Speaking at the Superbugs & Superdrugs conference in London on 16 March 2016, OHE’s Jorge Mestre-Ferrandiz delivered a presentation on financial and collaborative incentives to accelerate clinical success for antibiotics. Jorge discussed the economic challenges around antibiotics, and whether there is a need for a new business model. He reviewed of the impact of previous incentives, explaining what has worked in the past, and discussed possible new business models.

1. NEW BUSINESS MODELS FOR
ANTIBIOTICS: WHERE ARE WE
NOW?
Dr Jorge Mestre-Ferrandiz

2. 2
Agenda
• Economic challenges – is there a need
for a new business model?
• Impact of incentives – what has worked in
the past?
• Addressing the challenges – what could be
the new business model?
• Conclusions

3. 3
Context: the public health need
Well-documented, desperate need for new antibiotics against
established and emergent resistant bacterial pathogens but we
currently face a thin global pipeline of new agents in this arena

4. 4
Context: the economic
challenge
• Key challenge in driving investment in new antibiotics: expected
returns and associated risk are not competitive with other
therapeutic areas. Why?
– Low price of new innovative antibiotics. Society is used to low
price, generic antibiotics used in treating a large number of
patients/ regardless of infections
– Reserved use in earlier years => low volumes
– Variation in resistance and unpredictable resistance trend =>
commercial risk that resistance does not rise to a high level
throughout the antibiotics market exclusivity => uncertain
returns
• Significant uncertainty and financial risk around the expected use
of a new antibiotic for both the payer/health care system and innovator

5. 5
Context
• Initial science is difficult, reflected in the
high failure rate in pre-clinical research
and development (R&D)
• Structure of the regulatory framework for
antibiotics has historically not addressed
the clinical challenges faced in
demonstrating efficacy
• …but are things changing?

6. 6
Agenda
• Economic challenges – is there a need for a
new business model?
• Impact of incentives – what has worked
in the past?
• Addressing the challenges – what could be
the new business model?
• Conclusions

7. 7
The case for R&D incentives
•What is the case for specific incentives for
biomedical R&D?
• ‘Market failures’ – public good nature (‘externalities’);
lack of effective demand / low expected return in some
cases (e.g. neglected diseases, orphan drugs,
antibiotics)
• High level of uncertainty due to a significant scientific
challenge at early stage (basic research and pre-clinical)
and recurrent risk of failure at clinical phases
• Large investment required (vs. other sectors)
•Role for ‘public’ intervention / additional incentives
•Broadly speaking, they can be categorised into two
types: “push” and “pull”

8. 8
R&D incentives: ‘push’ and ‘pull’
Key distinction Whether or not the reward is conditional on
having a successful product on the market
Push incentives fund or reward R&D effort ex ante, i.e.
irrespective of the outcome
Pull provides rewards for R&D effort ex post if the outputs of
R&D achieve health gain
Note that there are hybrid approaches:
Push funding can be part conditional on outcome as well as
on effort
Pull funding may be staged and reward intermediate
outcomes prior to delivery of a product

9. 9
‘Push’ incentives
Push initiatives: pay as you go
1. US National Institutes of Health. Funding for specific
trials or discovery programmes within broad portfolio
objectives.
2. Product Development Partnerships (PDPs). Funding
for specific trials or development /discovery programmes
within a portfolio to achieve licensed products.
3. Tax incentives to subsidise the costs of R&D. Three
possible forms: (1) tax credits (2) tax allowances and (3)
tax deferrals.
4. Low interest finance for development.

10. 10
‘Pull’ incentives
Pull initiatives: pay for final deliverable
1. Advance Market Commitment (AMC). Funding to purchase
products not yet completed development. The funding includes a
return on R&D.
2. GAVI Fund. Funding to purchase products already on the market
through a supply contract.
3. US Priority Review Vouchers. Priority FDA Review as a reward
for a neglected disease product.
4. Transferable/roaming intellectual property rights (TIPR). A
company is awarded additional IP on a product of its choice in
exchange for developing a given (neglected) disease product.
5. Prizes: Create a prize equal to the social value of innovation
through a system of patents buyout.

