Beyond Borders: Global biotechnology report 2010

A closer look
Uncertain by design: preparing for outcomes-based
pricing arrangements
As pricing pressures have intensified in recent years, outcomesbased
pricing arrangements have become increasingly visible
in some markets. These agreements represent a paradigm shift
for the industry, since they reimburse drug companies based
not on how many units of a product they sell, but rather on
how effective those products are in delivering health-related
outcomes. With health care reform initiatives in many countries
intensifying the focus on health care costs, such arrangements
could become even more common. Beyond the strategic
implications, these arrangements also present operational
challenges for drug companies.
Data matters
A recent report by Datamonitor classifies outcomes-based
pricing arrangements into three broad categories: clinical
risk-sharing, where a payor receives a refund from the
manufacturer if the drug fails to meet clinical outcomes; costeffectiveness
risk-sharing, where a payor receives a refund
if cost-effectiveness targets are not met; and fixed budget,
price or volume agreements, where the amount a payor pays
is limited by provisions such as price caps, utilization caps and
budget caps.
Clinical risk-sharing arrangements, in particular, carry significant
data-collection challenges. To track and evaluate outcomes,
companies must maintain large volumes of relevant patientlevel
data, without which they may be exposed to significant
reimbursement risk. The data collected needs to permit
reliably measuring clinical results — which may not be easily
accomplished for every therapy.
To address these challenges, companies should consider
several factors:
• Pick the right measure. Performance measures should be
selected carefully based on clinical-trial results and postmarketing
studies. Measures should lend themselves to
objective evaluation, since guarantees based on subjective
measures or long evaluation periods could lead to commercial
disputes with payors over outcomes, require maintaining
significant outcomes data for extended periods and raise the
potential for long-term revenue deferral.
• Monitor patients. Companies should consider effective
patient monitoring and assistance programs to facilitate
92 Beyond borders Global biotechnology report 2010
Anthony Masherelli
Ernst & Young LLP
patient compliance, which can increase the likelihood of
favorable outcomes.
• Boost information technology and management. Companies
will need to ensure that their information technology (IT)
systems are up to these challenges. Existing systems may
need to be upgraded to track the right metrics. Information
management is also important. Financial reporting personnel
will likely need greater access to clinical outcomes data to
account for outcomes-based arrangements, and companies
will need to facilitate data access while protecting patient
privacy. And since this data may become a critical input into
the financial reporting process, firms will need controls to
ensure information is complete and accurate.
Accounting implications
It’s not surprising that outcomes-based pricing arrangements
raise significant revenue recognition challenges. How much
revenue can a company recognize — and when can it recognize
it — in an arrangement where there is tremendous uncertainty
about how much it will ultimately be paid?
As is often the case, the answer will ultimately depend on
the specific facts and circumstances of each arrangement. In
some cases, companies will need to defer revenue until patient
outcomes are known or can be reliably estimated. In others,
they may be able to recognize full or partial revenues at the
time of sale.
In some arrangements (particularly those involving clinical risk
sharing) the timing of revenue recognition will depend on a
company’s ability to estimate, at the time of sale, the revenue it
will ultimately receive in connection with a sale — in other words,
whether the arrangement fee is fixed or determinable (US
GAAP) or can be measured reliably (IFRS) at the time of sale.
Depending on the nature of the arrangement, this determination
may prove challenging.
Given current industry trends, it seems inevitable that we will
see more outcomes-based pricing arrangements over time. It
is also inevitable that these structures bring more uncertainty
for companies. To manage this risk, firms should consider
accounting implications up front and should align program
design to the availability of clinically relevant information and
IT capabilities.