Learning from Netflix

A new drug licensing model

to enable universal

treatment access

Jean-Manuel Izaret, PhD

Dave Matthews, PhD

UCSF GLOBAL HEALTH ECONOMICS COLLOQUIUM

1 Cop

yrig

ht ©

201

7 by

The

Bos

ton

Con

sult

ing

Gro

up,

Inc.

All

rig

hts

rese

rved

.

New pricing models: the search for mechanisms to align price and value

Old economics model

Customers receiving surplus

Customer indifferent with buying

"Unserved" segment

Surplus Margin Marginal Cost Lost opportunity

"Take it or leave it" value extraction mindset

($)

Time, units, individuals, etc.

Value Price

Customer value (Willingness to pay)

PMC

2 Copy

righ

t ©

201

7 by

The

Bos

ton

Cons

ulti

ng G

roup

, In

c. A

ll r

ight

s re

serv

ed.

($)

New pricing models: the search for mechanisms to align price and value

Old economics model

Customers receiving surplus

Customer indifferent with buying

"Unserved" segment

New economics model

Surplus Margin Marginal Cost Lost opportunity

"Take it or leave it" value extraction mindset Value sharing mindset

All customers receiving surplus

Margin as a share of value created

High penetration, no "unserved" segment

($)

Time, units, individuals, etc. Time, units, individuals, etc.

Value Price

Customer value (Willingness to pay) Customer value

PP

MC

MC

3 Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

Netflix introduced a novel pricing model that fundamentally changed the movie industry

Historically: pay per view Today: subscription

Content creatorse.g., movie studios

Content distributors

Consumers

Content Payment

PaymentContent

Content Payment

PaymentContent

TV, theaters Netflix

Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

4

The problem:

Hepatitis C has been curable for 4 years...

...but global prevalence remains ~70 M people...

... and high prices make universal treatment untenable

What if we applied this model to healthcare?

The goal: A "win-win-win" solution

Universal patient treatment access

Lower cost to payers and providers

Proper incentives for pharma to keep innovating

5 Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

Value from HCV therapy varies widely by patient

$200

0 1,000 2,000 3,000 4,000

$0

$100

Expected healthcare cost-savings per patient over 10 years ($K)

Patients (K)

Example patient segment

• F4 (Advanced fibrosis)• Female, aged 60-70 yrs• 5K patients• $87K per patient in cost

incurred over 10 years

Note: Based on expected cost avoidance per patient treated and cured. Based on weighted-average disease progression and mortality rates for the entire prevalent population in U.S. and average costs at each stage. 2. No expected cost avoidance for patients with liver transplants or hepatocellular carcinoma. Source: CDA USA HCV EIM and LCM models, ver171010; BCG analysis

Inter-

feron

Former leading therapy

($35,000 / patient)Peg-interferon therapy equal to healthcare costs incurred

for later stage HCV

List price range

Net price range

6 Copyrig

ht ©

2017 b

y T

he B

oston C

onsult

ing G

roup, Inc. A

ll r

ights r

eserved.

A payer licensing agreement (PLA) model would realign

drug price with value delivered over time

Revenue

amortization

change

Pricing

basis

change

Pay per population vs. pay per treatment

• Payer licenses the drug with right to

distribute to all patients

• Price is set based on a percentage of

the costs avoided

Pay over time vs. pay at treatment

• Payer pays over 5-10 years, or

• A third party annuitizes, e.g., a for-

profit bank, etc.

7 Copyrig

ht ©

2017 b

y T

he B

oston C

onsult

ing G

roup, Inc. A

ll r

ights r

eserved.

Payer licensing provides a "win-win-win" solution

Payer licensing agreement

Surplus Margin Marginal Cost

Unserved

($)

Patient segments

Value Price

Aggregate license

to pharmacos

paid annually

System cost

savings for

payer(s)All patients

treated as quickly

as possible

8 Copyrig

ht ©

2017 b

y T

he B

oston C

onsult

ing G

roup, Inc. A

ll r

ights r

eserved.

Payer licenses in practice: benefit for all stakeholders

Current model

Unit-based payment model

Proposed model

Payer licensing agreement

Time Pay upfront Pay annuity over time

Units Pay per treatment Pay per population

Per patient price $30,000 / unit $0

Population priceYear 1: $760 M

Year 10: $60 M$350 M / year

# treated patients (10 yrs) 140 K 260 K

# cured (first 2 yrs) 45 K 144 K

# deaths (10 yrs) 22 K 7 K

System costs (10 yrs) $4.5 B $1.3 B

Pharma revenue (10 yrs) $3.25 B $3.55 B

Data for representative EU country

Primary pricing basis

$3.2BPayers savings in

systems costs

$300MPharma revenue

growth

100Kadditional patients

cured in 1st 2 years

9 Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

Payer licensing provides a "win-win-win" solution

0

1

2

3

4

5

Total system costs ($ B)

New

1.3

Current

4.5

Source: BCG + CDA Epidemiological model; ver170927; Example EU country data adapted from US epidemiology and cost data

0

20252020

150

300

Cured patients ('000s)

New model

Current trajectory

Eradication4

1

2

3

0

5

New

3.3

Drug revenues ($ B)

3.5

Current10 yr 10 yr

PatientsMore treatment access

PayersLower system costs

PharmaCosEqual or greater revenues

Data for representative EU country

Highly attractive for high-priced systems today,but also applicable to countries with significantly lower resources

10 Copy

righ

t ©

201

7 by

The

Bos

ton

Cons

ulti

ng G

roup

, In

c. A

ll r

ight

s re

serv

ed.

