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Beyond Borders: Global biotechnology report 2010

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A closer look<br />

Uncertain by design: preparing for outcomes-based<br />

pricing arrangements<br />

As pricing pressures have intensified in recent years, outcomesbased<br />

pricing arrangements have become increasingly visible<br />

in some markets. These agreements represent a paradigm shift<br />

for the industry, since they reimburse drug companies based<br />

not on how many units of a product they sell, but rather on<br />

how effective those products are in delivering health-related<br />

outcomes. With health care reform initiatives in many countries<br />

intensifying the focus on health care costs, such arrangements<br />

could become even more common. <strong>Beyond</strong> the strategic<br />

implications, these arrangements also present operational<br />

challenges for drug companies.<br />

Data matters<br />

A recent <strong>report</strong> by Datamonitor classifies outcomes-based<br />

pricing arrangements into three broad categories: clinical<br />

risk-sharing, where a payor receives a refund from the<br />

manufacturer if the drug fails to meet clinical outcomes; costeffectiveness<br />

risk-sharing, where a payor receives a refund<br />

if cost-effectiveness targets are not met; and fixed budget,<br />

price or volume agreements, where the amount a payor pays<br />

is limited by provisions such as price caps, utilization caps and<br />

budget caps.<br />

Clinical risk-sharing arrangements, in particular, carry significant<br />

data-collection challenges. To track and evaluate outcomes,<br />

companies must maintain large volumes of relevant patientlevel<br />

data, without which they may be exposed to significant<br />

reimbursement risk. The data collected needs to permit<br />

reliably measuring clinical results — which may not be easily<br />

accomplished for every therapy.<br />

To address these challenges, companies should consider<br />

several factors:<br />

• Pick the right measure. Performance measures should be<br />

selected carefully based on clinical-trial results and postmarketing<br />

studies. Measures should lend themselves to<br />

objective evaluation, since guarantees based on subjective<br />

measures or long evaluation periods could lead to commercial<br />

disputes with payors over outcomes, require maintaining<br />

significant outcomes data for extended periods and raise the<br />

potential for long-term revenue deferral.<br />

• Monitor patients. Companies should consider effective<br />

patient monitoring and assistance programs to facilitate<br />

92 <strong>Beyond</strong> borders <strong>Global</strong> <strong>biotechnology</strong> <strong>report</strong> <strong>2010</strong><br />

Anthony Masherelli<br />

Ernst & Young LLP<br />

patient compliance, which can increase the likelihood of<br />

favorable outcomes.<br />

• Boost information technology and management. Companies<br />

will need to ensure that their information technology (IT)<br />

systems are up to these challenges. Existing systems may<br />

need to be upgraded to track the right metrics. Information<br />

management is also important. Financial <strong>report</strong>ing personnel<br />

will likely need greater access to clinical outcomes data to<br />

account for outcomes-based arrangements, and companies<br />

will need to facilitate data access while protecting patient<br />

privacy. And since this data may become a critical input into<br />

the financial <strong>report</strong>ing process, firms will need controls to<br />

ensure information is complete and accurate.<br />

Accounting implications<br />

It’s not surprising that outcomes-based pricing arrangements<br />

raise significant revenue recognition challenges. How much<br />

revenue can a company recognize — and when can it recognize<br />

it — in an arrangement where there is tremendous uncertainty<br />

about how much it will ultimately be paid?<br />

As is often the case, the answer will ultimately depend on<br />

the specific facts and circumstances of each arrangement. In<br />

some cases, companies will need to defer revenue until patient<br />

outcomes are known or can be reliably estimated. In others,<br />

they may be able to recognize full or partial revenues at the<br />

time of sale.<br />

In some arrangements (particularly those involving clinical risk<br />

sharing) the timing of revenue recognition will depend on a<br />

company’s ability to estimate, at the time of sale, the revenue it<br />

will ultimately receive in connection with a sale — in other words,<br />

whether the arrangement fee is fixed or determinable (US<br />

GAAP) or can be measured reliably (IFRS) at the time of sale.<br />

Depending on the nature of the arrangement, this determination<br />

may prove challenging.<br />

Given current industry trends, it seems inevitable that we will<br />

see more outcomes-based pricing arrangements over time. It<br />

is also inevitable that these structures bring more uncertainty<br />

for companies. To manage this risk, firms should consider<br />

accounting implications up front and should align program<br />

design to the availability of clinically relevant information and<br />

IT capabilities.

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