11. 11
Incentives for antibiotics: Push
•Cost/risk-sharing as part of public-private partnerships (PPPs) =>
reduce financial R&D commitment required from the manufacturer
• EU Innovative Medicines Initiative (IMI)
– Funding provided by the EC; EFPIA members provide an equivalent in-kind
contribution
– Combatting Bacterial Resistance in Europe (COMBACTE) under the New
Drugs for Bad Bugs (ND4BB):focussed on funding for the improvements to
the design and more efficient implementation of clinical trials for novel
antibiotics
• US Biomedical Advanced Research and Development Authority
(BARDA)
– Portfolio approach whereby funding is allocated as programmes progress or
not i.e. it is not specific to a single candidate drug; funds follow successful
programmes and are transferred away from unsuccessful ones
•Changes to clinical trial requirements for regulatory approval reducing
time and cost (e.g. Rex et al; TATFAR)
COMBINED
EFFECTS ARE
INSUFFICIENT

12. 12
Incentives for antibiotics: Pull
•Not developed too much to date – not surprising as greater
complexities
•Limited to extending market exclusivity
• e.g. GAIN Act in the US: provides legal framework for extended exclusivity
of five years and priority review for qualifying antibiotics by the FDA
•Industry, and others, moving towards pull incentives given the
lack of action on this front at European level (understandable as
EC has less room – e.g. EC important Action Plan (Nov 11)
obviated P&R issues)
•9th IMI call under ND4BB: “Driving re-investment in R&D and
responsible use of antibiotics”

13. 13
Ongoing initiatives
Source: ‘Review on Antimicrobial Resistance. Tackling a Global Health Crisis:
Initial Steps. 2015’
Modelling impact of
“insurance” model
(collaboration with AZ)

14. 14
Agenda
• Economic challenges – is there a need for a
new business model?
• Impact of incentives – what has worked in
the past?
• Addressing the challenges – what could
be the new business model?
• Conclusions

15. 15
• Challenge is to conserve new drugs to avoid the
build up of resistance. Thus do not want to
incentivise volume sales
• “Pull” Buyout model: a global organisation has the
authority and resources to commit lump sum
payments to successful drug developers
• 15 new antibiotics per decade with 2 new classes
of drug
• Estimated cost of $16bn - $37bn per decade, i.e.
$1bn-$2.5bn per drug
• A $2bn “push” AMR innovation fund, paid for by
industry
O’Neill Review on Antimicrobial Resistance
(2015)

16. 16
Goals of a New Model
• Lifetime revenue should reflect value to society – require
availability without necessarily using a new antibiotic
• Should be sufficient to drive investment (into the type of
innovations that support public health need)
• Risk mitigation for both payer and investor linked to variation in
antibiotic resistance, incl. local outbreaks
• Should minimise incentive to market and use (local price?) –
stewardship
• Should remove financial barrier to timely and appropriate use
• Effective at international level

17. 17
Incentives and Effects
-5
0
5
10
15
20
0 2 4 6
NetRevenue
Time
Extended Exclusivity
-5
0
5
10
15
20
0 2 4 6
NetRevenue
Time
Premium Price
-5
0
5
10
15
20
0 2 4 6
NetRevenue
Time
PPP & Regulatory
-5
0
5
10
15
20
0 2 4 6
NetRevenue
Time
AMC

18. 18
Potential solution
•A commercial model where the returns are
‘de-linked’ from the traditional price x volume
formula – “Insurance Model”
“Buy-out”
“Staged Buy-out”

19. 19
“Insurance-type model”
• Re-balance differences between:
• Lifetime revenue based on pricevolume;
• Return required to stimulate
investment;
• Value to payer/society.
Annual
fee
• Annual fee: Difference
between revenue &
what is required to
drive investment

20. 20
“Insurance-type model”: key
characteristics
• Flat annual fee paid centrally by payers coupled with a (low) per
unit price paid to the manufacturer locally by healthcare providers
covered by the payers.
• This provides insurance in the following ways:
1. The company is insured against the commercial risk of both a low mean
price and highly variable use. The company, however, still bears the
scientific risk (i.e. the product may not obtain regulatory approval).
2. Payers are insured against not having an antibiotic to treat their patients,
i.e. public health consequences of AMR build up.
3. Payers / Providers are insured against the financial risks of having an
outbreak of infection (and therefore having to spend a lot of money on
expensive drugs) as there is a pre-agreed low price per unit.