Payer licensing agreements relevant for other therapeutic areas: a framework

EconomicsTherapy should satisfy value, time, cost criteria...

Epidemiology and access...then, market factors can be considered

Cost

Value Large cost differential between treating early and late stage patients

Time of payments not aligned with the time that value is consumed

Low marginal cost of production

High R&D cost

Impact

Access

Large prevalence affected in both developed and developing countries

Limited affordability and/or availability of prevention or treatment

Insufficient existing financing and pricing mechanisms, from commercial, government and/or NGOs

Time

bcg.com

12 Copy

righ

t ©

201

7 by

The

Bos

ton

Cons

ulti

ng G

roup

, In

c. A

ll r

ight

s re

serv

ed.

Novel pricing models are getting tested in healthcare

Capital credit for consumer assets

Tiered user access via freemium models

Dynamic, personalized price-setting

Many industries adopt new models Healthcare's new models are limited

Indication dependent pricing

Combination pricing

Tiered pricing

Outcomes-based pricing

Capitated pricing

Payer licensing

Model Change Model Change

User / segment Time Value redefinition

13 Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

An example:

Hepatitis C has been curable for 4 years...

...but global prevalence remains ~70 M people

Universal treatment access

Limited Access: >90% of countries restrict treatment to sickest patients.

Low diagnosis rates: Little incentive to diagnose early-stage patients when treatment cost is very high

What are we trying to accomplish?

14 Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

Hepatitis C virus treatment breakthrough faces value alignment challenges

Value per patient varies widely depending on fibrotic stage, sex, age, etc.•True for all value metrics, e.g., costs averted,

QALYs saved, GDP impact.

Time of payments by payers does not align with the time that value is delivered, no matter the value metric.

15 Copyrig

ht ©

2017 b

y T

he B

oston C

onsult

ing G

roup, Inc. A

ll r

ights r

eserved.

PLA could deliver value for all stakeholders

Epidemiology Economics

Data for representative EU country

$0

$500

2026

239

405318

System savings ($ M)

261

2024

268292366389

2018 2022

317342

2020

$800

$400

$0

Total pharma revenue ($ M)

FFS

PLA300

150

0

Cumulative patients treated ('000s)

0

20

10

202620242022

Cumulative patient deaths ('000s)

20202018

PLA FFS

Notes: PLA – Payer License Agreement, FFS – Fee for service, current trajectory with unit-based pricing. Sources: CDA, BCG, Datamonitor, Decision Resources Group

258,000

139,000

7,000

22,000

$3.5 B

$3.3 B

$3.2 B

16 Copyrig

ht ©

2017 b

y T

he B

oston C

onsult

ing G

roup, Inc. A

ll r

ights r

eserved.

The PLA approach works because of the long term cost-

savings from curing patients quickly

300

200

100

0

2018 202420222020 20282026

*Note: Annual hospitalization costs discounted at 3% annually. Cured and deaths are summed in time beginning 2017, all

other statuses are showing prevalence. Source: Based on CDA 171101 US-adapted model, BCG analysis

Number of patients impacted* ('000)

Current trajectory Payer licensing model300

200

100

0

202820262024202220202018

F3

F2

F1

F0

Cured but cirrhotic

Cured*

Liver-related deaths

Liver transplants

Cancer

Decomp cirrhosis

F4

Cured Cured

Dead

Dead

Status Annual cost*

0

$2,189

$0

$2,189

$2,189

$2,189

$2,189

$16,852

$26,885

$106,709

$0

Data for representative EU country

17 Cop

yrig

ht

© 2

017

by

The B

osto

n C

onsu

ltin

g G

roup,

Inc.

All

rig

hts

rese

rved.

HCV therapy delivers value over many years

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

-

500

1,000

1,500

2,000

2,500

Liver Transplant

HCC

Decomp Cirrhosis

Cirrhosis

F3

F2

F1

Chronic HCV (F0)

Total Cost

Non-drug costs of example HCV-infected patient cohort

Annual cost per patient ($) Cumulative cost ($)

Source: CDA, BCG; Chart shows average costs for male aged 30 when infected in 2013; 3% discount rate

Average DAAnet price($43K)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

-

500

1,000

1,500

2,000

2,500

Liver Transplant

HCC

Decomp Cirrhosis

Cirrhosis

F3

F2

F1

Chronic HCV (F0)

Total Cost