Using Pay-for-Success contracts and value-based pricing to incentivise discovery of new uses for off-patent medicines

A recent report by Government Outcomes Lab (GO Lab) and Chartered Institute of Public Finance and Accountancy (CIPFA) explores innovative financing mechanisms for delivering social outcomes under such circumstances. The report investigates advances in pricing and payment in healthcare and discusses some of the transferable learnings. In this blog, Savva Kerdemelidis outlines how pay-for-success contracts could change how new uses for generic medicines can be discovered.

Addressing a market failure caused by a Tragedy of the Commons

Generic medicines’ potential for cost savings is substantial --  low-cost generic drugs saved the U.S. healthcare system $1.67 trillion in the last decade and the NHS over £13 billion a year. However, repurposing generic medicines is challenging. In fact, the chance of a drug obtaining regulatory approval for a new use becomes significantly smaller once it goes off-patent. Since these medicines are available at low cost from multiple sources, pharmaceutical companies are unable to recover the costs of clinical trials. The lack of commercial incentives results in ‘a tragedy of the commons’ - underinvestment in potentially valuable goods for health stakeholders.

There has been increased awareness around the negative consequences of this tragedy of the commons. For healthcare payers and patients, the value lies in the clinical trial data validating safety and effectiveness of medicines rather than in the novelty of the active ingredient itself. In essence, treatment protocols involving new uses for generic drugs are non-rivalrous and “highly non-excludable” public goods. A 2014 Masters thesis by the author Savva Kerdemeldis concluded that because the patent system provided inadequate incentives for pharmaceutical companies to develop such “unmonopolisable therapies”, alternative “prize-like” incentives were needed to assign a price to clinical trial data for new off-patent treatment protocols before they have been developed.

There are other potentially untapped areas of financial innovation in this area. For example, the author’s charity and Decentralised Science (DeSci) project based in New Zealand, Crowd Funded Cures, is partnering with other DeSci projects VitaDAO.com and Molecule.to, to determine how pay-for-success contracts can be implemented as smart contracts using blockchain technology. These contracts with IP-Non Fungible Tokens (NFTs) facilitate investment in generic drug repurposing, enabling payers to back Medical Prize NFTs as a reward or payer fund for successful clinical trials. Smart contracts can reduce transaction costs and the issue of IP-NFTs and NFTs provide access to global liquidity by trading on the cryptocurrency markets. Social impact bonds have also been proposed as a novel mechanism to repurpose generic drugs, have not received backing from the NHS to date.

A generic drug repurposing pay-for-success contract/value-based pricing methodology backed by payers such as the NHS would reward the discovery of new uses for generic drugs to treat new diseases. This will result in lower healthcare costs per Quality-adjusted Life Year (QALY) because repurposing generic drugs can be developed at a fraction of the cost – in the order of millions instead of billions for new patented drugs – and significantly faster due to the availability of existing clinical trial safety data and real-world evidence.

However, currently, independent health technology assessment (HTA) agencies such as NICE evaluate medicines and treatments based on clinical and economic evidence and reference pricing in relation to the lowest cost available for the active ingredient of a generic medicine, not the social value of a new treatment protocol. A value-based approach would require a modification of assessment or reference pricing methodologies by payers, whereby they would ignore the marginal cost of the generic drug’s active ingredient, but instead pay a subsidised price for a repurposed generic drug based on the QALY impact of the treatment protocol for their newly-discovered use.

Using future cost savings for payers to finance generic drug repurposing

The main difficulty for payers will be to determine how future clinical trial data supporting generic drug repurposing will translate into a price per QALY. However, some of the existing payment mechanisms are already flexible enough to allow pricing determinations based on future health outcomes. This would provide sufficient incentives for pharmaceutical companies to fund generic medicine repurposing clinical trials as long as the marginal cost of the generic drug itself can be ignored or discounted when making such calculations.

Covid-19 has highlighted the willingness of payers to consider outcomes-based approaches such as pre-ordering new medicines subject to regulatory approval, which can allow pharmaceutical companies to capture some of the future benefits of the drug to society, but imposes high cost burden compared to cheaper off-patent alternatives.

For example, Merck's new patented Covid-19 drug molnupiravir could have equivalent efficacy to off-patent fluvoxamine, but with the latter having more safety data from extensive use as a generic drug since the United States’ the Food and Drug Administration (FDA) approval in 1994. However, Molnupinavir is expected to cost governments and health insurers $12 billion by 2025. According to the Institute for Clinical and Economic Review (ICER), fluvoxamine costs $6,000 per QALY, compared to $55,000 per QALY for molnupiravir. Therefore, if a pay-for-success mechanism can be used to capture some of the future value of repurposed generic drugs, they would still far outcompete patented drugs even if they were priced higher than in their original usage.

Innovative payment mechanisms have the potential to create cost savings for payers while discovering new off-patent treatments and cures for patients. Existing pharmacoeconomic tools can assign a price to repurposed generic medicines, but it is up to payers to take the first step and see the value in promoting an open-source approach to medicine development.