21. 21
Revenue & Cost estimates
• Lifetime revenue – scale up EU5 (25% global market,
25% global cost of R&D, approval)
HAIs
Share for pathogen (e.g. 15.7% for E. coli)
Share & rate of growth for resistant pathogens
Market share incl. LoE
Price
• Costs
CoGs, post-MA studies, S&M, G&A
• Scale up to reflect global revenues and costs

22. 22
Sensitivity analyses
•Growth in health associated infections
•Growth in rate of resistance
•“Tier B” [one phase III trial per indication]
(Rex et al.)
•Public private partnerships

23. 23
Globalised capitalised R&D cost
estimates
• $1.6 bn base case
• $0.8 bn with matching PDP funding
• $1.3 bn with Tier B registration option
• $0.7 bn with matching PDP funding
and Tier B registration

24. 24
Provisional Results
• With no additional incentives and with a fixed local price
per day of $120 ($1,680 per treatment)
• the fee for the global markets combined would be
$380m per annum for ten years to attain an NPV of
$100m.
• When the same incentives for R&D (with PPP and Tier B)
were applied to the insurance model
• the premium for ten years reduces to $158m per
annum
• Our analysis suggests an insurance-based model can be
part of an optimal solution

25. 25
“Insurance-type model” - Challenges
• Need international collaboration
• Avoid risk of arbitrage and free riding
• Structure of annual fee
• How to treat subsequent entrants
• Alone or combined with local price?
• What price at local level?
• Balance to minimise incentive to sell (price too high) or incentive to use
(price too low)
•Definition of what characteristics of antibiotics qualify
• Public health needs
• Agreed by relevant stakeholders: clinicians, regulators, payers and
developers
• Pragmatic – can be demonstrated

26. 26
“Insurance-type model”– Advantages
It provides a mechanism to achieve :
I. value-based reimbursement of antibiotics (should the premium
reflect the societal value of new antibiotics rather than being set ad-
hoc)
II. a reasonable return to the manufacturer
III. risk mitigation for payers, providers and manufacturers
IV. support for appropriate use by delinking revenues from volume of
use, and
V. conservation of antibiotic effectiveness by continued availability of
new antibiotics in the long-term
VI. support timely use – helps overcome financial barriers to use
=> Provides risk mitigation at the individual (provider) level by
risk pooling at the aggregate (payer) level

27. 27
Assessment of value
• Healthcare systems depend on the availability of effective
antibiotics because they:
i. provide treatment for infection that saves lives
ii. provide prophylaxis to reduce the risk of infection from
surgery and other interventions; and
iii. enable use of technologies that severely compromise a
patient’s immune system (e.g. in oncology and
transplantation)
i. Additional cost to society if people avoid procedures if worry about
getting AMR infections
the value of (i) is well understood and often measured
value of (ii) and (iii) are not well measured

28. 28
Impact of resistance

29. 29
Agenda
• Economic challenges – is there a need for a
new business model?
• Impact of incentives – what has worked in
the past?
• Addressing the challenges – what could be
the new business model?
• Conclusions

30. 30
Conclusions - Antibiotics
• Incentives for R&D & extension of
exclusivity highly likely to be insufficient
• Price alone unlikely to fix the problem
• Uncertainty / risk too high for both payer & investor
• “Insurance-type model” coupled with local
price can reduce uncertainty / risk for both
payer/health care system & investor

31. 31
To enquire about additional information and analyses, please contact
Dr. Jorge Mestre-Ferrandiz at jmestre-ferrandiz@ohe.org
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