down the line. The positions of all of the stakeholders in the pricing debate are also constantly evolving, especially as data on the cost-effectiveness of annuity and outcomes-based models continues to accumulate. One factor which makes things particularly difficult for licensors in forecasting potential future royalty streams for these products is that a licensor would rarely have any involvement in negotiations regarding pricing and reimbursement so will have no control over the model adopted.

Annuity model challenges

Generally a licensor will only receive royalties once the licensee has itself received (or at least invoiced) payment from payers. An annuity payment model is therefore likely to mean that royalties will also be paid in instalments potentially spread over a number of years following treatment of a patient. While in practice this may not be a large change for licensors to adjust to (as annual payments for these high price treatments are not out of line with other orphan drug costs, most of which need to be taken over a long period of time) there are also other factors to consider.

One concern that has been raised with annuity payment models is that there may be an increased risk of non-payment as over time licensees may face difficulties in collecting payments, for example because a payer stops complying with payment schedules or becomes insolvent. This may have the knock-on effect of reducing royalties due to a licensor. Licensors may seek to reduce this non-payment risk by asking that royalties are payable on sums invoiced by a licensee, rather than sums received (although this is likely to be resisted by a licensee or perhaps only accepted with caveats). Annuity-based models are also typically more complicated and more expensive for a licensee to manage administratively and those costs are likely to be deductible from sales totals before a licensor’s royalties are calculated.

From a legal drafting perspective, care would also need to be taken by the licensor when defining payment terms and the royalty term (which is commonly linked to patent expiry) to ensure that the licensor continued to receive royalties in respect of patients who are treated within the royalty term, notwithstanding the fact that payment may not be received until after the patents and royalty term has expired.

Outcome-based model challenges

In relation to outcome-based models, a fundamental concern for both licensors and licensees is the uncertainty associated with a model which involves an upfront payment of the full treatment price but a refund payable some months or years down the line if the clinical outcomes are not met.

If royalties are payable on net sales of the therapy on a regular basis (e.g. quarterly or annually) then unless the licence includes a mechanism to take account of outcomes-based refunds made by the licensee to payers, the licensee could find itself out of pocket, unable to recover royalties paid to the licensor despite having had to refund the therapy price to the payer. To counter this risk, a licensee may seek to build in a royalty claw back mechanism into the licence, or to delay the point at which royalties are payable until after the relevant patient has met the required outcome. However, a licensor is unlikely to accept a significant delay in payment of royalties, particularly where the licensee has itself been paid. Academic licensors, with an obligation to invest income from technology transfer activities into research and the provision of education, are particularly unlikely to agree a royalty claw back structure which could force them to refund royalties or milestones a year or more after having received them.

One alternative option may be to agree that the licensee can make deductions against future royalty payments. A further alternative could be for some portion of the royalties paid to be retained in escrow for a period of time, to be released to the licensor upon achievement of a positive clinical outcome or expiry of a set period of time. However, escrow arrangements necessarily increase the complexity of agreements and are difficult to negotiate upfront when payment and reimbursement models and the associated outcome triggers have not yet been set.

A compromise?

As we have outlined in this article, although there are some things each party can consider at the outset of negotiating a licence, getting into protracted negotiations about hypothetical scenarios is unlikely to be attractive to either party.

The parties may wish to adopt an alternative approach of including robust governance provisions in the licence to deal specifically with this issue. For example, establishing a committee comprised of representatives of both parties to oversee and review issues relating to pricing and reimbursement. This may give the licensor a clearer oversight (and potentially input) into decisions which may impact future royalty streams and may present the licensee with an opportunity to propose alternative payment structures to support its desired pricing model. This could be combined with a mechanism for proposing and agreeing amendments to payment provisions in the licence if necessary to accommodate pricing and reimbursement issues which were unforeseen at the outset. Of course the success of such mechanisms will depend on the strength of the relationship between the parties and a combined willingness to work together and potentially compromise. It would also be important to ensure it is clear what happens where the parties cannot agree (e.g. escalation? expert determination? preservation of the status quo?). However, in a future where pricing and reimbursement issues are only likely to become more complex and of key importance to the success of complex treatments such as cell and gene therapies, it will be interesting to see whether this is a route industry explores.

Conclusion

The launch in recent years of a number of advanced cell and gene therapies with blockbuster price tags has heralded a new era for drug pricing and associated payment and reimbursement issues. It is a trend that looks likely to continue if current pipelines can also deliver much anticipated advanced therapies for common conditions. The high prices associated with these products present a myriad of issues however, not only for patients, payers and healthcare providers, but also for the licensors of the underlying intellectual property underpinning such treatments as industry adopts innovative new payment and reimbursement models which may impact on royalty streams.

When negotiating a licence to technology underpinning a cell or gene therapy the parties should consider how less conventional pricing mechanisms may impact the royalty structure. However, while there are some issues licensees and licensors may be able to consider upfront, it is difficult to anticipate the issues that may become relevant at a stage where pricing models have not been set, particularly as there is no one-size-fits-all pricing approach.

We have proposed an increased use of robust governance processes in a licensing relationship as one option to consider. It will also be interesting to see whether any trends emerge in relation to upfront and milestone payments in response to the challenges outlined above. In particular, licensees may push for more back-loaded or performance-related milestone payments to reflect the risks associated with pricing models which take a longer term view of the cost benefits of these types of therapies. We look forward to seeing what innovative approaches licensors and licensees adopt to adapt to these challenges in the years to come.

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[1] According to the Alliance for Regenerative Medicine (ARM), as of the end of 2019, there were a global combined total of 1,066 ongoing clinical trials for gene and cell therapies and tissue engineering therapeutics. The field of regenerative medicines is also continuing to receive extensive investment, with total global financings for 2019 amounting to $9.8 billion

[2] Institute for Clinical and Economic Review

[3] Centres for Medicare & Medicaid Services